1. Predict the market return using assignment3data.xls posted on the compass2g website.

a) Regress the market return on the variable in column 1, AC. Turn in the regression output from Excel with your work. Do not turn in the underlying data.

b) Given the coe¢ cient estimate for AC in part a), what is the predicted change in the market expected return for the next period if AC increases by one standard deviation?

c) Is this estimated coe¢ cient statistically di§erent from zero at a 5% level of signiÖcance?

d) Given your answer to part c), is this statistical evidence a violation of the random walk hypothesis? Explain your answer.

e) If the variable AC is public information and is not related to any plausible measure of risk, is this a violation of the semi-strong form market e¢ ciency? Explain your answer.

2. Do Chapter 18 Problem 5 in BKM

3. Technology stocks have an expected rate of return of 15%. MS is a computer company with a stock price of $100 per share at the beginning of the year. The company is going to pay a dividend of $5 per share at the end of the year.

a) According to the Gordon growth model, what is the marketís forecast of the annual dividend growth rate for MS?

b) The marketís dividend growth forecasts for MS are suddenly revised downward to 5% per year. What happens to the price of MS? What happens to the dividend-price ratio?

4. Do Chapter 18 Problem 12 in BKM [Part a) and Part b) Only]