Corporate Finance
12th Edition
ISBN: 9781259918940
Author: Ross, Stephen A.
Publisher: Mcgraw-hill Education,
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Question
Chapter 14, Problem 13CQ
Summary Introduction
To discuss: The issues of market efficiency.
Introduction:
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Students have asked these similar questions
Which flow of funds indicator is considered bearish for equities?
A. Higher than Average cash balances in mutual funds
B. A Large increase in the number of IPOs
C. An upturn inmargin debt but one that is still below the long-term average
Investments in large-cap stocks have historically earned lower returns than small-cap stocks. This suggests that _____________________.
Data on small-cap stocks was less accurate than for large-cap stocks.
Small-cap stocks were riskier than large-cap stocks and offer higher returns in compensation
Small-cap stocks had better management than large-cap stocks
Government subsidies available to small firms produced a positive effect on small-cap returns
Consider the following information about the various states of economy and the returns
of various investment alternatives for each scenario. Answer the questions that follow.
State of the Economy
Recession
Below Average
Average
Above Average
Boom
Mean
Standard Deviation
Coefficient of Variation
Covariance with MP
Correlation with Market Index
Beta
CAPM Req. Return
Valuation
(Overvalued/Undervalued/Fairly
Valued)
Nature of stock
(Aggressive/Defensive)
Probability
0.2
0.1
0.3
0.3
0.1
Question 2
% Return on T-Bills, Stocks and Market
Index
Pay- Rubber- Market
made
Index
10
-13
T-
Bills
7
7
7
7
7
Phillips
-22
-2
20
35
50
up
28
14.7
0
-10
-20
Question 1
Fill the parts in the above table that are shaded in yellow. You will notice that there are
nine line items.
Using the data generated in the previous question (Question 1);
a) Plot the Security Market Line (SML)
-10
7
45
30
1
15
29
43
b) Superimpose the CAPM's required return on the SML
c) Indicate which investments will plot on, above and…
Chapter 14 Solutions
Corporate Finance
Ch. 14 - Prob. 1CQCh. 14 - Prob. 2CQCh. 14 - Efficient Market Hypothesis Which of the following...Ch. 14 - Market Efficiency Implications Explain why a...Ch. 14 - Efficient Market Hypothesis A stock market analyst...Ch. 14 - Semistrong Efficiency If a market is semistrong...Ch. 14 - Efficient Market Hypothesis What are the...Ch. 14 - Prob. 8CQCh. 14 - Prob. 9CQCh. 14 - Efficient Market Hypothesis For each of the...
Ch. 14 - Technical Analysis What would a technical analyst...Ch. 14 - Prob. 12CQCh. 14 - Prob. 13CQCh. 14 - Efficient Markets A hundred years ago or so,...Ch. 14 - Efficient Market Hypothesis Aerotech, an aerospace...Ch. 14 - Prob. 16CQCh. 14 - Prob. 17CQCh. 14 - Efficient Market Hypothesis Newtech Corp. is going...Ch. 14 - Prob. 19CQCh. 14 - Efficient Market Hypothesis The Durkin Investing...Ch. 14 - Efficient Market Hypothesis Your broker commented...Ch. 14 - Efficient Market Hypothesis A famous economist...Ch. 14 - Efficient Market Hypothesis Suppose the market is...Ch. 14 - Prob. 24CQCh. 14 - Prob. 25CQCh. 14 - Efficient Market Hypothesis Assume that markets...Ch. 14 - Prob. 27CQCh. 14 - Evidence on Market Efficiency Some people argue...Ch. 14 - Prob. 1QAPCh. 14 - Prob. 2QAPCh. 14 - Prob. 3QAPCh. 14 - Prob. 4QAPCh. 14 - Prob. 1MCCh. 14 - Prob. 2MCCh. 14 - Prob. 3MC
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Similar questions
- Beta calculations are subject to which of the following limitations? a. The market's rate of return varies from year to year. b. Beta is known to be erratic and unpredictable. c. Collecting rate of return data on individual assets is difficult. d. Beta is determined from historical data, and the stock's characteristics might have changed since hte measurement was performed.arrow_forwardIf markets systematically overreact, then the best stocks to buy today are those stocks which have: a. Recently performed exceedingly well b. Recently performed poorly c. Not yet reacted to economic changes d. Moved sharply above its recent high pricearrow_forwardWhile the capital asset pricing model (CAPM) has been widely used to analyze securities and manage portfolios for the past 50 years, it has also been widely criticized as providing too simple a view of risk. Describe three problems in relation to the definition and estimation of the beta measure in the CAPM that would support this criticism.arrow_forward
