Ch. 8 Assignment
11. Which of the following most appears to contradict the
proposition that the stock market is weakly efficient?
Explain. (LO 8-3)
a. Over 25% of mutual funds outperform the market on average.
. Insiders earn abnormal trading profits.
c. Every January, the stock market earns abnormal returns.
13. Which of the following observations would provide
evidence against the semistrong form of the efficient market
theory? Explain. (LO 8-3)
a. Mutual fund managers do not on average make superior returns.
. You cannot make superior profits by buying (or selling) stocks
after the announcement of an abnormal rise in dividends.
c. Low P/E stocks tend to have positive abnormal returns.
d. In any year approximately 50% of pension funds outperform the
21. You know that firm XYZ is very poorly run. On a scale of 1
(worst) to 10 (best), you would give it a score of 3. The market
consensus evaluation is that the management score is only 2.
Should you buy or sell the stock? (LO 8-4)
22. Good News, Inc., just announced an increase in its annual
earnings, yet its stock price fell. Is there a rational explanation
for this phenomenon? (LO 8-1)
24. Examine the accompanying figure, which presents cumulative
abnormal returns both before and after dates on which insiders buy
or sell shares in their firms. How do you interpret this figure? What
are we to make of the pattern of CARs before and after the event
date? (LO 8-3)
Source: Nejat H. Seyhun, “Insiders, Profits, Costs of Trading and
Market Efficiency,” Journal of Financial Economics 16 pp. 189–21
You are a portfolio manager meeting a client. During the
conversation that follows your formal review of her account,
your client asks the following question: (LO 8-2)
My grandson, who is studying investments, tells me that one of
the best ways to make money in the stock market is to buy the
stocks of small-capitalization firms late in December and to sell
the stocks one month later. What is he talking about?
a. Identify the apparent market anomalies that would justify the
. Explain why you believe such a strategy might or might not work
in the future.
Your investment client asks for information concerning the benefits of active portfolio management. She is
particularly interested in the question of whether active managers can be expected to consistently exploit
inefficiencies in the capital markets to produce above-average returns without assuming higher risk.
The semistrong form of the efficient market hypothesis asserts that all publicly available information is rapidly and
ectly reflected in securities prices. This implies that investors cannot expect to derive above-average profits from
purchases made after information has become public because security prices already reflect the information's full
effects. (LO 8-2)
a. Identify and explain two examples of empirical evidence that tend to support the EMH implication stated above.
. Identify and explain two examples of empirical evidence that tend to refute the EMH implication stated above.
c. Discuss reasons why an investor might choose not to index even if the markets were, in fact, semistrong-form