Assuming that the stock market is efficient, is each of the following statements
ID: 2650347 • Letter: A
Question
Assuming that the stock market is efficient, is each of the following statements true or false (to receive full credit, you must explain why in two or three sentences or with an example)?
1) The stock price of Company X doubled over the past year, the stock price of Company Z decreased by over 50%. Company X is the better stock investment today.
2) The stock price of Company X doubled over the past year, the stock price of Company Z decreased by over 50%. The market increased by 10%. The two stocks must have different Betas.
Explanation / Answer
Answer:-
(1) [TRUE] If stock price of X doubled the previous year and stock price of Z decreased by 50%. Because stock X better rate of return as compaired to stock Z.
(2) If stock X and stock Z have different Beta (Stock X beta is 1.5 and Stock Z beta is 0.5). In equilibrium, the expected return on Stock X will be greater than that on Stock Z.