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Unformatted text preview: chance or, in other words, a coincidence.
c. Market Inefficiency: One key to market efficiency is the high level of competition
among participants in the market. For small stocks, the level of competition is
relatively low because major market participants (e.g., mutual funds and pension funds) are biased toward holding the securities of larger, wellknown companies. Thus, it is likely that the market for small stocks is fundamentally different from the
market for larger stocks and hence, it is quite plausible that the smallfirm effect is
simply a reflection of market inefficiency. 13. Not true. If everyone believes that patterns exist, all will look for these patterns and all will
trade based on such patterns. But such trading itself will destroy the patterns. Remember
that we cannot all get rich simultaneously. 14. There are several ways to approach this problem, but all (when done correctly!) should
give approximately the same answer. We have chosen to use the regression analysis
function of an electronic spreadsheet program to calculate the alpha and beta for each
security. The regressions are in the following form: Security return = alpha + (beta ´ market return) + error term The results are: A l pha
Beta
Executive Cheese
0.89
0.50
Paddington Beer
0.51
2.01 (As a point of interest, the R2 for the Executive Cheese regression is 0.082, which is
relatively low for a regression of this type. For Paddington Beer, it is 0.74, a relatively
high value.) The abnormal return...
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 Fall '04
 JAMESBRIDGEMAN
 Math

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