Question

Question 1 a. Suppose your cousin invests in the stock market and doubles her money in a single year while the market, on average, earned a return of only about 15 percent. Explain if your cousin's performance a violation of market efficiency. (10 marks) b. Main Buyuk Bhd has developed a new product that can greatly improve its earning per share (EPS). Assuming market efficiency, explain whether the General Manager of the firm can get abnormal return from purchasing the firm's shares before the news on the new product is released (5 marks) Textile manufacturer who wishes to hedge against movements in cotton prices could use cotton futures contracts or buy options on cotton. Compare the two approaches. (10 marks) TOTAL 25 MARKS

Answer 1

the market efficient hypothesis exists for common investors but there are many violations when the players are people with power, knowledge and money.
violation of efficient market hypothesis is possible only in case of insider trading, in case of insider trading any of the official of the company who uses unpublished information for his benefit and take advantage to earn returns but it is impossible to earn returns more than average market return.

Here in above case your cousin beat the market returns and this could only because he has taken higher risk or has extraordinary tips and experience of stock market.

Dear student,

As per HOMEWORKLIB RULES, we are bound to give one answer at one time.

Good luck.