Solutions to Practice Problems - Class of Nov 17

Solutions to Practice Problems - Class of Nov 17 -...

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Solutions to Practice Problems – Class of November 17 CHAPTER 9 MARKET EFFICIENCY 6. b. Semi-strong efficiency implies that market prices reflect all publicly available information concerning past trading history as well as fundamental aspects of the firm. 7. a. The full price adjustment should occur just as the news about the dividend becomes publicly available. 8. d. If low P/E stocks consistently provide positive abnormal returns, this would represent an unexploited profit opportunity that would provide evidence that investors are not using all available information to make profitable investments. 9. c. In an efficient market, no securities are consistently overpriced or underpriced. While some securities will turn out after any investment period to have provided positive alphas (i.e., risk-adjusted abnormal returns) and some negative alphas, these past returns are not predictive of future returns. 10. c. A random walk implies that stock price changes are unpredictable, using past price changes or any other data. 11. d. A gradual adjustment to fundamental values would allow for strategies based on past price movements to generate abnormal profits. CHAPTER 11: EMPIRICAL EVIDENCE ON SECURITY RETURNS 14. (i) Betas are estimated with respect to market indexes that are proxies for the true market portfolio which is inherently unobservable. (ii) Empirical tests of the CAPM show that average returns are not related to beta in the manner
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Solutions to Practice Problems - Class of Nov 17 -...

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