《《Investment 8th Chap011》.docVIP

CHAPTER 11: THE EFFICIENT MARKET HYPOTHESIS PROBLEM SETS 1. The correlation coefficient between stock returns for two non-overlapping periods should be zero. If not, one could use returns from one period to predict returns in later periods and make abnormal profits. 2. No. Microsoft’s continuing profitability does not imply that stock market investors who purchased Microsoft shares after its success was already evident would have earned an exceptionally high return on their investments. 3. Expected rates of return differ because of differential risk premiums. 4. No. The value of dividend predictability would be already reflected in the stock price. 5. Over the long haul, there is an expected upward drift in stock prices based on their fair expected rates of return. The fair expected return over any single day is very small (e.g., 12% per year is only about 0.03% per day), so that on any day the price is virtually equally likely to rise or fall. However, over longer periods, the small expected daily returns accumulate, and upward moves are indeed more likely than downward ones. 6. c. This is a predictable pattern in returns which should not occur if the weak-form EMH is valid. 7. c. This is a classic filter rule which should not produce superior returns in an efficient market. 8. b. This is the definition of an efficient market. 9. c. The P/E ratio is public information and should not be predictive of abnormal security returns. 10. d. In a semistrong-form efficient market, it is not possible to earn abnormally high profits by trading on publicly available information. Information about P/E ratios and recent price changes is publicly known. On the other hand, an investor who has advance knowledge of management improvements could earn abnormally high trading profits (unless the market is also strong-form efficient). 11. The question regarding market efficiency is whether investors can earn abnormal risk-adjusted profits. If the stock price run-up occurs when only i