Investments
11th Edition
ISBN: 9781259277177
Author: Zvi Bodie Professor, Alex Kane, Alan J. Marcus Professor
Publisher: McGraw-Hill Education
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Chapter 11, Problem 4CP
Summary Introduction
To determine:
In accordance with
Introduction:
EMH which is known as efficient market hypothesis stand to be the investment theory wherein price of a share represent the entire information, however consistent alpha generation stands to be impossible. Hypothetically, the risk adjusted excess returns cannot be produced by either fundamental or technical analysis .Stock generally trade at fair value, over the stock exchange in accordance with efficient market hypothesis which makes it difficult for investors to sell stock at inflated prices or to purchase stocks at undervalued prices.
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According to the theory of arbitrage:a. High-beta stocks are consistently overpriced.b. Low-beta stocks are consistently overpriced.c. Positive alpha investment opportunities will quickly disappear.d. Rational investors will pursue arbitrage opportunities consistent with their risk tolerance.
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.
Assume 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.
Chapter 11 Solutions
Investments
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- A stock that has a negative beta tends to a. move up when the market as a whole moves down. b. move down when the market as a whole moves down. c. be volatile compared to the market as a whole. d. be stable compared to the market as a whole.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_forwardSuppose you find that prices of stocks before large dividend increases show on average consistently positive abnormal returns. Is this a violation of the EMH?arrow_forward
- Which of the following statements is most correct? Why?* a. If a market is weak-form efficient, this means that prices rapidly reflect all available public information. b. If a market is weak-form efficient, this means that you can expect to beat the market by using technical analysis that relies on the charting of past prices. c. If a market is strong-form efficient, this means that all stocks should have the same expected return. d. All of the statements above are correct. c. None of the statements above is correct.arrow_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_forward1.Why will the standard deviation not be a good measure of risk when returns are negatively skewed? 2. What are the risk implications for an investor for a returns series that exhibits fat tails? 3. A price weighted index places more weight on stocks with a higher price, whilst a value weighted index places more weight on stocks with a higher market capitalization. Discuss.arrow_forward
- Which 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 will (holding everything else constant) cause the price earnings (P/E) ratio of a stock to decrease: The required return increases The risk-free rate decreases The stock's beta decreases The required return decreasesarrow_forwardThe SML shows the return needed given risk as measured by beta. And there are situations where a stock might be mispriced relative to CAPM. Given the relationship with the security mark line (SML), if a stock is properly priced relative to CAPM , where would it plot on the graph relative to the SML? A. on the Y-axis B. on the security market line C. below the security market line D. above the security market linearrow_forward
- 1. A stock with a beta of zero would be expected to have a rate of return equal to a. the risk-free rate b. the market risk premium c. zero d. the market rate of return 2. If an individual stock's beta is higher than 1.0, that stock is: a. riskier than the market. b. always the most attractive to investors. c. less risky than the market. d. exactly as risky as the market. 3. If Brewer Corporation's bonds are currently yielding 8% in the marketplace, why is the firm's cost of debt lower? a. Market interest rates have increased. b. Additional debt can be issued more cheaply than the original debt. c. Interest is deductible for tax purposes. d. There should be no difference; cost of debt is the same as the bonds' market yield.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_forward“There is no alpha in an efficient market”. In light of this statement, briefly describe market efficiency and its forms and why an investor may not be able to locate stocks that provide a positive alpha (undervalued stocks) consistentlyarrow_forward
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