Tutorial 10

1. If markets are efficient, what should be the correlation coefficient between stock returns
for 2 nonoverlapping time periods ?
2. “If all securities are fairly priced, all must offer equal expected rates of return.”
Comment.
3. If prices are likely to increase as decrease, why do investors earn positive returns from
the market on average ?
4. A successful firm like Microsoft has consistently generated large profits for years. Is
this a violation of the EMH ?
5. At a cocktail party, your co-worker tells you that he has beaten the market for each of
the last 3 years. Suppose you believe him. Does this shake your belief in efficient
markets ?
6. Which of the following statements are true if the efficient market hypothesis holds ?
(a) It implies that future events can be forecast with perfect accuracy.
(b) It implies that prices reflect all available information.
(c) It implies that security prices change for no discernible reason.
(d) It implies that prices do not fluctuate.
7. In an efficient market, professional portfolio management can offer all of the following
benefits except which of the following ?
(a) Low-cost diversification
(b) A targeted risk level.
(c) Low-cost record keeping
(d) A superior risk-return trade-off.
8. Which version of the efficient market hypothesis (weak, semistrong, or strong-form)
focuses on the most inclusive set of information ?
9. “Constantly fluctuating stock prices suggest that the market does not know how to price
stocks”. Respond.
10. Which of the following sources of market inefficiency would be most easily exploited
?
(a) A stock price drops suddenly due to a large block sale by an institution.
(b) A stock is overpriced because traders are restricted from short sales.
(c) Stocks are overvalued because investors are exuberant over increased
productivity in the economy.