投资学10版习题答案11

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1、Chapter 11 - The Efficient Market HypothesisCHAPTER 11: THE EFFICIENT MARKET HYPOTHESISPROBLEM SETS 1.The correlation coefficient between stock returns for two nonoverlapping periods should be zero. If not, returns from one period could be used to predict returns in later periods and make abnormal p

2、rofits. 2.No. Microsofts 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. It simply means that Microsoft has made risky investments over the ye

3、ars that have paid off in the form of increased cash flows and profitability. Microsoft shareholders have benefited from the risk-expected return tradeoff, which is consistent with the EMH.3.Expected rates of return differ because of differential risk premiums across all securities.4.No. The value o

4、f dividend predictability would be already reflected in the stock price.5.No, markets can be efficient even if some investors earn returns above the market average. Consider the Lucky Event issue: Ignoring transaction costs, about 50% of professional investors, by definition, will “beat” the market

5、in any given year. The probability of beating it three years in a row, though small, is not insignificant. Beating the market in the past does not predict future success as three years of returns make up too small a sample on which to base correlation let alone causation.6. Volatile stock prices cou

6、ld reflect volatile underlying economic conditions as large amounts of information being incorporated into the price will cause variability in stock price. The efficient market hypothesis suggests that investors cannot earn excess risk-adjusted rewards. The variability of the stock price is thus ref

7、lected in the expected returns as returns and risk are positively correlated.7.The following effects seem to suggest predictability within equity markets and thus disprove the efficient market hypothesis. However, consider the following:a. Multiple studies suggest that “value” stocks (measured often

8、 by low P/E multiples) earn higher returns over time than “growth” stocks (high P/E multiples). This could suggest a strategy for earning higher returns over time. However, another rational argument may be that traditional forms of CAPM (such as Sharpes model) do not fully account for all risk facto

9、rs that affect a firms price level. A firm viewed as riskier may have a lower price and thus P/E multiple. b. The book-to-market effect suggests that an investor can earn excess returns by investing in companies with high book value (the value of a firms assets minus its liabilities divided by the n

10、umber of shares outstanding) to market value. A study by Fama and French Fama, Eugene and Kenneth French, “Common Risk Factors in the Returns on Stocks and Bonds,” Journal of Finance 33:1, pp. 3-56. suggests that book-to-market value reflects a risk factor that is not accounted for by traditional on

11、e variable CAPM. For example, companies experiencing financial distress see the ratio of book to market value increase. Thus a more complex CAPM that includes book-to-market value as an explanatory variable should be used to test market anomalies.c. Stock price momentum can be positively correlated

12、with past performance (short to intermediate horizon) or negatively correlated (long horizon). Historical data seem to imply statistical significance to these patterns. Explanations for this include a bandwagon effect or the behaviorists (see Chapter 12) explanation that there is a tendency for inve

13、stors to underreact to new information, thus producing a positive serial correlation. However, statistical significance does not imply economic significance. Several studies that included transaction costs in the momentum models discovered that momentum traders tended to not outperform the efficient

14、 market hypothesis strategy of buy and hold.d. The small-firm effect states that smaller firms produce better returns than larger firms. Since 1926, returns from small firms outpace large firm stock returns by about 1% per year. Do small cap investors earn excess risk-adjusted returns? The measure o

15、f systematic risk according to Sharpes CAPM is the stocks beta (or sensitivity of returns of the stock to market returns). If the stocks beta is the best explanation of risk, then the small-firm effect does indicate an inefficient market. Dividing the market into deciles based on their betas shows a

16、n increasing relationship between betas and returns. Fama and French Ibid show that the empirical relationship between beta and stock returns is flat over a fairly long horizon (19631990). Breaking the market into deciles based on sizes and then examining the relationship between beta and stock retu

17、rns within each size decile exhibits this flat relationship. This implies that firm size may be a better measure of risk than beta and the size-effect should not be viewed as an indicator that markets are inefficient. Heuristically this makes sense, as smaller firms are generally viewed as risky com

18、pared to larger firms and perceived risk and return are positively correlated. In addition this effect seems to be endpoint and data sensitive. For example, smaller stocks did not outperform larger stocks from the mid-1980s through the 1990s. In addition, databases contain stock returns from compani

19、es that have survived and do not include returns of those that went bankrupt. Thus small-firm data may exhibit survivorship bias.8.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

20、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. Over longer periods, the small expected daily returns accumulate, and upward moves are more likely than downward ones. Remember that economies tend to grow over time and

21、stock prices tend to follow economic growth, so it is only natural that there is an upward drift in equity prices.9.c.This is a predictable pattern in returns that should not occur if the weak-form EMH is valid.10.a.Acute market inefficiencies are temporary in nature and are more easily exploited th

22、an chronic inefficiencies. A temporary drop in a stock price due to a large sale would be more easily exploited than the chronic inefficiencies mentioned in the other responses.11.c.This is a classic filter rule that should not produce superior returns in an efficient market.12.b.This is the definit

