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Investment Theory: For each of the following, indicate whether the statement is a violation of the...

Investment Theory:

For each of the following, indicate whether the statement is a violation of the Efficient Markets Hypothesis and, if so, of which form. Explain why. Your answers should be short and concise.

1. Stocks before large dividend increases have consistently positive abnormal returns. The dividend increase is publicly announced.

2. Company A announced its intention to hire Mr. X, a well-known specialist in the industry. Its stock price gradually rose over the two weeks following the announcement.

3. You observe significant positive serial correlation between non-overlapping market returns (e.g. weekly returns of security A are positively correlated with the returns the preceding week).

4. You observe significant negative serial correlation between non-overlapping market returns (e.g. monthly returns of security A are negatively correlated with the returns the preceding month).

Solutions

Expert Solution

1. Stocks before large dividend increases have consistently positive abnormal returns. The dividend increase is publicly announced.

Answer 1: As per concept of efficiency of Market ,investors cannot earn excess risk-adjusted profits.Here the information is available in public domain so it is violation of semi strong form of efficiency.

2.Company A announced its intention to hire Mr. X, a well-known specialist in the industry. Its stock price gradually rose over the two weeks following the announcement.

Answer 2. As the price of share increases gradually with the announcement , it is in line with the concept of efficiency.

3. You observe significant positive serial correlation between non-overlapping market returns (e.g. weekly returns of security A are positively correlated with the returns the preceding week).

Answer 3> No violation of efficiency concept , weak form of efficiency

4. You observe significant negative serial correlation between non-overlapping market returns (e.g. monthly returns of security A are negatively correlated with the returns the preceding month).

Answer 4> No violation of efficiency concept , weak form of efficiency

jeff jeffy answered 6 months ago
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