Question

16. New England Singers has increased its dividends by 3.7 percent per year for each of the past 16 years. Recently, the company has been experiencing very low levels of growth, so market experts and investors anticipated that the firm would announce that it expects dividends to decrease by 1.2 percent per year forever. This morning, New England Singers announced that it expects dividends to decrease by 1.2 percent per year forever, which would be a larger decrease than any annual dividend decrease in the company’s history. The amount of the expected dividend decrease was not known before the announcement, so the announcement can be considered the release of new information. Which of the following assertions best describes what most likely happened with New England Singers stock immediately after the announcement? No other news was released except the expected dividend decrease and risk is expected to remain unchanged. Markets are semi-strong form efficient.

A. The actual return was equal to the expected return
B. The actual return was less than the expected return
C. The actual return was greater than the expected return

17. The expected return on the market is greater than the risk-free rate, which is greater than zero. Based on the information in the table and in this paragraph, which stock has the highest expected return?

Stock	Geometric average annual return over the past 15 years	Arithmetic average annual return over the past 15 years	Share price	Beta	Expected standard deviation of returns
A	-18.3%	-11.3%	$82.50	0.67	47.1%
B	9.4%	22.2%	$42.70	1.08	41.3%
C	-27.2%	-14.9%	$72.30	1.32	51.3%
D	-7.3%	-2.8%	$62.90	1.49	32.8%
E	10.7%	19.1%	$52.10	0.87	20.4%

A. Stock A

B. Stock B

C. Stock C

D. Stock D

e. stock e

Answer 1

16. When markets are semi strong efficient, abnormal gains are not possible as all public information is immediately incorporated inot the stock price. No fundamental or technical analysis can be used to capitalize on public information and only non public information can help the investor to earn abnormal profit. Since dividends are expected to decrease by 1.2% per year forever, the answer is option (b)

17. Stock B and C has the most positive returns. But B has higher beta and standard deviation of returns is also very high where as C has lower beta and standard deviation. The answer is option (b)