AcF 214 Tutorial. Week 7

Transcription

1 AcF 214 Tutoial Week 7

2 What does it mean if an asset is located above (below) the secuity maket line (SML)? Retun Secuity Maket Line B Maket etun = m. j = f + ( m f ) β j Risk-fee etun = f Maket potfolio Beta 1.0 Beta of maket potfolio = 1.0

3 Q1. What does it mean if an asset is located above (below) the secuity maket line (SML)? Retun Secuity Maket Line A Maket etun = m. j = f + ( m f ) β j Risk-fee etun = f Maket potfolio Beta 1.0 Beta of maket potfolio = 1.0

4 What does it mean if an asset is located above (below) the secuity maket line (SML)? Asset above SML: undepiced Asset below SML: ovepiced

5 Q2. Descibe the thee foms of the efficient-maket hypothesis and give an example of the evidence fo each. Weak: The maket pice of an asset eflects all infomation contained in the histoy of past pices - you cannot beat the maket by meely analysing past pices. Semi-stong: The maket pice of an asset eflects all elevant publicly available infomation - you cannot beat the maket by tading on publicly known infomation. Stong: The maket pice of an asset eflects all elevant infomation, both public and pivate you cannot beat the maket even if you have access to pivileged infomation.

6 Q3. Give thee examples of appaent violations of the efficientmaket hypothesis. Excess volatility Pices ae fa too volatile to be explained by ational intepetation of undelying fundamentals. (Violation of the semi-stong fom) Seasonalities Stock etuns ae highe in Januay than in othe months - Stock etuns ae lowe ove the weekend than ove the est of the week. (Violation of weak fom) Size effect Small fims give highe isk-adjusted etuns than lage fims. (Violation of the semi-stong fom)

7 Q4. Implications of post-eanings announcement dift on maket efficiency Semi-stong fom efficiency implies that all publicly available infomation is incopoated into pices instantaneously. So, if semi-stong fom efficiency holds, one would expect the infomation content of eanings announcement to be impounded into pices immediately. The dift that lasts fo seveal months implies that investos do not incopoate the infomational content of eanings announcement immediately, but athe slowly. Thus, it is a clea violation of semi-stong fom maket efficiency, theefoe EMH.

8 Q5. a. sell 1, hold 2 b. sell both c. sell both d. sell 2, hold 1

9 Q6. State which of the following is inconsistent with an efficient capital maket, the CAPM, o both: (a) A secuity with only divesifiable isk has expected etun that exceeds the isk-fee inteest ate. This statement is inconsistent with both. Why? Only divesifiable isk implies no undivesifiable (maket) isk. Thus, this is a zeo-beta secuity, which is expected to ean the iskfee ate. If it has highe expected etun than the isk-fee ate, this is not consistent with CAPM. It is above the SML and undepiced, In an efficient maket, savy investos would buy this stock pushing its pice up, loweing its etun. In equilibium, its expected etun should match the equied etun, i.e. the isk fee-ate. If this is not the case makets ae not efficient (potentially due to limits in abitage)

10 (b) A secuity with a beta of 1 had an excess etun of 15% last yea when the maket excess etun in the same yea was 9%. This statement is consistent (o is not inconsistent) with both Why? Realized etuns might diffe fom expected etuns due to continuous aival of new infomation. If duing the yea thee wee good news (i.e. eanings supises) about the stock, investos could have incopoated this into pices, implying highe than expected etuns fo the yea. (c) A small stock with beta of 1.5 tend to have highe etuns on aveage than a lage stock with a beta of 1.5. This statement is inconsistent with the CAPM but not necessaily with efficient capital makets. Why? Beta might not be the coect specification fo isk. Small fims might be iskie due to othe souces of isk factos (i.e. volatility isk, liquidity isk, business cycle isk, etc.), theefoe investos might equie highe etuns fo small stocks taking into account those isk factos.