Investments, tenth edition

tistics.  Rank the fi rms based on each of the criteria separately, and divide the fi rms 

into fi ve groups based on their ranking for each criterion. Calculate the average 

rate of return for each group of fi rms. 

 

  

Do you confi rm or reject any of the anomalies cited in this chapter? Can you 

uncover a new anomaly? Note: For your test to be valid, you must form your port-

folios based on criteria observed at the  beginning  of the period. Why?  

   

b.  Use the price history from the  Historical Prices  tab to calculate the beta of each of 

the fi rms in part ( a ). Use this beta, the T-bill rate, and the return on the S&P 500 to 

calculate the risk-adjusted abnormal return of each stock group. Does any anomaly 

uncovered in the previous question persist after controlling for risk?  

   

c.  Now form stock groups that use two criteria simultaneously. For example, form a 

portfolio of stocks that are both in the lowest quintile of price–earnings ratio and 

in the highest quintile of book-to-market ratio. Does selecting stocks based on 

more than one characteristic improve your ability to devise portfolios with abnor-

mal returns? Repeat the analysis by forming groups that meet three criteria simul-

taneously. Does this yield any further improvement in abnormal returns?     

   2.  Several Web sites list information on earnings surprises. Much of the information sup-

plied is from   Zacks.com.     Each day the largest positive and negative surprises are listed. 

Go to   www.zacks.com/research/earnings/today_eps.php   and identify the top pos-

itive and the top negative earnings surprises for the day. The table will list the time and 

date of the announcement. Do you notice any difference between the times of day 

positive announcements tend to be made versus negative announcements? 

 Identify the tickers for the top three positive surprises. Once you have identified the 

top surprises, go to   finance.yahoo.com    . Enter the ticker symbols and obtain quotes 

for these securities. Examine the 5-day charts for each of the companies. Is the infor-

mation incorporated into price quickly? Is there any evidence of prior knowledge or 

anticipation of the disclosure in advance of the trading? 

 Choose one of the stocks listed and click on its symbol to follow the link for more 

information. Click on the link for Interactive Chart that appears under the graph. You 

can move the cursor over various parts of the graph to investigate what happened 

to the price and trading volume of the stock on each trading day. Do you notice any 

patterns?   

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  The Efficient Market Hypothesis 

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