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Chapter 2: Q21I (page 285)

Question: Yesterday, the Dow Jones industrials gained 54 points. However, 1,704 issues declined in price while 1,367 advanced. Why might a technical analyst be concerned even though the market index rose on this day?

Short Answer

Expert verified

Answer

A technical analyst will be concerned because the pattern shows a “lack of broad based support”

Step by step solution

01

Definition

Dow Jones is a price weighted measurement stock market index of 30 prominent companies listed on stock exchange in United States.

02

Explanation on concerns of technical analyst

The pattern of the Dow Jones, as described above shows the lack of breadth. This is evident from the pattern where despite the index having gone up, more stocks have declined than advanced, which indicates a “lack of broad based support” for the rise in the market.

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Most popular questions from this chapter

Assume that a company announces an unexpectedly large cash dividend to its shareholders. In an efficient market without information leakage, one might expect:

a. An abnormal price change at the announcement.

b. An abnormal price increase before the announcement.

c. An abnormal price decrease after the announcement.

d. No abnormal price change before or after the announcement.

The security market line depicts:

a. A security’s expected return as a function of its systematic risk.

b. The market portfolio as the optimal portfolio of risky securities.

c. The relationship between a security’s return and the return on an index.

d. The complete portfolio as a combination of the market portfolio and the risk-free asset.

Are the following true or false? Explain.

a. Stocks with a beta of zero offer an expected rate of return of zero.

b. The CAPM implies that investors require a higher return to hold highly volatile securities.

c. You can construct a portfolio with beta of .75 by investing .75 of the investment budget in T-bills and the remainder in the market portfolio.

Your investment client asks for information concerning the benefits of active portfolio management. She is particularly interested in the question of whether active managers can be expected to consistently exploit inefficiencies in the capital markets to produce above-average returns without assuming higher risk.

The semi-strong form of the efficient market hypothesis asserts that all publicly available information is rapidly and correctly reflected in securities prices. This implies that investors cannot expect to derive above-average profits from purchases made after information has become public because security prices already reflect the information’s full effects.

a. Identify and explain two examples of empirical evidence that tend to support the EMH implication stated above.

b. Identify and explain two examples of empirical evidence that tend to refute the EMH implication stated above.

c. Discuss reasons why an investor might choose not to index even if the markets were, in fact, semi-strong-form efficient.

Shares of small firms with thinly traded stocks tend to show positive CAPM alphas. Is this a violation of the efficient market hypothesis?
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