1 .It is well known that the stock market e¢ ciently incorporates information. Which of the following statements is INCORRECT (does not make sense) assuming that the stock market is semi-strong form e¢ client.

(a) "The reported earnings of Caterpillar was much higher than investors expectations. Therefore, the Caterpillar stock price increased sharply in response to the earnings news."

b) "It is expected that the oil price increase will boost provits of Exxon Mobil during the next quarter. Therefore, Exxon Mobilís stock price should appreciate during the next quarter."

(c) "Everyone expects the Federal Reserve to announce an increase of the interest rate tomorrow. Therefore, the announcement may not affect stock prices tomorrow."

(d) "When the stock prices incorporate information efficiently, stock prices behave like random walks, i.e., their price changes (or returns) are difficult to predict."

2. A stock has an expected return of 13 percent (according to the CAPM theory). When the risk-free rate is 7 percent and the i`market risk premiumi^is 8 percent, what must the beta of this stock be? (Hint: Recall the deO¨nition of the market risk premium.)

(a) 0:60

(b) 0:75

(c) 1:20

(d) 1:50