354 Part Four Financing Decisions and Market Efficiency
bre44380_ch13_327-354.indd 354 09/11/15 07:55 AM
CHALLENGE- Market efficiency “The strong form of the efficient-market hypothesis is nonsense. Look
at mutual fund X; it has had superior performance for each of the last 10 years.” Does the
speaker have a point? Suppose that there is a 50% probability that X will obtain superior per-
formance in any year simply by chance.
a. If X is the only fund, calculate the probability that it will have achieved superior perfor-
mance for each of the past 10 years.
b. Now recognize that there are nearly 10,000 mutual funds in the United States. What is the
probability that by chance there is at least 1 out of 10,000 funds that obtained 10 succes-
sive years of superior performance? - Bubbles Some extreme bubbles are obvious with hindsight, after they burst. But how would
you define a bubble? There are many examples of good news and rising stock prices, followed
by bad news and falling stock prices. Can you set out rules and procedures to distinguish
bubbles from the normal ups and downs of stock prices?
Month Market ReturnExecutive
Cheese ReturnPaddington
Beer Return
Jun-13 –5.6 –3.2 –9.2
Jul 6.5 6.1 7.3
Aug –3.1 2.0 –6.7
Sep 0.8 0.4 0.5
Oct 4.2 2.7 7.3
Nov –1.2 –2.3 –4.9
Dec 1.5 1.4 1.8
Jan-14 –3.5 –3.8 –5.0
Feb 4.6 4.0 5.6
Mar –3.1 –4.2 –5.7
Apr 2.8 1.3 4.5
May 1.0 0.9 0.5
Jun –1.5 –1.4 –0.7
Jul –0.2 –0.3 –0.8
Aug 1.3 1.6 2.2
Sep –2.9 –2.4 –6.4
Oct –1.2 –0.9 –0.8
Nov 2.7 2.3 3.4
Dec –2.3 –1.7 –2.3
Jan-15 4.0 5.7 4.1◗ TABLE 13.1
See Problem 18. Rates of
return in percent per month.Use finance.yahoo.com to download daily prices for five U.S. stocks for a recent five-year period.
For each stock, construct a scatter diagram of successive returns as in Figure 13.1. Calculate the
correlation between the returns on successive days. Do you find any consistent patterns?● ● ● ● ●
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