Corporate Finance (4th Edition) (Pearson Series in Finance) - Standalone book
4th Edition
ISBN: 9780134083278
Author: Jonathan Berk, Peter DeMarzo
Publisher: PEARSON
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Textbook Question
Chapter 13, Problem 1P
Assume that all investors have the same information and care only about expected return and volatility. If new information arrives about one stock, can this information affect the price and return of other stocks? If so, explain why?
Expert Solution & Answer
Summary Introduction
To determine: To respond to the given statement.
Statement: Can the stock prices and stock returns affect if any new information arrives regarding the stock?
Introduction: Expected return is the method of finding the average anticipated probability of several diverse interest rates that are probable on a particular asset. The issues in such persistence comprise of dissimilar market environments that includes the beta of an asset.
Answer to Problem 1P
Answer: Yes, the stock prices and stock returns affect if any new information arrives regarding the stock.
Explanation of Solution
Yes, the stock prices and stock returns affect if any new information arrives regarding the stock.
Following are the reasons that suggest that the stock prices and stock returns affect if any new information arrives regarding the stock:
- If the other stock prices remain constant, the shareholders will prefer to raise the weight of the stock by indicating not to hold the market portfolio.
- As a result of the arrival of new information, it modifies the stock’s appearance.
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Students have asked these similar questions
When all investors have the same information and care only about expected return and volatility; if new information arrives about one stock, can this information affect the price and return of other stocks?
1. What effect does increasing inflation expectations have on the required returns of investors in common stock?
2. Explain the specific relationship between risk and reward and why this relationship must be true.
Which of the following statements concerning the Efficient Market Hypothesis is correct?
Select one:
a. Stock market prices are based on speculation not on underlying information
b. New information that confirms investor expectations should change stock prices
c. Stock prices should slowly respond when unexpected information becomes available
d. Careful research can help investors earn abnormal profits
e. Your return on investment should reflect the riskiness of your portfolio
Chapter 13 Solutions
Corporate Finance (4th Edition) (Pearson Series in Finance) - Standalone book
Ch. 13.1 - If investors attempt to buy a stock with a...Ch. 13.1 - What is the consequence of investors exploiting...Ch. 13.2 - How can an uninformed or unskilled investor...Ch. 13.2 - Under what conditions will it be possible to earn...Ch. 13.3 - Do investors hold well-diversified portfolios?Ch. 13.3 - Why is the high trading volume observed in markets...Ch. 13.3 - What must be true about the behavior of small,...Ch. 13.4 - What are several systematic behavioral biases that...Ch. 13.4 - Prob. 2CCCh. 13.5 - Prob. 1CC
Ch. 13.5 - Prob. 2CCCh. 13.6 - Prob. 1CCCh. 13.6 - Prob. 2CCCh. 13.7 - Prob. 1CCCh. 13.7 - How can you use the Fama-French-Carhart factor...Ch. 13.8 - Which is the most popular method used by...Ch. 13.8 - Prob. 2CCCh. 13.8 - Prob. 3CCCh. 13 - Assume that all investors have the same...Ch. 13 - Assume that the CAPM is a good description of...Ch. 13 - Prob. 3PCh. 13 - Prob. 4PCh. 13 - Prob. 5PCh. 13 - Explain what the following sentence means: The...Ch. 13 - You are trading in a market in which you know...Ch. 13 - Prob. 8PCh. 13 - Your brother Joe is a surgeon who suffers badly...Ch. 13 - Prob. 11PCh. 13 - Suppose that all investors have the disposition...Ch. 13 - Prob. 14PCh. 13 - Prob. 15PCh. 13 - Prob. 16PCh. 13 - Prob. 17PCh. 13 - Prob. 18PCh. 13 - Each of the six firms in the table below is...Ch. 13 - Prob. 20PCh. 13 - In Problem 20, assume the risk-free rate is 3% and...Ch. 13 - Prob. 22PCh. 13 - Prob. 23PCh. 13 - Prob. 24PCh. 13 - Explain why if some investors are subject to...Ch. 13 - Prob. 26PCh. 13 - Prob. 27PCh. 13 - You are currently considering an investment in a...Ch. 13 - Prob. 29P
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Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Similar questions
- Let's explore the difference between "expected" and "actual" return of a stock. 1) How might we calculate what the expected return of a stock should be? 2) How might we calculate the "actual" return of a stock?arrow_forwardplease answer both. If a stock's fair return increases, what will happen to the stock's value? A. It will increase. B. It will not change. C. It will decrease. If the market risk premium rises, what will happen to the stock's price? A. It will not change. B. It will increase. C. It will decrease.arrow_forwarda. What determines stock market valuations? b. Is a stock's price primarily determined by the discounted sum of future cash flows, monetary policy, or fear and greed? c. Is market timing possible using sentiment indicators such as put/call ratios and Investor's Intelligence surveys? Please ensure to add references and citations.arrow_forward
- Strong form efficient market hypothesis states that stock prices reflects all the information in a market. The information may be public or private (i.e., insider information about the market) and such information will not benefit an investor in the form of higher returns.arrow_forwardWhat are efficient markets? Imagine if the price of a stock is going up and financial markets are efficient what can you tell us about the nature of the stock? What if the markets are inefficient then how would you react to increasing prices for a particular stock?arrow_forwardWhy might the stock price changing make sense within the context of risk and return?arrow_forward
- Explain the effect of D/E on asset returns, equity returns (assuming that cost of debt is not affected), asset beta and equity beta (assuming that debt beta is zero). Should an investor choose to invest in a stock of a company with high or low D/E, or why expected returns on these stocks are equivalent, although they are not equal?arrow_forwardTo what extent does investor mood contribute to the observed fluctuations in stock prices? Explainarrow_forward3) Understanding if a stock is undervalued or overvalued will influence if the investor will invest in the stock at the current moment of the analysis. T/Farrow_forward
- How does the Efficient Market Hypothesis (EMH) explain stock price behavior, and what are the implications for investors? Describe the three forms of EMH and discuss whether active or passive management is more suitable in light of this theory.arrow_forwardIf the fair value of a stock is more than its market value, which of the following is a reasonable conclusion? a. The stock has a low level of risk b. The stock offers a high dividend payout ratio c. The market is undervaluing the stock d. The market is overvaluing the stockarrow_forwardb) "If a stock had high returns so far, it will have low returns in the future". Discuss whether this statement is true or false, based on the knowledge of the different theories and models out there.arrow_forward
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