1. Suppose you are a financial analyst at Star Investment Co., Ltd., a local asset management company.

1. Suppose the profit of XYZ Company has dropped by 10% compared to the previous month. However, its stock price is up by 0.5% after the announcement today. Is this an evidence against the efficient market hypothesis? Provide your reasons. (5 marks)
2. You expect the market interest rate to decline in the near future even though the current bond market is not indicating any sign of this change. Which type of bond (e.g., short-term, long-term) would you suggest your client to purchase? Would you suggest to purchase the bond now or wait until the market interest rate actually declines? Provide your reasons. (5 marks)

Suppose you collect monthly stock returns for all listed firms during the past 30 years. You regress the stock return in month t on its lagged return in month t-1 and find a statistically significant regression coefficient of −0.3. What can you conclude on the market efficiency? Provide your reasons. Under this form of market efficiency, how would you analyze a company to identify useful trading signals?