Investments
11th Edition
ISBN: 9781259277177
Author: Zvi Bodie Professor, Alex Kane, Alan J. Marcus Professor
Publisher: McGraw-Hill Education
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Question
Chapter 11, Problem 15PS
Summary Introduction
To determine: If it is a violation of the EMH, when the stock show an average consistently positive returns, even before there is an increase in the large dividends.
Introduction: The
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Assuming that the stock price follows a geometric Brownian motion, is it a Markov process when the coefficient is not constant?
1.Which of the following is assumed by the Black-Scholes-Merton model?
A.The return from the stock in a short period of time is lognormal
B.The stock price at a future time is lognormal
C.The stock price at a future time is normal
D.None of the above
1. Suppose stock A has a higher volatility than stock B. According to CAPM,
which one is expected to deliver a higher return?
A. A
B. B
C. The information provided is insufficient
D. None of above is correct
Chapter 11 Solutions
Investments
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- Based on the CAPM model, a stock with a negative beta has which of the following characteristics? A. An expected return less than zero. B. An expected return equal to the risk-free rate. C. Since these are so rare, the CAPM model does not account for negative beta stocks. D. An expected return less than the risk-free rate.arrow_forwardAssume that the risk-free rate remains constant, but the market risk premium declines. Which of the following is most likely to occur? a. The required return on a stock with beta = 1.0 will not change. b. The required return on a stock with beta > 1.0 will increase. c. The return on "the market" will increase. d. The return on "the market" will remain constant. e. The required return on a stock with a positive beta < 1.0 will decline.arrow_forwardWhich of the following statements is INCORRECT about the Random Walk Hypothesis? A) It assumes successive returns are statistically independent. B) It assumes there is no correlation between the returns in one period and the next. C) It assumes the distribution of returns in all periods is identical. D) It assumes historical share prices can be used to predict future price movements.arrow_forward
- How can you evaluate if stocks are underperforming?arrow_forwardIn efficient markets, the rate of return on a stock should be: A. always greater than the risk-free rate B. Less than zero C. Related to the systemic risk of the stock D. Zero; no stock should earn a positive returnarrow_forwardWhich of the following statements is CORRECT? a. The slope of the Security Market Line is beta. b. Any stock with a negative beta must in theory have a negative required rate of return, provided rRF is positive. c. If a stock's beta doubles, its required rate of return must also double. d. If a stock's returns are negatively correlated with returns on most other stocks, the stock's beta will be negative. e. If a stock has a beta of to 1.0, its required rate of return will be unaffected by changes in the market risk premium.arrow_forward
- State whether the following statement is True or False and explain why. “The return on a risk-free asset and the return on any common stock are perfectly negatively correlated.”arrow_forwardA “random walk” occurs when:a. Stock price changes are random but predictable.b. Stock prices respond slowly to both new and old information.c. Future price changes are uncorrelated with past price changes.d. Past information is useful in predicting future prices.arrow_forwardAccording to the CAPM, a stock's expected return is positively related to its beta. True or False True Falsearrow_forward
- 3) The return on a stock, in a factor model, in a given period will be related to A) firm-specific events. B) macroeconomic events. C) the error term. D) both firm-specific events and macroeconomic events. E) neither firm-specific events nor macroeconomic events. 4) Assume the index model is valid, what inputs will be required to determine covariance between two assets? A) βk B) βL C) σM D) all of the options E) None of the options are correct.Choose the correct answer with justification.arrow_forwardSuppose we observe from market data that, for a given non-dividend paying stock, F, ± Soer. What might explain the inequality in this relationship (i.e. why don't we observe Fo = Soer") if markets are efficient? Hint: try to identify real-world market frictions that might cause cases where F, + S,e! does not result in arbitrage opportunities rTarrow_forward1. What effect does increasing inflation expectations have on the required returns of investors in common stock? 2. Explain the specific relationship between risk and reward and why this relationship must be true.arrow_forward
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