Fundamentals of Corporate Finance
11th Edition
ISBN: 9780077861704
Author: Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Bradford D Jordan Professor
Publisher: McGraw-Hill Education
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Chapter 12, Problem 9CRCT
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8. The efficient markets hypothesis
True or False: The efficient markets hypothesis holds only if all investors are rational.
O False
O True
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 described in the following statement:
Current market prices reflect all relevant information, whether it is known publicly or privately.
This statement is consistent with:
O Semistrong form efficiency
O Strong form efficiency
O Weak form efficiency
History suggests that all stock market bubbles will eventually pop and cause severe financial loss for many of those who purchased stock. Given this history, do you think that stock market bubbles will continue to occur? Why or why not?
What is Efficient Market Hypothesis (EMH)
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article if needed: The Global Financial Crisis and the Efficient Market Hypothesis, What have we learned?
Chapter 12 Solutions
Fundamentals of Corporate Finance
Ch. 12.1 - Prob. 12.1ACQCh. 12.1 - Why are unrealized capital gains or losses...Ch. 12.1 - What is the difference between a dollar return and...Ch. 12.2 - Prob. 12.2ACQCh. 12.2 - Why doesnt everyone just buy small stocks as...Ch. 12.2 - What was the smallest return observed over the 88...Ch. 12.2 - About how many times did large-company stocks...Ch. 12.2 - What was the longest winning streak (years without...Ch. 12.2 - How often did the T-bill portfolio have a negative...Ch. 12.3 - Prob. 12.3ACQ
Ch. 12.3 - What was the real (as opposed to nominal) risk...Ch. 12.3 - Prob. 12.3CCQCh. 12.3 - What is the first lesson from capital market...Ch. 12.4 - In words, how do we calculate a variance? A...Ch. 12.4 - With a normal distribution, what is the...Ch. 12.4 - Prob. 12.4CCQCh. 12.4 - What is the second lesson from capital market...Ch. 12.5 - Prob. 12.5ACQCh. 12.5 - Prob. 12.5BCQCh. 12.6 - What is an efficient market?Ch. 12.6 - Prob. 12.6BCQCh. 12 - Chase Bank pays an annual dividend of 1.05 per...Ch. 12 - The risk premium is computed as the excess return...Ch. 12 - Prob. 12.4CTFCh. 12 - Prob. 12.5CTFCh. 12 - Prob. 12.6CTFCh. 12 - Investment Selection [LO4] Given that Fannie Mae...Ch. 12 - Prob. 2CRCTCh. 12 - Risk and Return [LO2, 3] We have seen that over...Ch. 12 - Market Efficiency Implications [LO4] Explain why a...Ch. 12 - Efficient Markets Hypothesis [LO4] A stock market...Ch. 12 - Semistrong Efficiency [LO4] If a market is...Ch. 12 - Efficient Markets Hypothesis [LO4] What are the...Ch. 12 - Stocks versus Gambling [LO4] Critically evaluate...Ch. 12 - Efficient Markets Hypothesis [LO4] Several...Ch. 12 - Efficient Markets Hypothesis [LO4] For each of the...Ch. 12 - Calculating Returns [LO1] Suppose a stock had an...Ch. 12 - Calculating Yields [LO1] In Problem 1, what was...Ch. 12 - Prob. 3QPCh. 12 - Prob. 4QPCh. 12 - Nominal versus Real Returns [LO2] What was the...Ch. 12 - Bond Returns [LO2] What is the historical real...Ch. 12 - Prob. 7QPCh. 12 - Risk Premiums [LO2, 3] Refer to Table 12.1 in the...Ch. 12 - Calculating Returns and Variability [LO1] Youve...Ch. 12 - Calculating Real Returns and Risk Premiums [LO1]...Ch. 12 - Calculating Real Rates [LO1] Given the information...Ch. 12 - Prob. 12QPCh. 12 - Prob. 13QPCh. 12 - Calculating Returns and Variability [LO1] You find...Ch. 12 - Arithmetic and Geometric Returns [LO1] A stock has...Ch. 12 - Arithmetic and Geometric Returns [LO1] A stock has...Ch. 12 - Using Return Distributions [LO3] Suppose the...Ch. 12 - Prob. 18QPCh. 12 - Distributions [LO3] In Problem 18, what is the...Ch. 12 - Blumes Formula [LO1] Over a 40-year period an...Ch. 12 - Prob. 21QPCh. 12 - Calculating Returns [LO2, 3] Refer to Table 12.1...Ch. 12 - Using Probability Distributions [LO3] Suppose the...Ch. 12 - Using Probability Distributions [LO3] Suppose the...Ch. 12 - Prob. 1MCh. 12 - Prob. 2MCh. 12 - Prob. 3MCh. 12 - Prob. 4MCh. 12 - A measure of risk-adjusted performance that is...Ch. 12 - Prob. 6M
