Question

• Suppose that you are analyzing a stock that has a seasonal business (i.e., sales are consistently stronger during certain times of the year).  Would you expect the stock price to also follow a seasonal pattern? Why or why not?
• Suppose money manager A has earned an average return of 12% over the past 5 years, while manager B has earned 8% over that span. The S&P 500 has returned 10% over the same period.  There are 3 possibilities: 1) manager A outperformed manager B; 2) Manager B outperformed manager A; and 3) they performed equally well.  Explain how each scenario could be true.
• Is it possible to 'make money' in an efficient market? Be precise about what you mean by 'make money' because your response will depend on how you define this phrase.

Please provide detailed answers and explanations.

Answer 1

1) Stock prices changes as per demand and supply. Its fact that demand of certain seasonal products increases whenever season arrives. For example, demand of sweaters increases whenever winter season arrives, demand of stationery and other related things increases whenever new academic season starts, demand of fertilizer increases whenever rainy season comes etc. So this increase in demand will certainly have positive outcome on results and ultimately stock market will take in positive way. In conculsion, stock price will increase in seasonal patterns.

2) Scenario 1: Manager A has certainly outperformed Manager B because Manager A has earned average return of 12% which is more than Manager B's 8% in past 5 years. Moreover, Manager A's return is also more than S&P 500 return. So in terms of return we can say that Manager A has outperformed Manager B. Scenario 2: If we assume that Manager B has earned consistent return of 8% in 5 years and there is much more variation in Manager A' return, then in terms of consistency we can say that Manager B has outperformed Manager A. Scenario 3: If we compare from average term then Manager A has earned 2% more and Manager B has earned 2% less. Varation of + or - 2% can be treated as normal if we measure for 5 years. So in this term, we can say that they both performed equal.

3)   'Make money' means any appreciation in wealth over a period of time. In an efficient market, we can make money because demand and supply wil be in our favor.