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Unformatted text preview: rket inefficiency is that it implies there is easy money to be made. The following appear to suggest market inefficiency: (b) strong form (d) weak form (e) semi­strong form 4. a. Companies tend to split after their stock has performed well, but that does not mean that the stock of each individual company in the figure performed well in each month before the split. Some may have performed well in month 12 and others in month 11, and so on. There is a smooth progression in the averages, but you could not have taken advantage of this unless you knew ahead of time which stocks would split and when they would split. b. The price fell to levels prevailing before the announcement of the split. 5. Dividends. A company that pays high dividends is putting its money where its mouth is, i.e., showing that it has (and expects to continue to have) cash to distribute. Capital Structure. If the manager suffers a penalty when the firm goes bankrupt, high leverage may be a signal of management confidence. Manager’s Shareownership. An entrepreneur who puts her own money into the business is telling you something about that business’s prospects. 6. The estimates are first substituted in the market model. Then the result from this expected return equation is subtracted from the actual return for the month to obtain the abnormal return. Abnormal return (Intel) = Actual return ­ [0.07 + (1.61 ´ Market return)] Abnormal return (Conagra) = Actual return ­ [0.17 + (0.47 ´ Market return)] 7. One possible procedure is to first form groups of stocks with similar P/E ratios, adjusting for market risk (using either historical estimates of alpha or estimates based on th...
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This note was uploaded on 04/26/2013 for the course MATH 289Q taught by Professor Jamesbridgeman during the Fall '04 term at UConn.

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