hw3 - University of Hong Kong Department of Economics and...

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University of Hong Kong Department of Economics and Finance FINA 2802C – Investment and Portfolio Analysis First Semester: 2007-2008 Dr. Kam-Ming Wan Problem Set 3 Due Date: November 13, 2007 (Thur. by 9:30am) 1) Efficient Market Hypothesis True or False. Explain. a. “It may be true that in an efficient market there should be no patterns in stock prices, but, if everyone believes that they do exist, then this belief will be self-fulfilling.” b. “The random-walk theory implies that events are random, but many events are not random. If it rains today, there's a fair bet that it will rain again tomorrow.” 2) Announcement Effect Microsoft has a current stock price of $160. The company announced a new - commerce software project at 9:00 am Monday which the market had no knowledge of prior to the announcement. The new project has the same risk level as the overall company, which has a beta of 1.24. If the project generates a perpetual incremental cash flow of $3/year per share, and the market agrees with
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hw3 - University of Hong Kong Department of Economics and...

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