Question

Nichols and Wahlen's 2004 study showed that superior forecasting provides the potential to earn superior security returns. Nichols and Wahlen's findings indicate:

a. that an investor could earn excess returns if the investor could predict accurately the sign of the change in cash flows from operations one year ahead.
b. that an investor could earn excess returns if the investor could predict accurately the sign of the change in earnings one year ahead.
c. that an investor could earn excess returns if the investor could predict accurately the sign of the change in working capital one year ahead.
d. that an investor could earn excess returns if the investor could predict accurately the magnitude of the change in earnings one year ahead.

Answer 1

Nichols and Wahlen's study showed that superior forecasting can lead to superior security returns. Accurately predicting the sign of change in cash flows can help investors earn excess returns.

Step-by-step explanation:

Nichols and Wahlen's 2004 study found that superior forecasting provides the potential to earn superior security returns. This means that by accurately predicting certain factors, an investor could earn excess returns. From the options provided, the correct answer is a. that an investor could earn excess returns if the investor could predict accurately the sign of the change in cash flows from operations one year ahead. By accurately predicting the direction of change in cash flows, an investor could make profitable investment decisions. To capitalize on this, investors would need to anticipate shifts in market expectations, which is exceedingly challenging due to the nature of stock prices following what is known as a 'random walk with a trend.'