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13.

in the middle to late 1990s, the peformance of the pros was unusually poor,
on the order of 90 percent of all equity mutual funds underperformed a passively
managed index fund. how does this bear on the issue of market efficieny?
14. a hundred years ago or so, companies did not compile annual reports. even if
you owned stock in a particular company, you were unlikely to be allowed to see
the balance sheet and income statement for the company. assuming the market is
semistrong form efficient, what does this say about market efficiency then compa
red to now?
15. aerotech, an aerospace technology research firm, announced this morning that
is has hired the world's most knowledgeable and profilic space researchers. bef
ore today Aerotech's stock had been selling for $100. Assume that no other infor
mation is received over the next week and the stock market as whole does not mov
e.
a. what do you expect will happen to Aerotech' stock?
b. Consider the following scenarios: i. the stock price jumps to $118 on the day
of the announcement. in subsequent days it floats up to $123, then falls back t
o $116.
ii. the stock price jumps to $116 and remains at that level.
the stock price gradually climbs to $116 over the next week.
which scenario(s) indicate market efficiency? which do not? why?
16. when the 56 years founder of gulf & western, inc., died of a heart attack, t
he stock price immediately jumped from $18.00 a share to $20.25, a 12.5 percent
increase. this is evidence of market inefficiency because an efficient stock mar
ket would have anticipated his death and adjusted the price beforehand. assume t
hat no other information is received and the stock market as a whole does not mo
ve. is this statement about market efficiency true or false? explain.
17. today, the following announcement was made: early today the justice departme
nt reached a decision in the universal product Care (UPC) case. UPC has been fou
nd guilty of discriminatory practices in hiring. fot the next five years, UPC mu
st pay $2 million each year to a fund representing victims of UPC's policies. "
Assuming the market is efficient, should investors not buy UPC stock after the a
nnouncement because the litigation will cause an abnormally low rate of return?
explain.
18.newtech corp. is going to adopt a new chip-testing device that can greatly im
prove its production efficiency. do you think the lead engineer can profit from
purchasing the firm's stock before the news release on the device? after reading
the announcement in the Wall Street Journal, should you be able to earn an abno
rmal return frompurchasing the stock if the market is efficient?
19. transtrust corp. has changed how it accounts for inventory. taxes are unaffe
cted, althought the resulting earnings report released this quarter is 20 percen
t higher than what it would have been under the old accounting system. there is
no other surprise in the ernings report, at the change in the accounting treatme
nt was publicly announced. if the market is efficient, will the stock price be h
igher the market learns that the reported earnings are higher?
kuesen problem
1.

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