hw 8,9,10,11

Question 1

If a stock has positive earnings surprise and earn positive return during the earnings announcement, then its future stock return after the earnings announcement on average is likely to be

Answer 1

Positive as information is slowly incorporated into the stock prices

Question 2

If we run a hedge run based on patterns of stock returns around the earnings surprises, then we shall

Answer 2

buy positive earnings surprised stocks and sell negative earnings surprise stocks

Question 3

If you believe in the ____ form of EMH, you believe that stock prices should reflect all relevant information including historical stock prices and current public information about the firm, but not information that is available only to insiders.

Answer 3

semistrong

Question 4

If you believe in the reversal effect, you should

Answer 4

buy stocks this period that performed poorly last period

Question 5

On average, mutual funds earn what kind of alpha

Answer 5

insignificant small alpha

Question 6

On average, the risk-adjusted returns of small firms

Answer 6

were higher than the risk adjusted returns of large firms

Question 7

Proponents of the EMH typically advocate

Answer 7

Investing in an index fund and a passive investment strategy

Question 8

Researchers have found that most of the small firm effect occurs

Answer 8

in January

Question 9

Researchers have found that large stocks perform the best in which months?

Answer 9

November and December

Question 10

Stock return reversal is likely to happen for what kind of stocks?

Answer 10

stocks that have performed well in the past 3 - 5 years

Question 11

What stocks are likely to have stock price momentum?

Answer 11

stocks that have performed well in the past 6 months to 1 year

Question 12

When a stock has a large price change, and there is no trading volume, what is likely to happen to future stock prices?

Answer 12

It will revert. Future stock return is negative

Question 13

Which day of the week has the lowest return based on lectures in class?

Answer 13

Monday

Question 14

Why do small stocks do well in January?

Answer 14

because investors sold them to realized loss in December of last year so that they can lower their taxes on capital gains, and now they buy them back in January

Question 15

How does mental accounting explain the disposition effect?

Answer 15

investors have separate accounts for gains and losses and are reluctant to realized losses

Question 16

How does overextrapolation explain long term reversal of stock prices?

Answer 16

Investors extrapolate high earnings in the past too far into the future and earnings miss in the future.

Question 17

Overconfidence can best explain the following stock market pattern

Answer 17

excessive trading

Question 18

overextrapolation can explain the following stock return patterns

Answer 18

momentum, high price earnings ratio and long term reversal

Question 19

Overextrapolation of stock return at short-horizon means that

Answer 19

investors think future stock return is high because past stock return is high

Question 20

what is the disposition effect?

Answer 20

investors sell gains faster than they do losses

Question 21

what is overconfidence?

Answer 21

investors are tight about the probability distribution

Question 22

what stock price pattern does the disposition effect explain the best?

Answer 22

the momentum effect

Question 23

Which group is the most overconfident?

Answer 23

Single men

Question 24

An example of a highly cyclical industry is

Answer 24

the automobile industry

Question 25

an example of a positive demand shock is

Answer 25

a decrease in tax rates

Question 26

a trough is ___

Answer 26

a transition from a contraction in the business cycle to the start of an expansion

Question 27

Fiscal policy generally has a ___ direct impact than monetary policy on the economy, and the formulation and implementation of fiscal policy is ____ than that of monetary policy

Answer 27

more, slower

Question 28

If the economy is growing, firms with high operating leverage will experience ____

Answer 28

higher increases in profits than firms with low operating leverage

Question 29

Supply-side economists wishing to stimulate the economy as most likely to recommend

Answer 29

a decrease in the tax rate

Question 30

The most widely used monetary tool is ____

Answer 30

open market operations

Question 31

The "normal" range of price-earnings ratios for the S&P500 index is

Answer 31

between 12 and 25

Question 32

``` Which of the following are key economic statistics that are used to describe the state of the macroeconomy? I) Gross domestic product II) The unemployment rate III) inflation IV) consumer sentiment V) the budget deficit ```

Answer 32

I,II,III,IV and V

Question 33

Which sector should we invest in when the economy is at the trough of its business cycle

Answer 33

technology

Question 34

Which sector should we invest in when the economy is in a healthy expansion stage?

Answer 34

consumer discretionary

Question 35

A Company is expected to pay a dividend in year 1 of $1.65, a dividend in year 2 of $1.97, and a dividend in year 3 of $2.54. After year 3, dividends are expected to grow at the rate of 8% per year. An appropriate required return for the stock is 11%. The stock should be worth _______ today.

Answer 35

$71.80

Question 36

High P/E ratios tend to indicate that a company will ______, ceteris paribus.

Answer 36

Grow quickly

Question 37

Historically, P/E ratios have tended to be ________.

Answer 37

lower when inflation has been high

Question 38

Since 1955, Treasury bond yields and earnings yields on stocks were _______.

Answer 38

positively correlated

Question 39

Siri had a FCFE of $1.6M last year and has 3.2M shares outstanding. Siri's required return on equity is 12% and WACC is 9.8%. If FCFE is expected to grow at 9% forever, the intrinsic value of Siri's shares are ___________.

Answer 39

$18.17

Question 40

Smart Draw Company is expected to have per share FCFE in year 1 of$1.20, per share FCFE in year 2 of $1.50, and per share FCFE in year 3 of $2.00. After year 3, per share FCFE is expected to grow at the rate of 10% per year. An appropriate required return for the stock is 14%. The stock should be worth _______ today.

Answer 40

$40.68

Question 41

The Gordon Model

Answer 41

is a generalization of the perpetuity formula to cover the case of a growing perpetuity and is valid only when g is less than k.