Please do not use any extraneous information when answering Question 6. Just apply the EMH concept. Parts a, b, c, d, and e (of question 6) are independent of one another.

a) Your analysis indicates that, on average, stock prices of firms announcing decreased earnings in a given quarter tend to underperform the market in the following quarter. Is this consistent with or a contradiction of the efficient markets hypothesis (EMH)? Explain. (Explanation Required)

b) Your analysis of firms financial data indicates that, on average, stocks with high debt-to-equity ratios tend to have positive abnormal returns (or positive alphas) over the long run. Does this violate the efficient markets hypothesis (EMH)? Provide answers to both parts below.

- Violation (answer in terms of Yes or NO)

- Which form of EMH does the information relate to?

c) Stock prices tend to be predictably less volatile in December than in other months. Does this violate the efficient markets hypothesis (EMH)? Answer in terms of Yes or NO.

d) Nicholas Manufacturing announced yesterday that its fourth quarter earnings will be 10% higher than last year's fourth quarter earnings. You observe that Nicholas Manufacturing had an abnormal return of -1.2% yesterday. In other words, the price fell by 1.2% (after adjusting for any changes in the market). This price response suggests that

A. Nicholas' stock will probably rise in value tomorrow.

B. investors expected the earnings increase to be larger than what was actually announced.

C. investors expected the earnings increase to be smaller than what was actually announced.

D. earnings are expected to decrease next quarter.

To answer part d), pick one of the above four choices (A, B, C, or D)

e) The correlation between the return during a given month and the return during the following month is 0.50. Does this violate the efficient markets hypothesis (EMH)? Answer in terms of Yes or NO.