Assignment:
Professionalism means . typed because it is easy to read. . you should show your calculations because your reader might need to understand how you got your answer in order to (1) make sure it is correct and (2) understand how to interpret your answer. . proofread because spelling and grammar mistakes (1) distract from your point, and reduce your credibility as an educated, intellectual person of authority.
1. If Martha Stewart was able to significantly outperform the market, in light of the theory of rational expectations and the efficient market hypothesis, how do you explain this?
2. For each of the following, explain whether or not it is an example of arbitrage?
a) J C Penny buys shoes from Nunn Bush and sells them in its stores.
b) You buy a baseball card collection at a garage sale, and resell it at a baseball card show.
c) A mutual fund firm sells shares to individual investors, pools them and then purchases a portfolio of stocks.
d) The value of houses declined in 2007 so a house-flipper buys a house, holds onto it, and re-sells it for a 13% profit after the housing market recovers in 2017.
e) You buy a 1972 Ford Mustang, restore it and sell it for a profit.
3. According to the theory of efficient markets, which of the following correctly completes the this statement: Mutual fund managers may be expected to earn
a) above-average returns if they are smarter than the average investor.
b) above-average returns if they have access to illegal, private information.
c) above-average profit by using early information from the company
d) above-average returns if they take on less risk.
e) above-average returns if they have learned from investing in the same stocks repeatedly.
f) above-average profit by using CEO Financial analysts' published recommendations
g) above-average returns if they participate in efficient markets.
h) above-average profit by using technical analysis
i) equal average returns to selecting by throwing darts at the financial page.
j) lower average returns than selecting by throwing darts at the financial page.
k) above-average profit by using hot tips from CNBC business news
l) higher average returns than selecting by throwing darts at the financial page.
4. As company earns an annual profit of $50 million. There are 150 million shares of stock outstanding. People expect a 16b% return on stock. What is a share of stock in this company worth?
Excel Problem: For this problem, you must calculate your answer using excel and upload the spreadsheet.
5. A stock was purchased for $20.00 on Jan 1, 2011. What is the rate of return on this stock if it is now trading for: a) $18.25? b) $22.50? c) $35.50?
6. Rules of the game: The game unfolds in two stages. In the first stage speculators buy a business from its retiring founder. In the second stage the speculators try to make a profit by selling the business to someone who will take over and manage the business (hopefully better than the founder did). Entrepreneurs are given instructions reading: You have started a successful business. Now it is time to sell it and retire. Your business earns $5 million per year. Negotiate a sale price. It may be useful information that interest rates are 6.25%. Speculators are given instructions reading: You want to buy stock in a business and then later you will have an opportunity to sell it, maybe, at a profit. Each business earns different profit, but you have a right to know the profits of the business before you buy. Interest rates are 6.25%. The entrepreneur and speculators then negotiate a price. Considering the information given, what price should a speculator pay for this business? ___________________________________
In the second stage of the game, the speculators turn around and try to sell the business to the managers, hopefully at a profit. The crucial difference between the two stages is the profitability of the business. The managers are given instructions reading: You are in the market to purchase a business. You have such confidence in your business ability that you think you can increase its annual profits by 50%. Negotiate a purchase price. You may want to know that interest rates are 6.25%. The speculators and managers then negotiate a price. Considering the information given, what price should a manager pay for this bond? ___________________________________