Economic Consequences

Exhibit $1\mathrm{.}11$ provides some results from an empirical research study that examined the relation between changes in firms' earnings and annual market$-$adjusted stock returns. Suppose exactly $12$ months ago, you and your friend each invested $$10,000$ in the stock of a particular company. Fortunately, you invested in a company that experienced an increase in annual earnings this year, but unfortunately, your friend invested in a different company that experienced a decrease in annual earnings.

Required:

Assume that both investments performed like the average results presented in Exhibit $1\mathrm{.}11.$

What is the value of your investment in the company at the end of the year in which earnings increased?

Earnings would have grown from $ to $

$2.$ What is the value of your friend's investment in the company at the end of the year in which earnings decreased?

Dropped from $ to only $

$3.$ How large is the difference in value between your portfolio and your friend's portfolio?

$

$$ Screen Shot $2024-...$

$($i$)$

The Association between Changes in Annual Earnings and Cumulative

Source: D$.$ Craig Nichols and James Wahlen, "Ihe Essential Kole or Accouning inrormarion in ine Lapiral markers: Updating Seminal Research Results with Current Evidence," forthcoming, Accounting Horizons, $2022.$