EBK CORPORATE FINANCE
11th Edition
ISBN: 8220102798878
Author: Ross
Publisher: YUZU
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Chapter 14, Problem 2QP
Cumulative Abnormal Returns The following diagram shows the cumulative abnormal returns (CAR) for 386 oil exploration companies announcing oil discoveries between 1950 and 1980. Month 0 in the diagram is the announcement month. Assume that no other information is received and the stock market as a whole does not move. Is the diagram consistent with
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QUESTION 1
Which of the following is NOT a piece of evidence for the investor underreaction?
OA The stock market index excess returns are positively autocorrelated at the monthly frequency.
O B. Stocks with higher returns in the last six months tend to earn higher returns in the future.
OCThe stock market index excess returns are negatively autocorrelated at the three to five year horizons.
O D. Stocks with higher standardized unexpected earnings tend to earn higher returns in the future.
QUESTION 2
Which of the following statements regarding the new era thinking is FALSE?
OA Dow's approach to the 1,000 milestone in 1960s provided an anchor for people's expectations.
O B. Speculative bubbles and their associated new era thinking do not end definitively with a sudden, final crash.
OCA low mortgage rate was also a factor for the housing market boom in California in 1970s.
O D. The new era theory emerged principally as an after-the-fact interpretation of a stock market boom.
QUESTION 3…
Which of the following is most likely true concerning the stability and trend of earnings?
Question options:
The stability and trend of earnings require at least five years of historical data to be meaningful.
The stability and trend of earnings are key factors when calculating cost of sales.
The stability and trend of earnings are not factored in the analysis of revenues.
The stability and trend of earnings depend on the trend of a single industry.
Which one of the following statements is correct?
A- Stock prices are independent of the economic cycle
B- Stock prices chane simultaneoustly with the economy
C- Stock prices often start to rise before the end of a recession
D- Changes in stock prices generally lag changes in the economy
Chapter 14 Solutions
EBK CORPORATE FINANCE
Ch. 14 - Prob. 1CQCh. 14 - Prob. 2CQCh. 14 - Efficient Market Hypothesis Which of the following...Ch. 14 - Market Efficiency Implications Explain why a...Ch. 14 - Efficient Market Hypothesis A stock market analyst...Ch. 14 - Semistrong Efficiency If a market is semistrong...Ch. 14 - Efficient Market Hypothesis What are the...Ch. 14 - Prob. 8CQCh. 14 - Prob. 9CQCh. 14 - Efficient Market Hypothesis For each of the...
Ch. 14 - Technical Analysis What would a technical analyst...Ch. 14 - Prob. 12CQCh. 14 - Prob. 13CQCh. 14 - Efficient Markets A hundred years ago or so,...Ch. 14 - Efficient Market Hypothesis Aerotech, an aerospace...Ch. 14 - Prob. 16CQCh. 14 - Prob. 17CQCh. 14 - Efficient Market Hypothesis Newtech Corp. is going...Ch. 14 - Prob. 19CQCh. 14 - Efficient Market Hypothesis The Durkin Investing...Ch. 14 - Efficient Market Hypothesis Your broker commented...Ch. 14 - Efficient Market Hypothesis A famous economist...Ch. 14 - Efficient Market Hypothesis Suppose the market is...Ch. 14 - Prob. 24CQCh. 14 - Prob. 25CQCh. 14 - Efficient Market Hypothesis Assume that markets...Ch. 14 - Prob. 27CQCh. 14 - Evidence on Market Efficiency Some people argue...Ch. 14 - Prob. 1QPCh. 14 - Cumulative Abnormal Returns The following diagram...Ch. 14 - Cumulative Abnormal Returns The following figures...Ch. 14 - Prob. 4QPCh. 14 - Prob. 1MCCh. 14 - Prob. 2MCCh. 14 - Prob. 3MC
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- Which of the following situations will most likely motivate managers to infl ate earnings inthe current period?A . Possibility of bond covenant violationB . Earnings in excess of analysts’ forecastsC . Earnings that are greater than the previous yeararrow_forwardin Chapter 7 S Ross Company, Westerfield, Incorporated; and Jordan Company announced a new agreement to market their respective products in China on July 18, February 12, and October 7, respectively. Given the information below, calculate the cumulative abnormal return (CAR) for these stocks as a group. Assume all companies have an expected return equal to the market return. Note: A negative value should be indicated by a minus sign. Leave no cells blank - be certain to enter "0" wherever required. Do not round intermediate calculations. Round your answers to 1 decimal place. Date July 12 July 13 July 16 July 17 July 18 July 19 July 20 July 23 July 24 Ross Company Market Return -0.3 0.3 0.4 -0.6 -1.7 -1.0 Days from announcement -4 -3 -2 -1 0 1 2 3 4 -0.9 0.6 0.3 Company Return -0.8 0.4 0.6 -0.2 1.3 -0.4 -1.2 0.4 0.0 Ross -0.5 0.1 0.2 0.4 3.0 0.6 -0.3 -0.2 -0.3 Westerfield, Incorporated Date February 8 February 9 February 10 February 11 February 12 February 15 February 16 February 17…arrow_forwardH. As a new analyst, you have obtained the prices for the stocks of both Lulu and Lemon. Both stocks did not paid any dividends during the entire period. (1) (II) (III) Your manager has asked you (i) to compute the rate of return and standard deviation of the two stocks and suggest that because these companies produce similar products, you should continue your analysis by (ii) computing their covariance and correlation. Show all calculations. Year 2019 2020 2021 2022 2023 Closing prices of LuLu Closing prices of Lemon 20.50 30.10 19.92 28.50 22.45 30.10 24.50 40.30 20.50 36.40 Compute the return and standard deviation of a portfolio with 60% investment in Lulu and 40% in Lemon. Would you recommend putting these two stocks together in a portfolio? Explain why or why not.arrow_forward
- could someone please explain to me why the decrease in stock price ( from 20th April) for the west texas intermediate is unusual? and explain why this has occurred and why the recovery is so sharp. Thanksarrow_forwardWhich of the following anomalies have historically existed in the U.S. stock market? O investors who buy stocks of Value Line Rating of 5 will earn abnormal returns O stocks returns are systematically higher in January than any other month of the year O large firm stocks have outperformed small firm stocks O markets tends to overreact to good news and under react to bad newsarrow_forwardA support level is the price range at which a technical analyst would expect the A) supply of a stock to increase dramatically. B) supply of a stock to decrease substantially. C) demand for a stock to increase substantially. D) demand for a stock to decrease substantially. E) price of a stock to fall. 8) A market decline of 23% on a day when there is no significant macroeconomic event ______ consistent with the EMH because ________. Please provide an accurate justification for the chosen answer.arrow_forward
- Use the following information on states of the economy and stock returns to calculate the expected return for Dingaling Telephone: (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) State of Economy Probability ofState of Economy Security Returnif State Occurs Recession 0.30 -6.5 % Normal 0.55 9.0 Boom 0.15 16.6arrow_forwardIf you were an investor considering purchasing the stock of a company and you were concerned about the company's ability to produce income or operating success for a given period of time, which of the following trends would worry you most? O a decreasing inventory turnover ratio an increasing return on common stockholders' equity ratio O a decreasing return on assets ratio an increasing current ratioarrow_forwardAssume that markets are semi-strong form efficient. Suppose, then, that during a trading day, important new information is released for the first time concerning a certain company. This information indicates that one of the firm's oil fields, previously thought to be very promising, just came up dry. How would you expect the price of a share of stock to react to this information?arrow_forward
- QUESTION 1 Professors Narishimhan Jegadeesh and Sheridan Titman, demonstrated how stocks with high returns over a 3- to 12-month period did not earn excess profits of about 1% per month for the following year. True False QUESTION 2 A candlestick with equal opening and closing prices A. Neutral Cloud B. Morning Star C. Doji D. A Hammer QUESTION 3 The advance-decline line is used to indicate A. if the majority of stocks in the market are acting in concert with the major averages B. if the intermediate market cycle is nearing completion C. if a bull market is occurring D. if volume trends are confirming price trendsarrow_forwardConsider the following information: State of Economy Probability of State of Economy Recession .15 Normal Boom .60 .25 Rate of Return if State Occurs Stock A .06 .09 14 Stock B -.19 .10 .27 Check a. Calculate the expected return for Stocks A and B. (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.) b. Calculate the standard deviation for Stocks A and B. (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.) k a. Stock A expected return a. Stock B expected return b. Stock A standard deviation b. Stock B standard deviation % % % %arrow_forwardAn analyst has estimated how a particular stock’s return will vary depending on what will happen to the economy. What is the coefficient of variation on the company's stock? OF THEECONOMY PROBABILITY OFSTATE OCCURRING STOCK'S EXPECTEDRATE IF THISSTATE OCCURS Recession Below Average Average Above Average Boom .10 .20 .40 .20 .10 (.60) (.10) .15 .40 .90arrow_forward
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