PRIN.OF CORPORATE FINANCE
13th Edition
ISBN: 9781260013900
Author: BREALEY
Publisher: RENT MCG
expand_more
expand_more
format_list_bulleted
Textbook Question
Chapter 13, Problem 6PS
- a) “The random-walk theory, with its implication that investing in stocks is like playing roulette, is a powerful indictment of our capital markets.”
- b) “If everyone believes you can make money by charting stock prices, then price changes won't be random.”
- c) “The random-walk theory implies that events are random, but many events are not random. If it rains today, there's a fair bet that it will rain again tomorrow. “
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solutionStudents have asked these similar questions
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.
Respond to each of the following comments.a. If stock prices follow a random walk, then capital markets are little different from a casino.b. A good part of a company’s future prospects are predictable. Given this fact, stock prices can’t possibly follow a random walk.c. If markets are efficient, you might as well select your portfolio by throwing darts at the stock listings in The Wall Street Journal.
Which of the following statements concerning the Efficient Market Hypothesis is correct?
Select one:
a. Stock market prices are based on speculation not on underlying information
b. New information that confirms investor expectations should change stock prices
c. Stock prices should slowly respond when unexpected information becomes available
d. Careful research can help investors earn abnormal profits
e. Your return on investment should reflect the riskiness of your portfolio
Chapter 13 Solutions
PRIN.OF CORPORATE FINANCE
Ch. 13 - Market efficiency True or false? The...Ch. 13 - Prob. 2PSCh. 13 - Market efficiency Which (if any) of these...Ch. 13 - Prob. 4PSCh. 13 - Market efficiency How would you respond to the...Ch. 13 - Market efficiency Respond to the following...Ch. 13 - Prob. 7PSCh. 13 - Prob. 8PSCh. 13 - Market efficiency evidence Which of the following...Ch. 13 - Prob. 10PS
Ch. 13 - Prob. 11PSCh. 13 - Prob. 12PSCh. 13 - Market efficiency implications What does the...Ch. 13 - Prob. 14PSCh. 13 - Prob. 15PSCh. 13 - Abnormal returns Here are alphas and betas for...Ch. 13 - Prob. 18PSCh. 13 - Behavioral finance True or false? a. Most managers...Ch. 13 - Prob. 20PSCh. 13 - Prob. 21PSCh. 13 - Prob. 22PS
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Similar questions
- Which of the following is/are true about the Efficient Markets Hypothesis (EMH) (I) The rate of return on a stock is equal to the expected return (II) Stocks are fairly valued (III) Stocks are always in equilibrium (IV) It's impossible for an investor who does not have inside information to constantly "beat the market" (a) I and II only (b) II and IV only (c) I only (d) all of the abovearrow_forwardWhich of the following is/are true about the Efficient Markets Hypothesis (EMH) I.The required rate of return on a stock is equal to the expected return II. Stocks are fairly valued III. Stocks are always in equilibrium IV. It is impossible for an investor who does not have inside information to constantly “beat the market” Select one: a. I and II only b. II and IV only c. I only d. All of the abovearrow_forwardYou believe you have found a trading strategy that could make significant profits. It requires looking at analyst forecasts and purchasing stock where therehas been an upgrade in the recommendation and selling shares where there has been a downgrade in the recommendation.a. Describe which form the Efficient Market Hypothesis will be viola ed if you are able to make significant profits from your trading strategy in the future.b. List three factors that you may be overlooking in assessing the profitability of your trading strategy.arrow_forward
- You are a risk-averse investor who is considering investing in one of two economies. The expectedreturn and volatility of all stocks in both economies is the same. In the first economy, all stocks movetogether in good times all prices rise together, and in bad times they all fall together. In the secondeconomy, stock returns are independent one stock increasing in price has no effect on the prices ofother stocks. Which economy would you choose to invest in? Explain. a. A risk averse investor would prefer the economy in which stock returns are independent becauseby combining the stocks into a portfolio he or she can get a higher expected return than in theeconomy in which all stocks move together.b. A risk averse investor would choose the economy in which stock returns are independent becauserisk can be diversified away in a large portfolio.c. A risk averse investor is indifferent in both cases because he or she faces unpredictable risk.d. A risk averse investor would choose the economy…arrow_forwardWhich of the following statements about the Efficient Market Hypothesis (EMH) is incorrect? Group of answer choices a)If the market is strong-form efficient, investors can not earn abnormal returns using inside information. b) If the investment in small firms earns a positive abnormal return, the stock market is not semi-strong form efficient. c) If a market is efficient, investors tend to follow a passive investment strategy. d) If the future stock price change depends on its history, the market is not weak-form efficient. e) If a market is weak-form efficient, fundamental analysis can not earn a positive abnormal return.arrow_forwardThe 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_forward
- basic economics can give us the sniff test. It provides us with a basic set of rules to which any decent investment advice must conform." These "set of rules" include all of the below EXCEPT THIS ONE. Which of the below is NOT one of these rules for wise investment? Group of answer choices Invest for the long run. Take risk, earn reward,. Engage in high risk short-term trading. Diversify your investments.arrow_forwardDay traders try to take advantage of the normal ebbs and flows of the market, seeking to buy stocks that are undervalued and sell them when they become overvalued. How does this compare to Warren Buffet’s investing strategy?arrow_forwardAnswer the following questions: A. Explain why the price of many individual stocks still goes down, even when the overall stock market goes up. b. How can you avoid the value of your stock from going down?arrow_forward
- Market efficiency requires: all investors are rational all the time. all investors are rational in the short term. all investors are rational in the long term. all investors are irrational in the short term. many investors are rational at any point in time. All of the above answers are correct. None of the above answers is correct.arrow_forwardSelect all that are takeaways with respect to risk and return in financial markets that we gleaned from historical data. Group of answer choices In a competitive market, one should expect higher returns for taking on more risk In a competitive market, one will earn a higher return if they take on more risk Individual stocks and portfolios (of those individual stocks), by definition, exhibit the same risk-return trade offs We use historical data to quantify the risk-return relation because we know this same relation will hold in the futurearrow_forwardWhich 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…arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
Chapter 8 Risk and Return; Author: Michael Nugent;https://www.youtube.com/watch?v=7n0ciQ54VAI;License: Standard Youtube License