Topic 1

Chapter 14:

Concept Questions 3: Efficient Market Hypothesis

Which of the following statements are true about the efficient market hypothesis?

a. It implies perfect forecasting ability.

b. It implies that prices reflect all available information.

c. It implies an irrational market.

d. It implies that prices do not fluctuate.

e. It results from keen competition among investors

Concept Questions 5: Efficient Market Hypothesis

A stock market analyst is able to identify mispriced stocks by comparing the average price for the last 10 days to the average price for the last 60 days. If this is true, what do you know about the market?

Concept Questions 9: Efficient Market Hypothesis

Several celebrated investors and stock pickers frequently mentioned in the financial press have recorded huge returns on their investments over the past two decades. Does the success of these particular investors invalidate the EMH? Explain.

Concept Questions 15: Efficient Market Hypothesis

Aerotech, an aerospace technology research firm, announced this morning that it has hired the world's most knowledgeable and prolific space researchers. Before today Aerotech's stock had been selling for $100. Assume that no other information is received over the next week and the stock market as a whole does not move.

a. What do you expect will happen to Aerotech's stock?

b. Consider the following scenarios:

i The stock price jumps to $118 on the day of the announcement. In subsequent days it floats up to $123, then falls back to $116.

ii. The stock price jumps to $116 and remains at that level.

iii. The stock price gradually climbs to $116 over the next week. Which scenario(s) indicate market efficiency? Which do not? Why?

Concept Questions 22: Efficient Market Hypothesis

A famous economist just announced the The Wall Street Journal his findings that the recession is over and the economy is again entering an expansion. Assume market efficiency. Can you profit from investing in the stock market after you read this announcement?