Chapter 2: Question 4B (page 258)
A successful firm like Microsoft has consistently generated large profits for years. Is this a violation of the EMH?
The correct answer is NO.
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A market anomaly refers to:
a. An exogenous shock to the market that is sharp but not persistent.
b. A price or volume event that is inconsistent with historical price or volume trends.
c. A trading or pricing structure that interferes with efficient buying and selling of securities.
d. Price behavior that differs from the behavior predicted by the efficient market hypothesis.
Two investment advisers are comparing performance. One averaged a 19% return and the other a 16% return. However, the beta of the first adviser was 1.5, while that of the second was 1.
a. Can you tell which adviser was a better selector of individual stocks (aside from the issue of general movements in the market)?
b. If the T-bill rate were 6% and the market return during the period were 14%, which adviser would be the superior stock selector?
c. What if the T-bill rate were 3% and the market return 15%?
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: The variable ( A ) in the utility formula represents the:
a. Investor’s return requirement.
b. Investor’s aversion to risk.
c. Certainty equivalent rate of the portfolio.
d. Preference for one unit of return per four units of risk.
Characterize each company in the previous problem as underpriced, overpriced, or properly priced.
What would be the fair return for each company, according to the capital asset pricing model (CAPM)?
If the simple CAPM is valid, which of the situations in Problems 13 – 19 below are possible? Explain. Consider each situation independently.
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