Figure 16.3: Daily Returns to Jim-Bob's Spark Plugs, LLC
-Figure 16.3 shows the daily stock returns to Jim-Bob's Sparkplugs, LLC. From this figure you conclude that ________ because ________.
A) this market is efficient; the data seems to follow a random walk
B) Jim-Bob does not know how to operate his business; returns can be negative
C) Jim-Bob can beat the market; average returns are greater than zero
D) stock prices are predictable; fluctuations are consistent
E) there is some insider trading occurring; mean returns are zero

Question

Figure 16.3: Daily Returns to Jim-Bob's Spark Plugs, LLC 
-Figure 16.3 shows the daily stock returns to Jim-Bob's Sparkplugs, LLC. From this figure you conclude that ________ because ________.
A) this market is efficient; the data seems to follow a random walk 
B) Jim-Bob does not know how to operate his business; returns can be negative 
C) Jim-Bob can beat the market; average returns are greater than zero 
D) stock prices are predictable; fluctuations are consistent 
E) there is some insider trading occurring; mean returns are zero

Quizplus · Accepted Answer

The fact that the daily returns follow a random walk suggests that the market is efficient, meaning that all relevant information is already reflected in the stock prices and there is no way to consistently beat the market. Choice B is unfounded and speculative, as negative returns can be caused by factors beyond Jim-Bob's control. Choice C is also unfounded, as higher average returns could be due to higher risk or could still be consistent with market performance. Choice D is incorrect, as the fact that returns follow a random walk means that stock prices cannot be predicted based on past performance. Choice E is also unfounded, as there is no evidence to suggest insider trading is occurring based solely on the information provided in the figure.

Figure 163: Daily Returns to Jim-Bob's Spark Plugs, LLC