Logout Open In App
Open In App
Warning: foreach() argument must be of type array|object, bool given in /var/www/html/web/app/themes/studypress-core-theme/template-parts/header/mobile-offcanvas.php on line 20

Chapter 2: Q8-18I (page 260)

Why are the following “effects” considered efficient market anomalies? Are there rationalexplanations for these effects?

a. P/E effect

b. Book-to-market effect

c. Momentum effect

d. Small-firm effect

Short Answer

Expert verified

There are several anatomies including the ones mentioned above. Similarly there are many rational explanations offered. One of the most dominant explanation cites low trading value hence more risk due to their reduced liquidity.

Step by step solution

01

Definition

The distortions in return contrary to the Efficient Market Hypothesis are termed as efficient market anomaly.

02

Explanation

Usually considered an exception of EMH, there are historical data to prove that these have produced excess risk adjusted abnormal returns in past.

Amongst many explanations for several anatomies, one dominant explanation suggests that many of these firms have very low trading value hence they are not a part of an efficient market or offer more risk due to their reduced liquidity.

Unlock Step-by-Step Solutions & Ace Your Exams!

  • Full Textbook Solutions

    Get detailed explanations and key concepts

  • Unlimited Al creation

    Al flashcards, explanations, exams and more...

  • Ads-free access

    To over 500 millions flashcards

  • Money-back guarantee

    We refund you if you fail your exam.

Start your free trial

Over 30 million students worldwide already upgrade their learning with Vaia!

One App. One Place for Learning.

All the tools & learning materials you need for study success - in one app.

Get started for free

Most popular questions from this chapter

You are a portfolio manager meeting a client. During the conversation that follows your formal review of her account, your client asks the following question:

My grandson, who is studying investments, tells me that one of the best ways to make money in the stock market is to buy the stocks of small-capitalization firms late in December and to sell the stocks one month later. What is he talking about?

a. Identify the apparent market anomalies that would justify the proposed strategy.

b. Explain why you believe such a strategy might or might not work in the future.

Use the following data in answering CFA Questions:

Investor “satisfaction” with portfolio increases with expected return and decreases with variance according to the “utility” formula: U = E(r) - ½ Aσ2where A = 4.

Question: Based on the formula for investor satisfaction or “utility,” which investment would you select if you were risk averse with A = 4?

A “random walk” occurs when:

a. Stock price changes are random but predictable.

b. Stock prices respond slowly to both new and old information.

c. Future price changes are uncorrelated with past price changes.

d. Past information is useful in predicting future prices.

Assume both portfolios A and B are well diversified, that E ( r A ) = 14% and E ( r B ) = 14.8%. If the economy has only one factor, andβA= 1 whileβB = 1.1, what must be the risk-free rate?

You are a consultant to a large manufacturing corporation considering a project with the following net after-tax cash flows (in millions of dollars):

YEARS FROM NOWAfter-Tax CF
0
1-9
10		-20
10
20

The project’s beta is 1.7. Assuming r f = 9% and E ( r M ) = 19%, what is the net present value of the project? What is the highest possible beta estimate for the project before its NPV becomes negative?
See all solutions

Recommended explanations on Business Studies Textbooks

Human Resources

Read Explanation

Nature of Business

Read Explanation

Intermediate Accounting

Read Explanation

Organizational Behavior

Read Explanation

Influences On Business

Read Explanation

Corporate Finance

Read Explanation
View all explanations

What do you think about this solution?

We value your feedback to improve our textbook solutions.

Study anywhere. Anytime. Across all devices.

Sign-up for free