AFM101 Chapter 13: AFM 101 chapter 13 notes.6

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).

6. Constant-growth rates One of the most important components ofstock valuation is a firm’s estimated growth rate. Financialstatements provide the information needed to estimate the growthrate. Kenji Taylor, an equity research analyst at Taylor Advisors,believes in efficient markets. He has been following the miningindustry for the past 10 years and needs to determine theconstant-growth rate that he should use while valuing Pan AsiaMining Co. Kenji has the following information available: • PanAsia Mining Co.’s stock (Ticker: PAMC) is trading at 16.25 pershare. • The company has forecasted net income and book value ofequity for the coming year to be $1,025,700 and $8,027,500,respectively. • The company has also been paying dividends for thepast 8 years and has maintained a dividend payout ratio of 32.50%.Based on this information, Kenji’s forecast of PAMC’s growth ratein earnings and dividends should be . Which of the followingstatements accurately describes the relationship between earningsand dividends, when all other factors are held constant? Long-runearnings growth occurs primarily because firms retain earnings andreinvest them in the business. Dividend growth and earnings growthare unrelated. Paying a higher percentage of earnings as dividendswill result in a higher growth rate.

Question 25

1. What does the efficient market hypothesis require?

1. Financial markets to be competitive.

2. Prices to adjust rapidly.

3. Prices of undervalued securities to fall.

3 points

Question 26

1. Which of the following does the strong form of the efficient market hypothesis suggest?

1. Inside information will not lead to superior investment results.

2. Inside information will lead to superior investment results.

3. Studying financial statements will not lead to superior investment results.

4. Studying financial statements will lead to superior investment results.

3 points

Question 27

1. Which of the following is the least broad-based measure of stock prices?

3 points

Question 28

1. What is dollar-cost averaging?

2 points

Question 29

1. Stock dividends cause:

2 points

Question 30

1. Which of the following occurs when a stock has a two-for-one split?

3 points

Question 31

1. Dividend reinvestment plans offer which of the following advantages?

1. Deferment of federal income taxes.

2. A convenient means to accumulate shares.

3. Dollar-cost averaging.

3 points

Question 32

1. When the Federal Reserve seeks to expand the money supply, it:

2 points

Question 33

1. The sum of cash, currency, and demand deposits is:

3 points

Question 34

1. If the Federal Reserve lowers the target federal funds rate:

3 points

Question 35

1. The anticipation of inflation suggests that the investor should:

3 points

Question 36

1. The current ratio is unaffected by:

2 points

Question 37

1. Which of the following are true as the debt ratio increases?

1. Fewer assets are debt financed.

2. More assets are debt financed.

3. The ratio of debt equity increases.

4. The ratio of debt equity decreases.

2 points

Question 38

1. The technical approach suggests that future stock prices are forecasted by:

2 points

Question 39

1. The Dogs of the Dow strategy:

3 points

Question 40

1. Behavioral finance combines aspects from which two fields in an attempt to identify human traits that affect investment decisions?