Your investment client asks for information concerning the benefits of active portfolio management. She is particularly interested in the question of whether active managers can be expected to consistently exploit inefficiencies in the capital markets to produce above-average returns without assuming higher risk. The semistrong form of the efficient market hypothesis asserts that all publicly available information is rapidly and correctly reflected in securities prices. This implies that investors cannot expect to derive above-average profits from purchases made after information has become public because security prices already reflect the information’s full effects. a. Identify and explain two examples of empirical evidence that tend to support the EMH implication stated above. b. Identify and explain two examples of empirical evidence that tend to refute the EMH implication stated above. c. Discuss reasons why an investor might choose not to index even if the markets were, in fact, semistrong-form efficient.

The Journal of Portfolio Management studied the relationship between country credit ratings and the volatility of the countries' stock markets (Spring 1996). The researchers point out that the countries' credit ratings can explain this volatility and whether the countries in question have developed or emerging markets. Data on the volatility (measured as the standard deviation of stock returns), the credit rating (measured as a percentage), and market type (developed or emerging) for a sample of 30 fictitious countries are saved in the file. (Selected observations are shown in the table below.)

| Volatility (standard deviation of return), $y$ | Credit Rating, $x_{1}$ | Developed (D) or Emerging Country, $x_{2}$ | |----------|------------------------------------------------|------------------------|--------------------------------------------| | 1 | $56.9$ | $9.5$ | $\mathrm{E}$ | | 2 | $25.1$ | $72.4$ | $\mathrm{D}$ | | 3 | $28.4$ | $58.2$ | $\mathrm{E}$ | | 4 | $56.2$ | $9.9$ | $\mathrm{E}$ | | 5 | $21.5$ | $92.1$ | $\mathrm{D}$ | | $\vdots$ | $\vdots$ | $\vdots$ | $\vdots$ | | 26 | $47.5$ | $16.9$ | $\mathrm{E}$ | | 27 | $22.0$ | $89.0$ | $\mathrm{D}$ | | 28 | $21.5$ | $91.9$ | $\mathrm{D}$ | | 29 | $38.1$ | $30.7$ | $\mathrm{E}$ | | 30 | $37.4$ | $32.2$ | $\mathrm{E}$ |

c. Fit the model, part a, to the data using a statistical software package. Report the least squares prediction equation for each of the two types of markets.

Critics of advertising argue that advertising:

a. Creates demand for products that people otherwise do not want or need.

b. Lowers barriers to entry into an industry because new firms can more easily establish themselves as competitors.

c. Increases competition by providing information about prices.

d. Encourages monopolization of markets by raising entry barriers.

Albert Reifschneider knew farming. Born and raised on a farm, he had been selling his crops for more than 20 years. He also had a lot of experience in farm futures (contracts made between farmers and buyers for the purchase of crops to be harvested at some future time). One year he orally contracted to sell more than 12,000 bushels of corn from the fall harvest to the ColoradoKansas Grain Company. Treating Reifschneider as a merchant, the company sent him a written confirmation of the deal to which he did not respond. When Reifschneider refused to deliver the corn, the Grain Company sued him for breach of contract. Who won, and why? (ColoradoKansas Grain Co. v. Reifschneider, 817 P. 2d 637)

A country exports crayfish to overseas markets. The buyers are prepared to pay high prices when the crayfish arrive still alive. If X is the number of deaths per dozen crayfish, the probability distribution for X is given by:

$$\begin{matrix} \text{x} & \text{0} & \text{1} & \text{2} & \text{3} & \text{4} & \text{5} & \text{>5}\\ \text{P(X = x)} & \text{0.54} & \text{0.26} & \text{0.15} & \text{k} & \text{0.01} & \text{0.01} & \text{0.00}\\ \end{matrix}$$

Over a long period, what is the mean number of deaths per dozen crayfish?

Kyzera manufactures, markets, and sells cellular telephones. The average total assets for Kyzera is $\$ 250,000$. In its most recent ypar, Kyzera reported net income of $\$ 65,000$ on revenues of $\$ 475,000$.

Required

1. What is Kyzera's return on assets?
2. Does return on assets seem satisfactory for Kyzera given that its competitors average a $12 \%$ return on assets?
3. What are total expenses for Kyzera in its most recent year?
4. What is the average total amount of liabilities plus equity for Kyzera?

Decide which of these labels best fits each of the following situations: rent-seeking, corruption, or bureaucratic capture. (If more than one is potentially applicable, pick the one that is the most narrowly tailored to the scenario.)

c. The president appoints a former head of an investment bank to the Securities and Exchange Commission (which oversees capital markets and enforces financial regulations).

A believer in the "random walk" theory of stock markets thinks that an index of stock prices has probability 0.65 of increasing in any year. Moreover, the change in the index in any given year is not influenced by whether it rose or fell in earlier years. Let X be the number of years among the next 6 years in which the index rises.

What are the possible values that X can take?

Aspen Company manufactures, markets, and sells ATV and mobile equipment and accessories. The average total assets for Aspen is $2,000,000. In its most recent year, Aspen reported net income of$100,000 on revenues of $1,200,000.

Required
1. What is Aspen Company’s return on assets?
2. Does return on assets seem satisfactory for Aspen given that its competitors average a 9.5% return on assets?
3. What are the total expenses for Aspen Company in its most recent year?
4. What is the average total amount of liabilities plus equity for Aspen Company?

Organize these businesses into three groups as they would form horizontal, vertical, and conglomerate firms to complete this activity. Ajax Trucking Co. Apex Super Markets Clean Soap Co. Dad’s Ice Cream Co. Harold’s Fruit Co. Joe’s Wholesale Co. Mom’s Detergent Co. Sue’s Sandwich Co. XYZ Soap Co.

[Related to the Apply the Concept on page 523] An article in the Wall Street Journal on the DOJ’s investigation into possible price fixing by pharmaceutical firms selling generic drugs noted, “Agreements among companies to set prices or to divide up markets have long been illegal under federal antitrust law.”

When did price fixing first become illegal under federal law? Why does the federal government care if firms collude to fix the prices of the products they sell?

The Dow Jones Industrial Average (DJIA) is a commonly used index of the overall strength of the U.S. stock market. In 2019, the mean daily change in the DJIA for the days that the stock markets were open was 20.94 points with a standard deviation of 206.77 points.

Find and interpret the standardized score (z-score) for the change in the DJIA on May 7, 2019, which was -473.39 points.

Use the following information to work Problems 8 and 9. Canada’s dairy industry is a rich, closed club If you want to be a dairy farmer, you buy a plot of land and some cows and start to sell your milk. Not in Canada. There, farmers must buy a quota to produce a set amount of milk. The situation is similar in the markets for chicken and eggs.

Draw a graph to illustrate the Canadian market for milk. With a production quota, show the quantity of milk produced, the price, consumer surplus, producer surplus, and the deadweight loss created.

A believer in the "random walk" theory of stock markets thinks that an index of stock prices has a probability of 0.65 of increasing in any year. Moreover, the change in the index in any given year is not influenced by whether it rose or fell in earlier years. Let $X$ be the number of years among the next 5 years in which the index rises.

Find the probability of each value $X$. Draw a probability histogram for the distribution of $X$.