Problem 1:
Below I have listed a set of phenomena that have been empirically documented to hold on average. For each of these phenomena, I want you to identify the weakest form of the efficient market hypothesis that each phenomena is inconsistent with. For each, circle the correct answer.
A. The January Effect:A portfolio of stocks in "small cap firms" (i.e., firms in the bottom 5 percentile ranked by market capitalization) has a higher average return than predicted by its risk in the first week in January.
Weak Form Semi-Strong Form Strong Form It is consistent with all forms
B. The average returns over a 3-year period following an existing publicly traded company issuing new shares (a seasoned equity offering or SEO) are on average less than those of similar firms (in terms of risk and business) that did not issue new equity.
Weak Form Semi-Strong Form Strong Form It is consistent with all forms
C. Immediately after an existing public firm announces that it is going to issue new equity (do an SEO), the price of its current equity falls on average.
Weak Form Semi-Strong Form Strong Form It is consistent with all forms
D. Immediately after an existing public firm announces that it is going to issue new equity (an SEO), on average the price does not change.However, by the end of the day the SEO occurs and the new equity is sold, the stock price rises on average.
Weak Form Semi-Strong Form Strong Form It is consistent with all forms
E. Every year there are a bunch of professional fund managers who beat the market (i.e., have larger returns than a passive portfolio invested in the "market" portfolio).
Weak Form Semi-Strong Form Strong Form It is consistent with all forms
F. When it is announced that a CEO has died while in office, the stock price of the firm rises on average.
Weak Form Semi-Strong Form Strong Form It is consistent with all forms
G. Whenever the Dow Jones Industrial Index rises by more than 1 percent in a given day, the stocks included in the index have negative returns the next day on average.
Weak Form Semi-Strong Form Strong Form It is consistent with all forms
Problem 2:
See the data in the attached spreadsheet called "data.xlsx."
The spreadsheet contains data on the closing price of an unidentified stock for one (undisclosed) year (252 trading days). The spreadsheet also plots price over time. Weekly data for this security is also provided starting at row 260.
Questions:
1. Does there appear to be a pattern in price movements? If today is day 252, what do you predict will happen to the price over the next day? What do you predict will happen to price over the next two to three weeks? Why?
2. If there is truly a pattern in price movements, then it should be the case that you can predict the next interval's return (albeit imperfectly) knowing the previous periods return. To see if this is true, calculate the series of returns over each interval. (The security paid no dividends.) Then create a plot of the return at t (on the vertical axis) against the return at t-1 (on the horizontal axis). If the prior return (at t-1) is useful a predicting the next period's return (at t), then this plot should show non-zero correlation. Does the data at the daily or weekly level show any correlation?
3. Is there a difference between what you perceived when you answered Question 1 and what you perceived when you answered Question 2? If so, which perception is correct? Why?
Attachment:- 1416048_1_data-.xlsx