Chapter 2: Question 8-22I (page 260)
Good News, Inc., just announced an increase in its annual earnings, yet its stock price fell. Is there a rational explanation for this phenomenon?
The correct answer is “mismatch in announcement with anticipation”.
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Which of the following observations would provide evidence against the semi-strong form of the efficient market theory? Explain.
a. Mutual fund managers do not on average make superior returns.
b. You cannot make superior profits by buying (or selling) stocks after the announcement of an abnormal rise in dividends.
c. Low P/E stocks tend to have positive abnormal returns.
d. In any year approximately 50% of pension funds outperform the market.
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%?
Suppose there are two independent economic factors, M 1 and M 2 . The risk-free rate is 7%, and all stocks have independent firm-specific components with a standard deviation of 50%. Portfolios A and B are both well diversified.
What is the expected return–beta relationship in this economy?
Shares of small firms with thinly traded stocks tend to show positive CAPM alphas. Is this a violation of the efficient market hypothesis?
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 above, which investment would you select if you were risk neutral?
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