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Chapter 7: Q.24 (page 210)
Why does entry occur?
Entry occurs as a result of the industry's above-average profit margins.
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Can a person with rational expectations expect the price of a share of Google to rise byin the next month?
Assume that the efficient market hypothesis holds. Marcos has been recently hired by a brokerage firm and claims that he now has access to the best market information. However, he is the “new guy,” and no one at the firm tells him much about the business. Would you expect Marcos’s clients to be better or worse off than the rest of the firm’s clients?
Visit the Bloomberg Markets website at www.bloomberg .com/markets/stocks. Their interactive graph allows you to see cumulative returns for individual stocks as well as market indices. Over the last five years, which of the three indices appears the most volatile––the S&P 500 (SPX:IND), the Dow Jones Industrial Average (INDU:IND), or the NASDAQ Composite (CCMP:IND)? Which index would have been the best investment if compounded over the last five years?
“An efficient market is one in which no one ever profits from having better information than the rest of the market participants.” Is this statement true, false, or uncertain? Explain your answer.
What basic principle of finance can be applied to the valuation of any investment asset?
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