FINE 3200 Lecture Notes - Lecture 6: Business Cycle, Pure Luck, Abnormal Return

63 views5 pages

pearantelope799

23 May 2017

School

Department

Course

Professor

For unlimited access to Class Notes, a Class+ subscription is required.

Document Summary

This is the definition of an efficient market. c. the p/e ratio is public information and should not be predictive of abnormal security returns. Magna"s continuing high return on assets does not imply that stock market investors who purchased magna shares after its success already was evident would have earned a high return on their investments. The question for market efficiency is whether investors can earn abnormal risk- adjusted profits. If the stock price run-up occurs when only insiders are aware of the coming dividend increase, then it is a violation of strong-form, but not semi- strong form efficiency. If the public already knows of the increase, then it is a violation of semi-strong form efficiency. While positive beta stocks will respond well to favourable new information about the economy"s progress through the business cycle, they should not show abnormal returns around already anticipated events. If a recovery, for example, already is anticipated, the actual recovery is not news.

Related Questions

Which of the following statements is correct?

A. Semistrong-form market efficiency implies that as soon as any public or private information comes into being it is incorporated into stock prices.

B. Weak-form market efficiency implies that recent trends in stock prices are of no use in predicting future stock prices.

C. Market efficiency implies that all stocks should have the same expected return.

D. According to strong-form market efficiency, insiders would find it possible to consistently earn abnormal returns in the stock market even if they have superior knowledge about the company.

E. Studies of the Efficient Markets Hypothesis suggest that neither the weak-form nor the semi-strong forms of efficiency hold, especially for larger companies. However, the market appears to be strong-form efficient because institutional traders make abnormal profits.

azurekangaroo326

//////////1. Your investment in a small business venture will produce cash flows that increase by 15 percent every year for the next 25 years. This cash flow stream is called: a. an annuity due. b. a growing perpetuity. c. an ordinary annuity. d. a growing annuity. //////////2. If your investment pays the same amount at the end of each year forever, the cash flow stream is called: a. a perpetuity. b. an ordinary annuity. c. an annuity due. d. none of the above. //////////3. George purchased a stock for $45 one year ago. The stock is now worth $65. During the year, the stock paid a dividend of $2.50. What is the total return to George from owning the stock? (Round your answer to the nearest whole percent.) (3 pts) a. 5% b. 44% c. 35% d. 50% //////////4. Barbara purchased a piece of real estate last year for $85,000. The real estate is now worth $102,000. If Barbara needs to have a total return of 25 percent during the year, then what is the dollar amount of income that she needed to have to reach her objective? (4 pts) a. $3,750 b. $4,250 c. $4,750 d. $5,250 //////////5. The risk-free rate of return is currently 3 percent, whereas the market risk premium is 6 percent. If the beta of Lenz, Inc., stock is 1.8, then what is the expected return on Lenz? (4 pts) a. 8.40% b. 10.80% c. 13.80% d. 19.20% //////////6. Which one of the following statements is NOT true? a. Weak-form market efficiency implies that investors who have access to inside or private information will be able to earn abnormal returns. b. Semistrong-form market efficiency implies that investors who have access to inside or private information will be able to earn abnormal returns. c. Strong-form market efficiency implies that investors who have access to inside or private information will be able to earn abnormal returns. d. None of the above. //////////7. Bonds sell at a discount off the par value when market rates for similar bonds are a. Less than the bond

Please write a 250 word response to the below discussion. Please provide 2 scholarly sources.

The efficient market hypothesis states that share prices reflect all relevant information, and that it is impossible to beat the market or achieve above-average returns on a sustainable basis. There are many critics of this theory, such as behavioral economists, who believe in inherent market inefficiencies. The Efficient Market Hypothesis (EMH) states that securities are very efficient in reflecting the truth about a stock. In other words, when new information is available about a stock, it is incorporated into the price adjustments of the stock quickly enough to reflect the actual state of the market (Malkiel, 2003). EHM debunks the idea that financial analysis and forecasting are useful tools to shop for stocks. In other words, because securities accurately reflect the status of that stock, it is not possible to use financial analysis to find an undervalued stock or predict trends in the market in order to buy low with the future insight to sell high. There are three levels, or degrees, of the efficient market hypothesis: weak, semi-strong, and strong. The weak form assumes that current stock prices reflect all available information, and that past price performance has no relationship with the future. In other words, this form of the hypothesis says that using technical analysis to achieve exceptional returns is impossible. The semi-strong form says that stock prices have factored in all available public information. Because of this, it's impossible to use fundamental analysis to choose stocks that will beat the market's returns. Finally, the strong form of the efficient market hypothesis says that all information, public as well as private, is incorporated into current stock prices. This form of the efficient market hypothesis essentially assumes a perfect market, and isn't plausible when there are insider trading restrictions (VanBergen, 2011). Yes, I believe that financial statement analysis can provide a significant advantage to an investor. The key is that empirical analysis, specifically statistical models aimed at forecasting future trends based on historical data, are simply another tool to be taken in to account. They are not a single source of the definitive answer. But, through the use of high power computing and mathematically rigorous modeling tools, forecasting is a powerful tool to provide additional insight to decision makers to include the financial industry. In support of my position, (Malkiel 2003) reports the findings of several empirical studies which demonstrate positive statistical correlations in short-run return analysis and the successful prediction of up to 40% of variation in long-term return analysis through time-series statistical models, which are able to take into account seasonal fluctuations (Malkiel 2003). One experimental study demonstrated with statistical significance that the Ohlson model provides predictive ability for future stock price movements (Lee, Chen and Tsai, 2014).

crimsonmammoth143

FINE 3200 Lecture Notes - Lecture 6: Business Cycle, Pure Luck, Abnormal Return

Document Summary

Get access

Related Documents

FINE 3200 Lecture Notes - Lecture 7: Fat-Tailed Distribution, Efficient Frontier, Liquidity Premium

FINE 3200 Lecture Notes - Lecture 8: Active Management, Tulip Mania, Efficient-Market Hypothesis

FINE 3200 Lecture Notes - Lecture 5: The Intercept, S&P 500 Index, Standard Deviation

Related Questions