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12/15/15
Accounting 507 Text Chapter 4 Research Methodology
Questions:
1. What are the steps in the Scientific Method of Inquiry?
Ans: The steps in the Scientific Method of Inquiry are as follows:
1.
12. What information is incorporated into stock price under the weak form of the EMH?
Ans: Under the weak form of the EMH, the historical price of a stock provides an unbiased
estimate of its future price. This hypothesis assumes that the rates of return on the market should
be independent; past rates of return have no effect on future rates. Given this assumption, rules
such as the ones traders use to buy or sell a stock, are invalid.
13. What information is incorporated into stock price under the semi-strong form of the
EMH?
Ans: Under the semi-strong form of the EMH, all publicly available information, including past
stock prices, is assumed to be important in determining securities prices. In other words, if this
form of the EMH is correct, no investor can make an excess return by use of publicly available
information because this information has already been considered by the marketplace in
establishing securities prices.
This hypothesis assumes that stocks adjust quickly to absorb new information. The semi-strong
form EMH also incorporates the weak-form hypothesis. Given the assumption that stock prices
reflect all new available information and investors purchase stocks after this information is
released, an investor cannot benefit over and above the market by trading on new information.
14. What information is incorporated into stock price under the strong form of the EMH?
Ans: The strong-form EMH implies that the market is efficient: it reflects all information
both public and private, building and incorporating the weak-form EMH and the semistrong form EMH. Given the assumption that stock prices reflect all information (public
as well as private) no investor would be able to profit above the average investor even if
he was given new information.
15. What is a Ponzi scheme? Chain letter?
Ans: A Ponzi scheme is a fraudulent investment operation where the operator, an
individual or organization, pays returns to its investors from new capital paid to the
operators by new investors, rather than from profit earned by the operator.
A typical chain letter consists of a message that attempts to convince the recipient to
make a number of copies of the letter and then pass them on to as many recipients as
possible.
Ans: Portfolio helps to reduce unsystematic risk. Investors can eliminate the risk associated with
acquiring a particular companys common stock by purchasing diversified portfolios.