3. (2 P oints) The stock price of Company X doubled over the past year, the stoc

Question

3. (2 P oints) The stock price of Company X doubled over the past year, the stock price of Company Z decreased by over 50%. If the market is efficient, if the stocks have the same A. Will you be able to identify which stock is most likely to have the higher actual B. Will you be able to identify the economic factors that contributed to last year's Beta, and if you do a little research: investment return next year? Why or why not? stock returns? (i.e., Why did Company X double, and why did Company Z decrease by 50%?) Why or why not?

Explanation / Answer

A. The firm that will most likely have higher returns in the next year cannot be identified. As per the effecient market hypothesis, the future prices of the stocks follows a random walk theory and therefore cannot be predicted.

B. The economic factors that contributed to the last year's stock returns can be identified by analysing the past financial performances of both the companies. All economic indicators and data related to the past year are available and hence it is possible to identify the economic factors that contributed to the last year's stock returns.

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