59533341-FM11-Ch-07-Instructors-Manual-1

N if equilibrium does not exist how will it be

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Unformatted text preview: be established? Answer: Securities will be bought and sold until the equilibrium price is established. o. What is the efficient markets hypothesis, what are its three forms, and what are its implications? Answer: The EMH in general is the hypothesis that securities are normally in equilibrium, and are ³priced fairly,´ making it impossible to ³beat the market.´ Weak-form efficiency says that investors cannot profit from looking at past movements in stock prices--the fact that stocks went down for the last few days is no reason to think that they will go up (or down) in the future. This form has been proven pretty well by empirical tests, even though people still employ ³technical analysis.´ Semistrong-form efficiency says that all publicly available information is reflected in stock prices, hence that it won¶t do much good to pore over annual reports trying to find undervalued stocks. This one is (I think) largely true, but superior analysts can still obtain and process new information fast enough to gain a small advantage. Strong-form efficiency says that all information, even inside information, is embedded in stock prices. This form does not hold--insiders know more, and could take advantage of that information to make abnormal profits in the markets. Trading on the basis of insider information is illegal. Mini Case: 7 - 25 p. Answer: Temp Force recently issued preferred stock. It pays an annual dividend of $5, and the issue price was $50 per share. What is the expected return to an investor on this preferred stock? › r ps = = D ps Vps $5 $50 = 10%. Mini Case: 7 - 26...
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