Investment Performance. It seems that every month we read an article in The Wall Street Journal about a stock picker with a marvelous track record. Do these examples mean that financial markets are not efficient?
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Investment Performance. It seems that every month we read an article in The Wall Street Journal about a stock picker with a marvelous track record. Do these examples mean that financial markets are not efficient?
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- Several celebrated investors and stock pickers have recorded huge returns on their investments over the past two decades. Is the success of these particular investors an invalidation of an efficient stock market? Explain.Which of the following is an example of unsystematic risk? XYZ corp stock price fell when the news of a drop in GDP was released. When the new employment numbers showed the economy is creating more jobs, the stock market rose. ABC Manufacturing stock price falls upon the announcement that they have a parts shortage from their suppliers When news of strong consumer demand was released, proctor and gamble stock price rose The stock market rose at the announcement of higher GDP numbersAs the economy goes through highs and lows, investors with stock in various companies can face significant risk, and significant benefits. How do you see the stock market affecting your own investing plans in the future? What types of risks do investors take? Do you have any companies you follow thru their stock prices?
- Say stocks of firms which change their logo in a given year tend to outperform (have higher abnormal returns) the stocks of firms which don't change their logos for the following year. If markets are efficient and you used the correct model for expected returns in your analysis, what must be true about firms that change their logos relative to firms that don't change their logos? Firms that change their logos are more exposed to risk than firms that don't change their logos. Firms that change their logos are equally exposed to risk as firms that don't change their logos. Firms that change their logos are less exposed to risk than firms that don't change their logos. O We can't make any of the above statementsIn a few sentences, answer the following question as completely as you can. Imagine you are the treasurer of a small manufacturing firm. Your firm is planning to go public (i.e., sell stock to investors for the first time). One unresolved question concerns the market’s required return on the stock. Given what you have learned, how do you think the required return will affect the market value of your firm’s stock? How would you go about estimating this rate?What are the benefits of investing and trading in the stock market? “The track record of the stock market also shows that a good basket of stocks climb more often than decline - reducing risk over the long-term.” Explain this statement.
- What are efficient markets? Imagine if the price of a stock is going up and financial markets are efficient what can you tell us about the nature of the stock? What if the markets are inefficient then how would you react to increasing prices for a particular stock?“If markets are efficient, you might as well select yourportfolio by throwing darts at the stock listings in the Wall StreetJournal”. The statement is true or false? ExplainRespond to each of the following comments.a. If stock prices follow a random walk, then capital markets are little different from a casino.b. A good part of a company’s future prospects are predictable. Given this fact, stock prices can’t possibly follow a random walk.c. If markets are efficient, you might as well select your portfolio by throwing darts at the stock listings in The Wall Street Journal.
- Which of the following are consistent with the efficient market hypothesis? Check all that apply. Changes in stock prices can be accurately predicted by investors. At the market price, the number of people who believe the stock is overvalued exactly equals the number of people who think the stock is undervalued. A positive news release about a company will increase the value and stock price for that firm. Some investors cite the existence of anomalies—observations that do not fit the model—as evidence that stock markets are not efficient. Which of the following are such anomalies? Check all that apply. The best time to sell a stock is late on Wednesday or Friday, whereas the best time to buy a stock is late on Tuesday or Thursday. The movement of stock prices of companies over time is the same as the changes in their earnings. High returns to a stock in one period are associated with even higher returns in a later period. There is a…Banks and other financial institutions have many unique features in their financial statements. When we project the financial statements of a bank in the next few years, do we usually start with sales forecast? When we conduct a valuation of a bank, do we usually estimate its entire firm value? No; Yes OYes: Yes O No; No O Yes; NoHistory suggests that all stock market bubbles will eventually pop and cause severe financial loss for many of those who purchased stock. Given this history, do you think that stock market bubbles will continue to occur? Why or why not?