23、ion of an efficient market.13.a.Though stock prices follow a random walk and intraday price changes do appear to be a random walk, over the long run there is compensation for bearing market risk and for the time value of money. Investing differs from a casino in that in the long-run, an investor is

24、compensated for these risks, while a player at a casino faces less than fair-game odds.b.In an efficient market, any predictable future prospects of a company have already been priced into the current value of the stock. Thus, a stock share price can still follow a random walk.c.While the random nat

25、ure of dart board selection seems to follow naturally from efficient markets, the role of rational portfolio management still exists. It exists to ensure a well-diversified portfolio, to assess the risk-tolerance of the investor, and to take into account tax code issues.14.d.In a semistrong-form eff

26、icient 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 trad

27、ing profits (unless the market is also strong-form efficient).15.Market efficiency implies investors cannot earn excess risk-adjusted profits. If the stock price run-up occurs when only insiders know of the coming dividend increase, then it is a violation of strong-form efficiency. If the public als

28、o knows of the increase, then this violates semistrong-form efficiency.16.While positive beta stocks respond well to favorable new information about the economys progress through the business cycle, they should not show abnormal returns around already anticipated events. If a recovery, for example,

29、is already anticipated, the actual recovery is not news. The stock price should already reflect the coming recovery.17.a.Consistent. Based on pure luck, half of all managers should beat the market in any year.b.Inconsistent. This would be the basis of an “easy money” rule: simply invest with last ye

30、ars best managers.c.Consistent. In contrast to predictable returns, predictable volatility does not convey a means to earn abnormal returns.d.Inconsistent. The abnormal performance ought to occur in January when earnings are announced.e.Inconsistent. Reversals offer a means to earn easy money: just

31、buy last weeks losers.18.The return on the market is 8%. Therefore, the forecast monthly return for Ford is:0.10% + (1.1 8%) = 8.9%Fords actual return was 7%, so the abnormal return was 1.9%.19.a.Based on broad market trends, the CAPM indicates that AmbChaser stock should have increased by: 1.0% + 2

32、.0 (1.5% 1.0%) = 2.0%Its firm-specific (nonsystematic) return due to the lawsuit is $1 million per $100 million initial equity, or 1%. Therefore, the total return should be 3%. (It is assumed here that the outcome of the lawsuit had a zero expected value.)b.If the settlement was expected to be $2 mi

33、llion, then the actual settlement was a “$1 million disappointment,” and so the firm-specific return would be 1%, for a total return of 2% 1% = 1%.20.Given market performance, predicted returns on the two stocks would be:Apex:0.2% + (1.4 3%) = 4.4%Bpex:0.1% + (0.6 3%) = 1.7%Apex underperformed this

34、prediction; Bpex outperformed the prediction. We conclude that Bpex won the lawsuit.21.a.E(rM ) = 12%, rf = 4% and = 0.5Therefore, the expected rate of return is:4% + 0.5 (12% 4%) = 8%If the stock is fairly priced, then E(r) = 8%.b. If rM falls short of your expectation by 2% (that is, 10% 12%) then

35、 you would expect the return for Changing Fortunes Industries to fall short of your original expectation by: 2% = 1%Therefore, you would forecast a revised expectation for Changing Fortunes of: 8% 1% = 7%c.Given a market return of 10%, you would forecast a return for Changing Fortunes of 7%. The act

36、ual return is 10%. Therefore, the surprise due to firm-specific factors is 10% 7% = 3%, which we attribute to the settlement. Because the firm is initially worth $100 million, the surprise amount of the settlement is 3% of $100 million, or $3 million, implying that the prior expectation for the sett

37、lement was only $2 million.22.Implicit in the dollar-cost averaging strategy is the notion that stock prices fluctuate around a “normal” level. Otherwise, there is no meaning to statements such as: “when the price is high.” How do we know, for example, whether a price of $25 today will turn out to b

38、e viewed as high or low compared to the stock price six months from now?23.The market responds positively to new news. If the eventual recovery is anticipated, then the recovery is already reflected in stock prices. Only a better-than-expected recovery should affect stock prices.24.Buy. In your view

39、, the firm is not as bad as everyone else believes it to be. Therefore, you view the firm as undervalued by the market. You are less pessimistic about the firms prospects than the beliefs built into the stock price.25.Here we need a two-factor model relating Fords return to those of both the broad m

40、arket and the auto industry. If we call rI the industry return, then we would first estimate parameters in the following regression:Given these estimates we would calculate Fords firm-specific return as:This estimate of firm-specific news would measure the markets assessment of the potential profita

41、bility of Fords new model.26.The market may have anticipated even greater earnings. Compared to prior expectations, the announcement was a disappointment.27.Thinly traded stocks will not have a considerable amount of market research performed on the companies they represent. This neglected-firm effe

42、ct implies a greater degree of uncertainty with respect to smaller companies. Thus positive CAPM alphas among thinly traded stocks do not necessarily violate the efficient market hypothesis since these higher alphas are actually risk premiums, not market inefficiencies. 28.The negative abnormal retu

43、rns (downward drift in CAR) just prior to stock purchases suggest that insiders deferred their purchases until after bad news was released to the public. This is evidence of valuable inside information. The positive abnormal returns after purchase suggest insider purchases in anticipation of good ne

