Chap 008

Chapter 08 - The Efficient Market Hypothesis

Chapter 08 The Efficient Market Hypothesis Multiple Choice Questions

1. Which of the following beliefs woul not preclue charting as a !etho of portfolio !anage!ent" #. The !arket is strong for! efficient. $. The !arket is se!i-strong for! efficient. C. The !arket is weak for! efficient. %. &tock prices follow recurring patterns.

'. (n a 1)*+ stuy of stock prices, Maurice enall foun that . #. there were no preictable patterns pa tterns in stock prices $. stock prices e/hibite strong serial autocorrelation C. ay to ay stock prices followe consistent trens %. funa!ental analysis coul be use to generate abnor!al returns

+. The weak for! of the EMH states that  !ust be reflecte in the current stock price. #. all past infor!ation incluing security price an olu!e ata $. all publicly aailable infor!ation C. all infor!ation incluing insie infor!ation %. all costless infor!ation

. The se!i-strong for! of the EMH states that  !ust be reflecte in the current stock price. #. all security price an olu!e ata $. all publicly aailable infor!ation C. all infor!ation incluing insie infor!ation %. all costless infor!ation

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*. The strong for! of the EMH states that  !ust be reflecte in the current stock price. #. all security price an olu!e ata $. all publicly aailable infor!ation C. all infor!ation incluing insie infor!ation %. all costless infor!ation

2. 3ano! price !oe!ents inicate . #. irrational !arkets $. that prices cannot e4ual funa!ental alues C. that technical analysis to uncoer trens can be 4uite useful %. that !arkets are functioning efficiently

5. When the !arket risk pre!iu! rises, stock prices will . #. rise $. fall C. recoer %. hae e/cess olatility

8. The s!all fir! in 6anuary effect is strongest . #. early in the !onth $. in the !ile of the !onth C. late in the !onth %. in een nu!bere years

). Eience suggests that there !ay be  !o!entu! an  reersal patterns in stock price behaior. #. short-run, short-run $. long-run, long-run C. long-run, short-run %. short-run, long run

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10. 7roponents of the EMH typically aocate . #. a conseratie inest!ent strategy $. a liberal inest!ent strategy C. a passie inest!ent strategy %. an aggressie inest!ent strategy

11. &tock prices that are stable oer ti!e . #. inicate that prices are useful inicators of true econo!ic alue $. inicate that the !arket is not incorporating new infor!ation into current stock prices C. ensure that an econo!y allocates its resources efficiently %. inicates that returns follow a rano! walk process

1'. The tenency when the  perfor!ing stocks in one perio are the best perfor!ers in the ne/t an the current cu rrent  perfor!ers are lagging the !arket later is calle the reersal effect. #. worst, best $. worst, worst C. best, worst %. best, best

1+. Which of the following is not a !etho e!ploye by followers of technical analysis" #. Charting $. 3elatie strength analysis C. Earnings forecasting %. Traing aroun support an resistance leels

1. Which of the following is not a !etho e!ploye by funa!ental analysts" an alysts" #. #nalying the 9e:s ne/t interest rate !oe $. 3elatie strength analysis C. Earnings forecasting %. Esti!ating the econo!ic growth rate

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1*. The pri!ary ob;ectie of funa!ental analysis is to ientify . #. well run fir!s $. poorly run fir!s C. !is-price stocks %. high 7
12. (f you beliee in the  for! of the EMH, you beliee that stock prices reflect all publicly aailable infor!ation but not infor!ation that is aailable only to insiers. #. se!i-strong $. strong C. weak %. perfect

15. (f you beliee in the  for! of the EMH, you beliee that stock prices reflect all releant infor!ation incluing infor!ation that is aailable only to insiers. #. se!i-strong $. strong C. weak %. perfect

18. Most of the stock price response to a corporate earnings or iien announce!ent occurs within . #. about +0 secons $. about 10 !inutes C. 2 !onths %. ' years

1).  is the return on a stock beyon what woul be preicte fro! !arket !oe!ents alone. #. # nor!al return $. # subli!inal return C. #n abnor!al return %. #n e/cess return

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'0. =ou beliee that stock prices reflect all infor!ation that can be erie by e/a!ining !arket traing ata such as the history of past stock prices, traing olu!e or short interest but you o not beliee stock prices reflect all publicly aailable or insie infor!ation. =ou are a proponent of . #. se!i-strong $. strong C. weak %. perfect

