Solns-Study Problem Set 5

Solns-Study Problem Set 5 - Solutions, 6F111 BKM,...

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Solutions, 6F111 BKM, Investments, 8 th Ed. Chapter 11 7. a. That the average rate of return greatly exceeds zero does not contradict the Weak Form Efficiency criteria because markets may well be weak form efficient while still providing significantly high returns. In particular, historical prices and the information they contain do not preclude large upward price changes in the future, only that such large upward price changes cannot be predicted based on the observed historical prices. b. This fact actually supports the weak form hypothesis because it demonstrates that one week’s prices do not predict next week’s prices (or returns). c. This contradicts the weak form market efficiency hypothesis because it states that future prices can be predicted by observed trends in historical prices. d. This certainly contradicts the semi-strong form efficient market hypothesis, but does not necessarily contradict the weak-form efficient market hypothesis. To contradict weak-form market efficiency, we would have to assume that dividend yields are reflected in current and historical prices, and that they affect prices in a predictable way so that it can be utilized to predict future prices. This actually assumes more than weak market efficiency requires, and therefore would not generally be considered contradictory evidence. CFA Problem 9. a. The efficient market hypothesis (EMH) states that a market is efficient if security prices immediately and fully reflect all available relevant information. If the market fully reflects information, the knowledge of that information would not allow an investor to profit from the information because stock prices already incorporate the information. i. The
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Solns-Study Problem Set 5 - Solutions, 6F111 BKM,...

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