Chapter 10 Solutions

Chapter 10 Solutions - Chapter 10: Some Lessons From...

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Chapter 10: Some Lessons From Capital Market History Answers to Concepts Review and Critical Thinking Questions 3. No, stocks are riskier. Some investors are highly risk averse, and the extra possible return doesn’t attract them relative to the extra risk. 4. On average, the only return that is earned is the required return—investors buy assets with returns in excess of the required return (positive NPV), bidding up the price and thus causing the return to fall to the required return (zero NPV); investors sell assets with returns less than the required return (negative NPV), driving the price lower and thus the causing the return to rise to the required return (zero NPV). 5. The market is not weak form efficient. 10. a. If the market is not weak form efficient, then this information could be acted on and a profit earned from following the price trend. Under (2), (3), and (4), this information is fully impounded in the current price and no abnormal profit opportunity exists. b. Under (2), if the market is not semi-strong form efficient, then this information could be used to buy the stock “cheap” before the rest of the market discovers the financial statement anomaly. Since (2) is stronger than (1), both imply that a profit opportunity exists; under (3) and (4), this information is fully impounded in the current price and no profit opportunity exists. c . Under (3), if the market is not strong form efficient, then this information could be used as a profitable trading strategy, by noting the buying activity of the insiders as a signal that the stock is underpriced or that good news is imminent. Since (1) and (2) are weaker than (3), all three imply that a profit opportunity exists. Under (4), this information does not signal any profit opportunity for traders; any pertinent information the manager-insiders may have is fully reflected in the current share price. Solutions to Questions and Problems 1. The return of any asset is the increase in price, plus any dividends or cash flows, all divided by the initial price. The return of this stock is: R = [($91 – 83) + 1.40] / $83 R = .1133 or 11.33% 2. The dividend yield is the dividend divided by price at the beginning of the period
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This note was uploaded on 10/13/2010 for the course FIN 300 taught by Professor Dicle during the Fall '08 term at Loyola New Orleans.

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Chapter 10 Solutions - Chapter 10: Some Lessons From...

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