Why do the arithmetic average return and the geometric return differ?
Answer: The arithmetic average return does not take what the value of the investment was at the start of each period. Hence, even though a company may have the same arithmetic return for two consecutive years, the dollar amount of those returns will be different in later years than in the first year. For instance, if the investor started with $1,000, and earned 20% the first year, lost 20% the second year, and earned 15% the third year, the average arithmetic return would be 5%, and the 20% gain the first year would be $200, but the 20% loss the second year would be $240. The investment would be worth $1104 after three years, giving an average geometric return of 3.35%, different from the average arithmetic return.
Each of the following would tend to weaken the Efficient Market Hypothesis EXCEPT
A) There is publicly available information that Boeing Aircraft has procured a contract to build 25 planes for the U.S. Government and the price of Boeing quickly goes up.
B) ACG, Inc. performed well for the past six months, but they just lost a major distribution contract, but the price of ACG stock continues to go up.
C) Louisville Slugger, Inc., gets a contract to supply bats for Little League play, a contract it never had before, and stock price remains stable.
D) Muguet Company consistently underperforms the market in October, but outperforms the market in May.
Jayden spends a lot of time studying charts of stocks past performance, but his investment return are only average. This outcome supports
A) the weak-form efficient market hypothesis.
B) the semi-strong form efficient market hypothesis.
C) the strong form efficient market hypothesis.
D) all of the above.
Which of the following is consistent with the efficient market hypothesis?
A) so-called value stocks outperform growth stocks.
B) stocks that have performed well over the past year continue to perform well for several more months.
C) a company announces higher than expected sales and earnings. The stock price immediately increases by 10%.
D) a company announces higher than expected sales and earnings. The stock price remains unchanged.
