1 The model predicts returns on XYZ stock using returns on a market portfolio, represented by the Dow Jones Industrial Average (DJIA), and a nominalvariable that has three categories; that is, whether the return occurs in the first week of January, in the last week of December, or in any other weekbesides these two. The two indicator variables, I and Is, represent the three categories of the qualitative variable.A return that occurs in the last week of December is represented byIn this case, the mean XYZ return is:O E(y I last week of December)= Bo + Balz + BixiO E(y I last week of December)= Be + B+Ba+ BaxiOE(y I last week of December) Bo+ BalzOE(y I last week of December) = Bo + B3 + B1x1110 and 1=1XI 0 and I = 0XI 0 and Isw 1I= 1 and I 0 A calendar effect is an observed pattern in stock prices based on the calendar-for example, a rise or fall associated with a particular weekday ormonth.The most well-known effect is the January effect, a tendency for prices to increase (especially for small-capitalization stocks) in the first few weeks ofJanuary. One explanation is that investors sell poor-performing stocks at year-end to reduce their capital gains taxes, thus depressing the prices. Thisprompts investors to buy undervalued stocks during the first few weeks of January, causing their prices to go up.In recent years, what has been observed instead is a rise in stock prices in the last week of December, between the Christmas and New Year holidays.This December effect may reflect stock buyers' anticipation of the January effect.Consider the returns on XYZ stock. A researcher makes the simplifying assumption that the January effect occurs during the first week of January. Todetermine whether the January and December effects are present for this stock, he specifies the following model:His regression model is as follows:ywhere yXIPo+Pix1 + P₂l₂ + Pals +the daily return on XYZ stockthe daily return on the Dow Jones Industrial Average11 if the return occurs in the first week of January; 0 otherwise11 if the return occurs in the last week of December, 0 otherwise

This is a 3 factor return model where the return of the stock is depends on 3 factors:x1 = daily…

A return that occurs in the last week of December is represented by In this case, the mean XYZ return is: O E(y I last week of December) Bo+ Bala + Bixi O E(y last week of December) Bo + B+B+Bixi O E(y I last week of December) - Bo + Balz OE(y I last week of December) - Bo + B3+ Bixi 10 and 1=1 XI 0 and 1 = 0 XI 0 and Is = 1 I= 1 and Is=0

A return that occurs in the last week of December is represented by In this case, the mean XYZ return is: O E(y I last week of December) Bo+ Bala + Bixi O E(y last week of December) Bo + B+B+Bixi O E(y I last week of December) - Bo + Balz OE(y I last week of December) - Bo + B3+ Bixi 10 and 1=1 XI 0 and 1 = 0 XI 0 and Is = 1 I= 1 and Is=0

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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You have noticed that stocks have a tendency to go down after days when coronavirus cases increase and vice versa. If you can make abnormal returns following this trading strategy, does this violate market efficiency?
Say stocks of firms which change their logo in a given year tend to outperform (have higher abnormal returns) the stocks of firms which don't change their logos for the following year. If markets are efficient and you used the correct model for expected returns in your analysis, what must be true about firms that change their logos relative to firms that don't change their logos? Firms that change their logos are more exposed to risk than firms that don't change their logos. Firms that change their logos are equally exposed to risk as firms that don't change their logos. Firms that change their logos are less exposed to risk than firms that don't change their logos. O We can't make any of the above statements
Suppose that, after conducting an analysis of past stock prices, you come up with the following observations. Which would appear to contradict the weak form of the efficient market hypothesis? A. The average rate of return is significantly greater than zero. B. The correlation between the return during a given week and the return during the following week is zero. C. One could have made superior returns by buying stock after a 10% rise in price and selling after a 10% fall. D. One could have made higher-than-average capital gains by holding stocks with low dividend yields.
Which of the following hypothetical phenomena would be either consistent with or a violation of the efficient market hypothesis? a. Nearly half of all professionally managed mutual funds are able to outperform the S&P 500 in a typical year. Consistent Inconsistent b. Money managers who outperform the market (on a risk-adjusted basis) in one year are likely to outperform the market in the following year. Consistent Inconsistent c. Stock prices tend to be predictably more volatile in January than in other months. Consistent Inconsistent d. Stock prices of companies that announce increased earnings in January tend to outperform the market in February. Consistent Inconsistent
Which of the following anomalies have historically existed in the U.S. stock market? O investors who buy stocks of Value Line Rating of 5 will earn abnormal returns O stocks returns are systematically higher in January than any other month of the year O large firm stocks have outperformed small firm stocks O markets tends to overreact to good news and under react to bad news
A support level is the price range at which a technical analyst would expect the A) supply of a stock to increase dramatically. B) supply of a stock to decrease substantially. C) demand for a stock to increase substantially. D) demand for a stock to decrease substantially. E) price of a stock to fall. 8) A market decline of 23% on a day when there is no significant macroeconomic event ______ consistent with the EMH because ________. Please provide an accurate justification for the chosen answer.
Which of the following (hypothetical) observations would most contradict the proposition that the stock market is weakly efficient? Explain.a. Over 25% of mutual funds outperform the market on average.b. Insiders earn abnormal trading profits.c. Every January, the stock market earns abnormal returns.
During periods when investors become fearful that stocks are overvalued, they try to get rid of their stocks, and the stock market experienced a major decline. During these periods, interest rates also tend to decline. Use the loanable funds to explain how a massive sale of stocks leads to lower interest rates.
A stock market analyst is able to identify mispriced stocks by comparing the average price for the last 10 days to the average price for the last 60 days. If this is true, what do you know about the market?
Evidence of market inefficiency occurs when investors earn abnormal returns: Only in the short term. In any given quarter. In any given year. Consistently over the long term. All of the above answers are correct. None of the above answers is correct.
10) A critical factor that explains why investors who beat the market on a given year are generally not the same in the following years is: a) The arguments of the Efficient Market hypothesis b) The reasoning of the Random Walk hypothesis c) The feature of stock prices changed by the dissemination of new information d) All of the above e) None of the above
based on the current variables that may impact stock demand, such as inflation, budget deficit, monetary policies, political situations, and investor's sentiment generally. Do you believe that stock prices will grow or drop this year's end based on these conditions? Justify your response using logic. Which of the following factors do you believe will have the greatest influence on stock prices?

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