Question

My question is Q7 efficient markets hypothesis , thank you .

Chapter 12 Some Lessons from Capital Market History 5. Efficient Marke officient Markets Hypothesis (LO4] A stock market analyst is able to identify mispriced stocks by comparing the average price for the last 10 days to the average ce for the last 60 days. If this is true, what do you know about the market? emistrong Efficiency (LO4] If a market is semistrong form efficient, is it also price for the last 60 days. 6. Semistrong Elfici weak form efficient? Explain. 7. Efficient Markets Hypothes Efficient Markets Hypothesis (LO4] What are the implications of the efficient markets hypothesis for investors who buy and sell stocks in an attempt to "beat the market"? Stocks versus Gambling (LO4] Critically evaluate the following statement: Playing the stock market is like gambling. Such speculative investing has no social value other than the pleasure people get from this form of gambling. Efficient Markets Hypothesis [LO4] Several celebrated investors and stock pickers frequently mentioned in the financial press have recorded huge returns on their investments over the past two decades. Is the success of these particular inves. tors an invalidation of the EMH? Explain. 10. Efficient Markets Hypothesis [LO4] For each of the following scenarios, discuss whether profit opportunities exist from trading in the stock of the firm under the conditions that (1) the market is not weak form efficient, (2) the market is weak form but not semistrong form efficient, (3) the market is semistrong form but not strong form efficient, and (4) the market is strong form efficient. a. The stock price has risen steadily each day for the past 30 days. b. The financial statements for a company were released three days ago, and you believe you've uncovered some anomalies in the company's inventory and cost control reporting techniques that are causing the firm's true liquidity strength to be understated. observe that the senior managers of a company have been buying a lot of the company's stock on the open market over the past week. c. You observe that the seni СС QUESTION UESTIONS AND PROBLEMS 1. Calculating Retur paid a dividend of $1.4 $88. Compute - Calculating Yields (LO Returns (LO1] Suppose a stock had an initial price of $79 per share, BASIC nd of $1.45 per share during the year, and had an ending share price of (Question mpute the percentage total return. elds (LO1] In Problem I, what was the dividend yield? The capital gains yield? land 2 assuming the ending share

Answer 1

Solution:

Implications of EMH for an investor who buys and sell to beat the markets are:-

• EMH claims that investors cannot outperform the market or beat the market but there are few who has been doing that.
• EMH does not imply that the investors cant do that at all but rather investors should not be expected to do that predictably and consistently.
• Constant arrival of information makes the share price fluctuate , it is possible that on the arrival of the information the investor might gain if he posses the respective scrip.
• EMH states that an investor might be able to outperform the market for very long but that will be merely by chance even if markets are efficient.
• Probability of an investor beating the market in an year is 50% i.e. .5 , the probability of him doing for 10 years is .5^10 I.e. one tenth of a percent.
• But the probability see a sudden spike if the number of investors who tries to do that increases a lot i.e. In a study it was noticed that in a group of 1000 investors the probability of finding one winner for a perfect 10 year record is 63% but it goes to 99% for 10000 investors i.e. almost a certainty .
• EMH could be in problem if one can know about the outperformers prior but rather after they have done that.