Bkmsol_ch08 - CHAPTER 8 THE EFFICIENT MARKET HYPOTHESIS 1 The assumptions consistent with efficient markets are(a and(c Many independent

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CHAPTER 8: THE EFFICIENT MARKET HYPOTHESIS 1. The assumptions consistent with efficient markets are (a) and (c). Many independent, profit-maximizing participants [statement (a)] leads to efficient markets. Statement (c) is the result of efficient markets. 2. The correlation coefficient should be zero. If it were not zero, then one could use returns from one period to predict returns in later periods and therefore earn abnormal profits. 3. c.This is a predictable pattern in returns, which should not occur if the stock market is weakly efficient. 4. c.This is a classic filter rule, which would appear to contradict the weak form of the efficient market hypothesis. 5. b. This is the definition of an efficient market. 6. d. 7. c.The P/E ratio is public information so this observation would provide evidence against the semistrong form of the efficient market theory. 8. No, this is not a violation of the EMH. Intel’s continuing large profits do 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 is not a violation of the EMH. This empirical tendency does not provide investors with a tool that will enable them to earn abnormal returns; in other words, it does not suggest that investors are failing to use all available information. An investor 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 (i.e., positive abnormal returns) which drives up the stock price above a desired "trading range" and then leads managers to split the stock. After the fact, the stocks that happen to have performed the best will be split candidates, but this
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This note was uploaded on 10/28/2009 for the course MBA MBA608 taught by Professor Martin during the Spring '09 term at Beirut Arab University.

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Bkmsol_ch08 - CHAPTER 8 THE EFFICIENT MARKET HYPOTHESIS 1 The assumptions consistent with efficient markets are(a and(c Many independent

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