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Question - You have been following the stock price of Lee Inc., for the past 16 consecutive days in an attempt to determine whether you can outperform the buy and hold strategy by employing a filter rule. The simple filter rule states that your buy or sell decision is dictated by the level of the filter. If the price of the stock increases by at least the level of the filter, you will buy and hold the stock until it reaches a peak and then drops at least by the level of the filter. In this exercise, you will refrain from short selling. As a result, when the stock price drops from the peak by the level of the filter, you will liquidate the position and hold on to cash until the next buying opportunity arises.
Day
Security Prices ($)
1
100
2
99.2
3
98.59
4
97.11
5
94.33
6
96.09
7
95.57
8
95.59
9
94.64
10
94.47
11
94.99
12
95.43
13
93.22
14
92.7
15
94.7
16
93.36
i) Compute the return on $100.00 invested in the security by a 0.3% filter rule (without short sales) and compare this strategy to a buy and hold policy. Note that investors wait until the price increases by more than 0.3% for the first time. In addition, note that a fraction of a share can be purchased or sold.
ii) Perform the autocorrelation of price movement over the 16 day period. Explain your finding.
iii) What do the results obtained in (i) and (ii) imply for weak form market efficiency? Based on the limited data that you have analyzed, what is your conclusion about the weak form market efficiency? Justify your conclusion.
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