1)Which of the following scenarios is consistent with weak form efficiency? Stoc
ID: 2634514 • Letter: 1
Question
1)Which of the following scenarios is consistent with weak form efficiency?
Stocks that have increased in value over the last 6 months, on average, continue to increase in value over the next 6 months.
Stocks that have increased in value over the last 6 months, on average, decrease in value over the next 6 months.
The correlation between last year's stock return and this year's stock return for the S&P500 is zero.
Apple's stock price declines after the death of Steve Jobs.
2)Which of the following scenarios is consistent with semi-strong form efficiency?
Stocks that have increased in value over the last 6 months, on average, continue to increase in value over the next 6 months.
Stocks that have increased in value over the last 6 months, on average, decrease in value over the next 6 months.
The Wall Street Journal newspaper publishes a short biography of Steve Jobs one year after his death. As a result of this article, Apple's stock price declines the day afterwards.
Apple's stock price declines the day after the death of Steve Jobs.
3) If semi-strong form efficiency is the correct theory to describe how the stock markets work, which of the following would we expect to happen after a company announces that it earned more money in the prior quarter than people expected? Assume no other news is released about the company.
The stock price should increase the next day and continue to increase for several days afterwards.
The stock price should increase the next day and then decrease for several days afterwards.
The stock price should increase the next day and then stay the same for several days afterwards.
The stock price should decrease the next day and then stay the same for several days afterwards.
4) The current stock price of Apple is $100. If you expect Apple to pay a dividend next year of $5 per share, and the cost of equity capital is 12%, what would you expect the price of Apple to be next year right after the dividend is paid?
A)Stocks that have increased in value over the last 6 months, on average, continue to increase in value over the next 6 months.
B)Stocks that have increased in value over the last 6 months, on average, decrease in value over the next 6 months.
C)The correlation between last year's stock return and this year's stock return for the S&P500 is zero.
D)Apple's stock price declines after the death of Steve Jobs.
Explanation / Answer
Hi
The correct answers are:
1) A. Stocks that have increased in value over the last 6 months, on average, continue to increase in value over the next 6 months.
Explanation: Theoretical in nature, weak form efficiency advocates assert that fundamental analysis can be used to identify stocks that are undervalued and overvalued. Hence, the previous progress of stokc price is reflected in its coming 6 months
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2) C) The Wall Street Journal newspaper publishes a short biography of Steve Jobs one year after his death. As a result of this article, Apple's stock price declines the day afterwards
Explanation: Semi weak form that implies all public information is calculated into a stock's current. hence, the information provided by Wall Street Journal led to decrease in price
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3) c) The stock price should increase the next day and then stay the same for several days afterwards
Explanation: Semi weak form that implies all public information is calculated into a stock's current. Hence the news of earning more money in the prior quarter than people expected would inflate the price of stock
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4) First we need to calculate the dividend growth rate
100 = 5/(12%-dividednd growth rate)
=> dividend growth rate = 12%-(5/100)
=7%
Stock price next year = 5*(1+7%)/(12%-7%)
=$107
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