- Throughout the 1990s, the equity premium fell considerably especially in the USA. One conceivable reason for that change is a decrease in investors’ required rates of return. Explain carefully how and why a decline in the required rate of return affects stock values and returns.arrow_forwardCorporate Finance Since roughly the mid-1980’s, the cumulative performance of a Small Minus Big portfolio has been roughly zero. Does this mean the Fama & French three-factor model is theoretically incorrect?arrow_forwardDiversification occurs when stocks with low correlations of returns are placed together in a portfolio. Identify at least one type of firm that might exhibit low correlations of returns with the overall stock market? Explain why the correlations of these firms are expected to be low.arrow_forward
- Which of the following is most accurate in describing the problems of survivorship bias and backfill bias in the performance evaluation of hedge funds?a. Survivorship bias and backfill bias both result in upwardly biased hedge fund index returns.b. Survivorship bias and backfill bias both result in downwardly biased hedge fund index returns.c. Survivorship bias results in upwardly biased hedge fund index returns, but backfill bias results in downwardly biased hedge fund index returns.arrow_forwardAfter doing analysis, institutional investors and hedge funds managers (institutionals) felt GameStop stock was overvalued. The short squeeze orchestrated by users forced the institutionals to buy the GameStop shares at a higher price than they had anticipated when they covered the short. Group of answer choices True Falsearrow_forwardWhich of the following is NOT a potential problem when estimating and using betas, i.e., which statement is FALSE? a. Sometimes, during a period when the company is undergoing a change such as toward more leverage or riskier assets, the calculated beta will be drastically different from the "true" or "expected future" beta. b. The beta of an "average stock," or "the market," can change over time, sometimes drastically. c. Sometimes the past data used to calculate beta do not reflect the likely risk of the firm for the future because conditions have changed. d. All of the statements above are true. e. The fact that a security or project may not have a past history that can be used as the basis for calculating beta.arrow_forward
- A portfolio manager is running a strategy whose tracking error last year was close to zero. Based on this information only, can you comment on how successful this strategy is? More generally, provide the definition of tracking error and describe briefly whether a high or low tracking error is preferred, and why.arrow_forwardConsider the following information regarding the performance of a money manager in a recent month. The table represents the actual return of each sector of the manager’s portfolio in column 1, the fraction of the portfolio allocated to each sector in column 2, the benchmark or neutral sector allocations in column 3, and the returns of sector indices in column 4. Actual Return Actual Weight Benchmark Weight Index Return Equity 2% 0.70 0.60 2.5% (S&P 500) Bonds 1 0.20 0.30 1.2 (Barclay’s Aggregate) Cash 0.5 0.10 0.10 0.5 Required: a-1. What was the manager’s return in the month? (Do not round intermediate calculations. Input all amounts as positive values. Round your answer to 2 decimal places.) a-2. What was her overperformance or underperformance? (Do not round intermediate calculations. Input all amounts as positive values. Round your answer to 2 decimal places.)arrow_forwardConsider the following information regarding the performance of a money manager in a recent month. The table represents the actual return of each sector of the manager’s portfolio in column 1, the fraction of the portfolio allocated to each sector in column 2, the benchmark or neutral sector allocations in column 3, and the returns of sector indices in column 4. Actual Return Actual Weight Benchmark Weight Index Return Equity 2% 0.70 0.60 2.5% (S&P 500) Bonds 1 0.20 0.30 1.2 (Barclay’s Aggregate) Cash 0.5 0.10 0.10 0.5 b. What was the contribution of security selection to relative performance? (Do not round intermediate calculations. Round your answer to 2 decimal places. Negative amount should be indicated by a minus sign.) c. What was the contribution of asset allocation to relative performance? (Do not round intermediate calculations. Round your answer to 2 decimal places.)arrow_forward
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