Corporate Finance
12th Edition
ISBN: 9781259918940
Author: Ross, Stephen A.
Publisher: Mcgraw-hill Education,
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Chapter 14, Problem 4QAP
Summary Introduction
To compute: Is the given diagram consistent with market efficiency?
Introduction:
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A study analyzed the behavior of the stock prices of firms that had lost antitrust cases. Included in the diagram are all firms that lost the initial court decision, even if the decision was later overturned on appeal. The event at Time 0 is the initial, pre-appeal court decision. Assume no other information was released, aside from that disclosed in the initial trial. The stock prices all have a beta of 1. Is the diagram consistent with market efficiency? Why or why not?
Which of the following contradicts weak form efficiency?
Group of answer choices
1- Stock prices do not reflect information that is only available to insiders.
2- Good or bad recent stock return performance continues over the next three months.
3- The cumulative abnormal returns continue to increase until six months after a firm announces a good unexpected earnings.
4- Technical analysis could not provide abnormal returns. Fundamental analysis could not provide abnormal returns.
Which of the following is NOT a potential problem when estimating and using betas, i.e., which statement is FALSE?
a. Sometimes, during a period when the company is undergoing a change such as toward more leverage or riskier assets, the calculated beta will be drastically different from the "true" or "expected future" beta.
b. The beta of an "average stock," or "the market," can change over time, sometimes drastically.
c. Sometimes the past data used to calculate beta do not reflect the likely risk of the firm for the future because conditions have changed.
d. All of the statements above are true.
e. The fact that a security or project may not have a past history that can be used as the basis for calculating beta.
Chapter 14 Solutions
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. 1QAPCh. 14 - Prob. 2QAPCh. 14 - Prob. 3QAPCh. 14 - Prob. 4QAPCh. 14 - Prob. 1MCCh. 14 - Prob. 2MCCh. 14 - Prob. 3MC
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- The efficient markets hypothesis identifies three forms of market efficiency. (a) You observed that high-level managers make superior returns on investments in their company’s stock. Would this be a violation of weak-form market efficiency? Would it be a violation of strong-form market efficiency? (b) If the weak form of the efficient market hypothesis is valid, must the strong form also hold? Conversely, does strong form efficiency imply weak form efficiency? (c) Stock XYZ, which traded for several months at a price of K72, and then declines to K65. if the stock eventually begins to increase in price, K72 is considered a resistance level because investors who bought originally at K72 will be eager to sell their shares as soon as they can break even on their investment. If everyone in the market believes in resistance levels, why do these beliefs not become self-fulfilling prophecies?arrow_forwardWhich of the following empirical observations appear to contradict weak form market efficiency? a. The average rate of return of stocks is significantly greater than zero b. The month-to-month time series autocorrelation of stock returns is not significantly different from zero c. A strategy of buying recent high-return stocks (winners) and shorting recent low-return stocks (losers) provides significant positive alpha d. Low dividend stocks provide higher-than-average capital gains e. None of the abovearrow_forwardWhich of the following variables do Fama and French claim do a better job explaining stock returns than beta? 1. Book-to-market ratio, II. Unexpected change in industrial production, III. Firm size O a. I and II only Ob. I and Ill only OC. I, II, and III O d. I only Not yet answeredarrow_forward
- Which of the following statements is CORRECT? a. The SML shows the relationship between companies' required returns and their diversifiable risks. The slope and intercept of this line cannot be influenced by a firm's managers, but the position of the company on the line can be influenced by its managers. b. Suppose you plotted the returns of a given stock against those of the market, and you found that the slope of the regression line was negative. The CAPM would indicate that the required rate of return on the stock should be less than the risk-free rate for a well-diversified investor, assuming investors expect the observed relationship to continue on into the future. c. If investors become less risk averse, the slope of the Security Market Line will increase. d. If a company increases its use of debt, this is likely to cause the slope of its SML to increase, indicating a higher required return on the stock. e. The slope of the SML is determined by the value of beta.arrow_forwardSay stocks of firms which change their logo in a given year tend to outperform (have higher abnormal returns) the stocks of firms which don't change their logos for the following year. If markets are efficient and you used the correct model for expected returns in your analysis, what must be true about firms that change their logos relative to firms that don't change their logos? Firms that change their logos are more exposed to risk than firms that don't change their logos. Firms that change their logos are equally exposed to risk as firms that don't change their logos. Firms that change their logos are less exposed to risk than firms that don't change their logos. O We can't make any of the above statementsarrow_forward“When the stock market declines the net worth of companies decreases, causing the problem of asymmetric information to decrease as well.” Is this statement true, false, or uncertain? Explain your answer.arrow_forward
- Based on the CAPM, Jensen's Alpha of a firm a) equals zero if the firm's stock returns have underperformed as compared to the market after adjusting for its beta risk. b) is positive if the firm's stock returns have overperformed as compared to the market after adjusting for its beta risk. c) is negative if the firm's stock returns have overperformed as compared to the market after adjusting for its beta risk. d) equals one if the firm's stock returns have underperformed as compared to the market after adjusting for its beta risk.arrow_forwardBeta calculations are subject to which of the following limitations? a. The market's rate of return varies from year to year. b. Beta is known to be erratic and unpredictable. c. Collecting rate of return data on individual assets is difficult. d. Beta is determined from historical data, and the stock's characteristics might have changed since hte measurement was performed.arrow_forwardGiven the following anomalies, which is inconsistent with weak-form market efficiency? Day-of-the-week effect. Value effect. Earnings surprise. Stock split effect. All of the above answers are inconsistent with weak-form market efficiency. None of the above answers is consistent with weak-form market efficiency.arrow_forward
- Suppose that, after conducting an analysis of past stock prices, you come up with the following observations. Which would appear to contradict the weak form of the efficient market hypothesis? Explain.a. The average rate of return is significantly greater than zero.b. The correlation between the return during a given week and the return during the following week is zero.c. One could have made superior returns by buying stock after a 10% rise in price and selling after a 10% fall.d. One could have made higher-than-average capital gains by holding stocks with low dividend yields.arrow_forwardWhich is true in relation to stock market efficiency? A.Market Price and Intrinsic value are inputs in determining whether a share is overvalued or undervalued B. If markets are truly efficient, each share prices should have a high deviation from its intrinsic value C. Intrinsic Value is readily observed from the stock market daily reports D. Large companies which is followed by many analyst are generally considered as highly inefficientarrow_forwardEconomics According to Technical Analysis, a stock velocity statistics most closely resembles which of the following modern concepts? O Value at Risk O beta O Expected Shortfall O sigma Which of the following technical analysis technique is most likely to utilize spectral analysis from physics? O Relative Strength theory O Value theory O Elliot wave theory O Momentum theory Who, of the following people, is most often referred to as the "grandfather of technical analysis"? O Andrew Lo O Burton Malkiel O Charles Dow Edward and Mageearrow_forward
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