44、ws. The analysis is symmetric for insider sales.29.a. The market risk premium moves countercyclical to the economy, peaking in recessions. A violation of the efficient market hypothesis would imply that investors could take advantage of this predictability and earn excess risk adjusted returns. Howe

45、ver, several studies, including Siegel, Jeremy Siegel, Stocks for the Long Run: The Definitive Guide to Financial Market Returns and Long-Term Investment Strategies, 2002, New York: McGraw-Hill. show that successfully timing the changes have eluded professional investors thus far. Moreover a changin

46、g risk premium implies changing required rates of return for stocks rather than an inefficiency with the market.b. As the market risk premium increases during a recession, stocks prices tend to fall. As the economy recovers, the market risk premium falls, and stock prices tend to rise. These changes

47、 could give investors the impression that markets overreact, especially if the underlying changes in the market risk premium are small but cumulative. For example, the October Crash of 1987 is commonly viewed as an example of market overreaction. However, in the weeks running up to mid-October, seve

48、ral underlying changes to the market risk premium occurred (in addition to changes in the yields on long-term Treasury Bonds). Congress threatened investors with a “merger tax” that would have truncated the booming merger industry and loosened the discipline that the threat of mergers provides to a

49、firms management. In addition, the Secretary of Treasury threatened further depreciation in the value of the dollar, frightening foreign investors. These events may have increased the market risk premium and lowered stock prices in a seeming overreaction.CFA PROBLEMS 1.b.Semistrong form efficiency i

50、mplies that market prices reflect all publicly available information concerning past trading history as well as fundamental aspects of the firm.2.a.The full price adjustment should occur just as the news about the dividend becomes publicly available.3.d.If low P/E stocks tend to have positive abnorm

51、al returns, this would represent an unexploited profit opportunity that would provide evidence that investors are not using all available information to make profitable investments.4.c.In an efficient market, no securities are consistently overpriced or underpriced. While some securities will turn o

52、ut 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.5.c.A random walk implies that stock price changes are unpredictable, using past price changes or any other data.6.

53、d.A gradual adjustment to fundamental values would allow for the use of strategies based on past price movements in order to generate abnormal profits.7.a.8.a.Some empirical evidence that supports the EMH:(i) Professional money managers do not typically earn higher returns than comparable risk, pass

54、ive index strategies.(ii) Event studies typically show that stocks respond immediately to the public release of relevant news.(iii) Most tests of technical analysis find that it is difficult to identify price trends that can be exploited to earn superior risk-adjusted investment returns.b. Some evid

55、ence that is difficult to reconcile with the EMH concerns simple portfolio strategies that apparently would have provided high risk-adjusted returns in the past. Some examples of portfolios with attractive historical returns:(i) Low P/E stocks.(ii) High book-to-market ratio stocks.(iii) Small firms

56、in January.(iv) Firms with very poor stock price performance in the last few months.Other evidence concerns post-earnings-announcement stock price drift and intermediate-term price momentum.c.An investor might choose not to index even if markets are efficient because he or she may want to tailor a p

57、ortfolio to specific tax considerations or to specific risk management issues, for example, the need to hedge (or at least not add to) exposure to a particular source of risk (e.g., industry exposure).9.a.The efficient market hypothesis (EMH) states that a market is efficient if security prices imme

58、diately and fully reflect all available relevant information. If the market fully reflects information, the knowledge of that information would not allow an investor to profit from the information because stock prices already incorporate the information.i. The weak form of the EMH asserts that stock

59、 prices reflect all the information that can be derived by examining market trading data such as the history of past prices and trading volume.A strong body of evidence supports weak-form efficiency in the major U.S. securities markets. For example, test results suggest that technical trading rules

60、do not produce superior returns after adjusting for transaction costs and taxes.ii. The semistrong form states that a firms stock price reflects all publicly available information about a firms prospects. Examples of publicly available information are company annual reports and investment advisory d

61、ata.Evidence strongly supports the notion of semistrong efficiency, but occasional studies (e.g., identifying market anomalies such as the small-firm-in-January or book-to-market effects) and events (e.g. stock market crash of October 19, 1987) are inconsistent with this form of market efficiency. T

62、here is a question concerning the extent to which these “anomalies” result from data mining.iii. The strong form of the EMH holds that current market prices reflect all information (whether publicly available or privately held) that can be relevant to the valuation of the firm.Empirical evidence sug

63、gests that strong-form efficiency does not hold. If this form were correct, prices would fully reflect all information. Therefore even insiders could not earn excess returns. But the evidence is that corporate officers do have access to pertinent information long enough before public release to enab

64、le them to profit from trading on this information.b.i. Technical analysis involves the search for recurrent and predictable patterns in stock prices in order to enhance returns. The EMH implies that technical analysis is without value. If past prices contain no useful information for predicting future prices, there is no point in following any technical trading rule.ii. Fundamental analysis uses earnings and dividend prospects of the firm, expectations of future interest rates, and risk evaluation of the firm to determine proper stock prices. The EMH predicts that most f