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- weak form efficient? Explain. 10.7 Efficient Markets Hypothesis What are the implications of the efficient markets hypothesis for investors who buy and sell stocks in an attempt to 04 "beat the market"? 10 8 Stocks verSus Gambling Critically evaluate the following statement:arrow_forwardSeveral celebrated investors and stock pickers have recorded huge returns on their investments over the past two decades. Is the success of these particular investors an invalidation of an efficient stock market? Explain.arrow_forwardWhat are efficient markets? Imagine if the price of a stock is going up and financial markets are efficient what can you tell us about the nature of the stock? What if the markets are inefficient then how would you react to increasing prices for a particular stock?arrow_forward
- CG hypothesize that non-tech companies were not expected to benefit from the tech revolution. However, we know now that improvements in technology had a substantial impact in all sectors of the economy.. In hindsight, the run up in the Dow Jones Index observed in the late 1990s was not really a bubble. Do you agree with this conclusion? Select one: O a. Yes, stock prices usually reflect news of future fundamentals. O b. No, this is an ex-post evidence. O c. Can't say. It depends on the information that was available to market participants. Clear my choicearrow_forwardH5. Dan has heard that his required investing knowledge is redced due to the efficient market hypothesis. which of the following is not an implication he can rely on? a) stocks are fairly valued overtime b) technical analysis will not help him choose better c) his best strategy is to buy and hold d) the odd hot tip can help him beat the market from time to timearrow_forwardWhat is a "Bubble?" Does a bubble in the Stock Market mean that the Market is not efficient?arrow_forward
- The efficient markets hypothesis True or False: The efficient markets hypothesis holds only if all investors are rational. False True 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 described in the following statement: Current market prices reflect all information contained in past price movements. This statement is consistent with: Strong form efficiency Semistrong form efficiency Weak form efficiency…arrow_forwardChoose Correct word in Bold Suppose you are an investor who owns shares of Facebook stock. If the Fed implements a stimulative monetary policy, then interest rates will (increase/decrease). If, as a result of the policy implementation, you believe that the economic conditions are much worse than anyone is anticipating, and that sales and earnings for Facebook could decrease significantly in the near future, then you believe that the value of the stocks will (increase/decrease), and as a result, your shares of Facebook stock would (increase/decrease) in value.arrow_forwardWhich of the following is a diversifiable risk? Multiple Choice The risk that the economy will go into a recession The price of oil rising The risk that a company's CEO is killed in a plane crash Inflation The corporate tax rate rising by 5%arrow_forward
- “When the stock market rises, investment spending isincreasing.” Is this statement true, false, or uncertain?Explain your answerarrow_forwardHi goodmorning can you answer questions 2 this is a continuation from question one . Question 2 Using the data generated in the previous question a) Plot the Security Market Line (SML) b) Superimpose the CAPM’s required return on the SML c) Indicate which investments will plot on, above and below the SML? d) If an investment’s expected return (mean return) does not plot on the SML, what does it show? Identify undervalued/overvalued investments from the grapharrow_forwardA friend of yours owns a company that is about to get a large government contract. He tells you this inside information about the contract and also mentions that it should make the company's stock price increase dramatically. If you invest based on this inside information, then you are implicitly saying that stock markets are inefficient in which context? Question 5 options: weak form efficient market theory semi-strong form efficient market theory strong form efficient market theoryarrow_forward
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