Chapter 7: Q.8 (page 210)
“If stock prices did not follow a random walk, there would be unexploited profit opportunities in the market.” Is this statement true, false, or uncertain? Explain your answer.
There would be no profit chances in the market if the stock price did not vary. The assertion is incorrect.
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Suppose that you are a trader at the stock market. T-Mobile’s stocks currently trade at and the expected return is . You have information that leads you to believe that by the end of year the company’s returns will be around . Are your expectations optimal? How will your behavior influence the stock price?
Suppose that increases in the money supply lead to a rise in stock prices. Does this mean that when you see that the money supply has sharply increased in the past week, you should go out and buy stocks? Why or why not?
If your broker has been right in her five previous buy and sell recommendations, should you continue listening to her advice?
What basic principle of finance can be applied to the valuation of any investment asset?
Suppose that you decide to play a game. You buy stock by throwing a dice a few times, using that method to select which stock to buy. After ten months you calculate the return on your investment and the return earned by someone who followed “expert” advice during the same period. If both returns are similar, would this constitute evidence in favor of or against the efficient market hypothesis?
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