Reference no: EM133068214

1. Which of the following statements are true about efficient capital markets? Explain your answers:

a) It implies perfect forecasting ability

b) It implies that prices perfectly reflect all available information

c) It implies an irrational market

d) It implies that prices do not fluctuate

e) It results from keen competition among investors

2. Suppose that I purchase Enron bonds after Enron filed for bankruptcy. What do you expect the NPV of my purchase will be, positive, negative, or zero? Explain your answer.

3. Define the three forms of market efficiency.

4. Does semi-strong form of market efficiency also imply weak form efficiency? Explain your answer.

5. Critically evaluate the following: 'Market momentum is defined as the 60day average of the stock prices. If a firm's current price crosses the average price from below, this is interpreted as evidence of market strength and provides a buy signal. . If a firm's current price crosses the average price from above, this is interpreted as evidence of market weakness and provides a sell signal.'

6. Critically evaluate the following statement: 'Stock market is nothing more than a big casino. For each winner, there is a loser, and society is no better off'.

7. Some people argue that the stock market crash of 1987 contradicts the market efficiency hypothesis. Provide an explanation that is consistent with market efficiency.

8. Suppose that a group of 400 oil companies who have discovered oil exhibit the following systematic patterns: Stock prices rise abnormally by 5% one month before the announcement, stock price rise another 10% during the month of the announcement. After the announcement of the oil discovery, stock prices decline by 2% each of the next seven months. Is this consistent with semi-strong form of market efficiency? Explain your answer.

9. Suppose stock prices do not react at all to our company's five most recent announcements. Can this be taken evidence of market inefficiency? Explain.

10. Federal Reserve kept the interest rates the same but market rose by 1% on announcement of no change. This is definitely inefficient. Discuss.