Questions from General Investment

Q: We know that the market should respond positively to good news and

We know that the market should respond positively to good news and that good-news events such as the coming end of a recession can be predicted with at least some accuracy. Why, then, can we not predi...

Q: You know that firm XYZ is very poorly run. On a

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...

Q: Good News, Inc., just announced an increase in its annual

Good News, Inc., just announced an increase in its annual earnings, yet its stock price fell. Is there a rational explanation for this phenomenon?

Q: Shares of small firms with thinly traded stocks tend to show positive

Shares of small firms with thinly traded stocks tend to show positive CAPM alphas. Is this a violation of the efficient market hypothesis?

Q: Examine the accompanying figure, which presents cumulative abnormal returns (CARs

Examine the accompanying figure, which presents cumulative abnormal returns (CARs) both before and after dates on which insiders buy or sell shares in their firms. How do you interpret this figure? Wh...

Q: An investor takes as large a position as possible when an equilibrium

An investor takes as large a position as possible when an equilibrium price relationship is violated. This is an example of: a. A dominance argument. b. The mean-variance efficient frontier. c. Arb...

Q: Suppose that as the economy moves through a business cycle, risk

Suppose that as the economy moves through a business cycle, risk premiums also change. For example, in a recession when people are concerned about their jobs, risk aversion and therefore risk premiums...

Q: If prices are as likely to increase as decrease, why do

If prices are as likely to increase as decrease, why do investors earn positive returns from the market on average?

Q: A successful firm like Microsoft has consistently generated large profits for years

A successful firm like Microsoft has consistently generated large profits for years. Is this a violation of the EMH?

Q: At a cocktail party, your co-worker tells you that

At a cocktail party, your co-worker tells you that he has beaten the market for each of the last three years. Suppose you believe him. Does this shake your belief in efficient markets?