Analysis for Financial Management, 9e SUGGESTED ANSWERS TO EVEN-NUMBERED PROBLEMS Chapter 5 2. The fact that government bonds give away a elevateder(prenominal) rate of return than common telephone circuits in one year is non indicate that investors are dead free to settle for lower returns on stocks than bonds. It means that investors expectations were non met, or rather that investors were surprised. To take on additional risk, risk-averse investors necessitate additional anticipate return. But expected returns are not the same as realized returns. Be military campaign stocks and bonds are risky, their returns exit vary from year to year, and bonds pull up stakes earn high(prenominal) returns than stocks in fewer years. But the expected returns of common stocks should always be higher than the expected returns of government bonds. 4. Earning high returns in an efficient grocery store store is bid come onning at roulette. In every haphazard process, there wi ll be throw outners and losers, and virtually winners might win big. Earning consistently high returns over duration is also affirmable in an efficient market, just like a gambler on a lucky bar might win repeatedly at roulette. The relevant questions are whether the very high returns or the length of the winning rivulet is inconsistent with machination luck or not. 6.a.
The market would be inefficient because it is not responding rapidly to new information. b. Buy the trains stock straightway on the announcement. Sell in four days after it has risen and pocket a nice profit. c. If more investors pursued this strat egy, the increased demand on announcement wo! uld cause the determine to jump sharply immediately after the announcement. The price response would become efficient. d. This problem illustrates the statement. hoi polloi discover an inefficiency, and in the process of capitalizing on the inefficiency, they drive it away. e. This is not necessarily evidence of market inefficiency. If investors expect the bid to be followed by higher bids from other potential buyers, the market will rationally and...If you desire to get a full essay, army it on our website: OrderCustomPaper.com
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