ch_09_sol - CHAPTER 9 THE EFFICIENT MARKET HYPOTHESIS 1 The...

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CHAPTER 9: THE EFFICIENT MARKET HYPOTHESIS 1. The statements consistent with efficient markets are (i) and (iii). Competition among participants (statement i) leads to efficient markets. Statement (iii) is the result of efficient markets. 2. Zero. If not, one could use returns from one period to predict returns in later periods and make abnormal profits. 3. c. This is a predictable pattern in returns which should not occur if the weak-form EMH is valid. 4. c. This is a classic filter rule which should not work in an efficient market. 5. b. This is the definition of an efficient market. 6. d. 7. c. The P/E ratio is public information and should not predict abnormal security returns. 8. No. Intel’s continuing high return on assets does not imply that stock market investors who purchased Intel shares after its success already was evident would have earned a high return on their investments. 9. No. This empirical tendency does not provide investors a tool to earn abnormal returns -- in other words, it does not suggest that investors are failing to use all available information. You could not use this phenomenon to choose undervalued stocks today. The phenomenon instead reflects the fact that stock splits occur as a response to good performance (positive abnormal returns) which drives up the stock price above a desired "trading range" and leads managers to split the stock. After the fact, the stocks that happen to have performed the best will be split candidates,
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ch_09_sol - CHAPTER 9 THE EFFICIENT MARKET HYPOTHESIS 1 The...

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