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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?Fundamental analysis is least likely to:a. Use security trends because it attempts to determine the intrinsic value of the stockb. Use macroeconomic factor because it uses information about the company.c. Use business model because measurement of stock is purely quantitatived. Put the management into microscope because stocks are valued in terms of demand and supplye. All of the abovef. None of the aboveWhich of the following would be a viable way to earn abnormally high trading profits if markets are semistrong-form efficient?a. Buy shares in companies with low P/E ratios.b. Buy shares in companies with recent above-average price changes.c. Buy shares in companies with recent below-average price changes.d. Buy shares in companies for which you have advance knowledge of an improvement in the management team.
- Strong form efficient market hypothesis states that stock prices reflects all the information in a market. The information may be public or private (i.e., insider information about the market) and such information will not benefit an investor in the form of higher returns.he concept of market efficiency underpins almost all financial theory and decision models. When financial markets are efficient, the price of a security—such as a share of a particular corporation’s common stock—should be (equal to or more than) the present value estimate of the firm’s expected cash flows discounted by its appropriate rate of return (also called the intrinsic value of the stock). Almost all financial theory and decision models assume that the financial markets are efficient. The informational efficiency of financial markets determines the ability of investors to “beat” the market and earn excess (or abnormal) returns on their investments. If the markets are efficient, they will react rapidly as new relevant information becomes available. Financial theorists have identified three levels of informational efficiency that reflect what information is incorporated in stock prices. Identify the form of capital market efficiency under the efficient market hypothesis…Reverse engineering share prices is an exercise in deductive reasoning. If we assume market price reflects share value, then through reverse engineering we can infer what the market assumes about a. the expected rate of return on equity capital, holding expected profitability and long-run growth constant. b. the expected profitability, holding the expected rate of return on equity capital and long-run growth constant. c. the expected long-run growth, holding the expected rate of return on equity capital and expected profitability constant.
- 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?The small firm effect refers to the observed tendency for stock prices to behave in a manner that is contrary to normal expectations. Describe this effect and discuss whether it represents sufficient information to conclude that the stock market does not operate efficiently. In formulating your response, consider: (a) what it means for the stock market to be inefficient, and (b) what role the measurement of risk plays in your conclusions about each effect.Which of the following are consistent with the efficient market hypothesis? Check all that apply. Changes in stock prices can be accurately predicted by investors. At the market price, the number of people who believe the stock is overvalued exactly equals the number of people who think the stock is undervalued. A positive news release about a company will increase the value and stock price for that firm. Some investors cite the existence of anomalies—observations that do not fit the model—as evidence that stock markets are not efficient. Which of the following are such anomalies? Check all that apply. The best time to sell a stock is late on Wednesday or Friday, whereas the best time to buy a stock is late on Tuesday or Thursday. The movement of stock prices of companies over time is the same as the changes in their earnings. High returns to a stock in one period are associated with even higher returns in a later period. There is a…
- True or False Please answer both. 1. High cash flow is generally associated with a higher share price whereas higher risk tends to result in a lower share price. 2. When considering each financial decision alternative or possible action in terms of its impact on the share price of the firm's stock, financial managers should accept only those actions that are expected to increase the firm's profitability.The efficient market hypothesis says that Multiple Choice market prices reflect underlying asset values. individual investors should not participate in the financial markets. investors should expect to earn abnormal profits. financial managers can accurately time stock and bond sales. creative accounting can be used to inflate stock prices.What are the conditions for stock market efficiency? Is it possible that market for individual stocks could be highly efficient but market for whole companies could be less efficient? Explain
