1. APPLICATION The Efficient Market Hypothesis
Suppose that a share of Microsoft had a closing price yesterday of $90, but new information was announced after the market closed that caused a revision in the forecast of the price next year to go to $120. If the annual equilibrium return on Microsoft is 15%, what does the efficient market hypothesis indicate the price will go to today when the market opens? (Assume that Microsoft pays no dividends.)
2.FYI Should You Hire an Ape as Your Investment Adviser?
The San Francisco Chronicle came up withan amusing way of evaluating how success full investment advisers are at picking stocks. They asked eight analysts to pick five stocks at the beginning of the year and then compared the performance of their stock picks to those chosen by Jolyn, an orangutan living at Marine World/Africa USA in Vallejo, California. Consistent with the results found in the Investment Dartboard feature of the Wall Street Journal, Jolyn beat the investment advisers as often as they beat her. Given this result, you might be just as well off hiring an orangutan as your investment adviser as you would be hiring a human being!