'1. =ou are an inest!ent !anager who is currently !anaging assets worth >2 billion. =ou beliee that actie !anage!ent of your fun coul generate between an aitional one tenth of 1? return on the portfolio. (f you want to !ake sure your actie strategy as alue, how !uch can you spen on security analysis" #. >1',000,000 $. >2,000,000 C. >+,000,000 %. >0

''. # !utual fun which atte!pts to hol 4uantities of shares in proportion to their representation in the !arket is calle a  fun. #. stock $. ine/ C. hege %. !oney !arket

'+. Choosing stocks by searching for preictable p reictable patterns in stock prices is calle . #. funa!ental analysis $. technical analysis C. ine/ !anage!ent %. rano! walk inesting

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'. Which of the following is not an a n issue that is central to the ebate regaring !arket efficiency" #. The !agnitue issue $. The ta/ loss selling issue C. The lucky eent issue %. The selection bias issue

'*. Most people woul reaily agree that the stock !arket is not . #. weak for! efficient $. se!i-strong for! efficient C. strong for! efficient %. efficient at all

'2. &!all fir!s hae tene to earn abnor!al returns pri!arily in . #. the !onth of 6anuary $. the !onth 6uly C. the trough of the business cycle %. the peak of the business cycle

'5. 9a!a an 9rench hae suggeste that !any !arket ano!alies can be e/plaine as !anifestations of . #. regulatory effects $. high traing costs C. infor!ation asy!!etry %. arying risk pre!iu!s

'8. 7roponents of the EMH think technical analysts . #. shoul focus on relatie strength $. shoul focus on resistance leels C. shoul focus on support leels %. are wasting their ti!e

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'). Eience supporting se!i-strong for! !arket efficiency suggests that inestors shoul . #. rely on technical analysis to select securities $. rely on funa!ental analysis to select securities C. use a passie traing strategy such as purchasing an ine/ fun or an ET9 %. select securities by throwing arts at the financial pages of the newspaper

+0. @$uy a stock if its price !oes up by '? !ore than the %ow #erage,@ is an e/a!ple of a . #. filter rule $. !arket ano!aly C. funa!ental approach %. passie traing strategy

+1. 6affee foun that stock prices    after insiers intensiely bought shares an  after insiers intensiely sol shares. #. ecrease, ecrease $. ecrease, increase C. increase, ecrease %. increase, increase

+'. (n a recent stuy, 9a!a an 9rench foun that the return on the aggregate stock !arket was  when the iien yiel was higher. #. higher $. lower C. unaffecte %. !ore skewe

++. 9a!a an 9rench A1))1B an 3einganu! A1)88B foun that fir!s with  !arket
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+. 6oe bought a stock at >*5 per share. The price pro!ptly fell to >**. 6oe hel on to the stock until it again reache >*5 an then he sol once he ha eli!inate his loss. (f other inestors o the sa!e to establish a traing pattern this woul contraict . #. the strong-for! EMH $. the weak-for! EMH C. technical analysis %. the se!istrong-for! EMH

+*. #ccoring to recent research securities !arkets fully a;ust to earnings announce!ents . #. instantly $. in 1 ay C. in 1 week %. graually oer ti!e

+2. When stock returns e/hibit positie serial correlation, this !eans that   returns ten to follow  returns. #. positie positie $. positie negatie C. negatie positie %. positie ero

+5. $asu foun that fir!s with high 7
+8. 9una!ental analysis is likely to yiel best results for  . #. D=&E stocks $. neglecte stocks C. stocks that are fre4uently in the news %. fast growing co!panies

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+). =ou are looking to inest in one of three stocks. &tock # has high e/pecte earnings growth, &tock $ has only !oest e/pecte earnings growth an &tock C is e/pecte to generate poor earnings growth. Which stock is likely to generate the greatest alpha for you" #. &tock # $. &tock $ C. &tock C %. =ou cannot tell fro! the infor!ation gien

0. =ou beliee that you can earn '? !ore on your portfolio if you engage in full ti!e stock research. Howeer, the aitional traing costs an ta/ liability fro! actie !anage!ent will cost you about 0.*?. =ou hae a >800,000 stock portfolio. What is the !ost you can affor to spen on your research" #. >,000 $. >8,000 C. >1',000 %. >12,000

1. Een if the !arkets are efficient, professional portfolio !anage!ent is still i!portant because it proies inestors with . (. low cost iersification ((. proies a portfolio with a specifie risk leel (((. proies better risk a;uste returns than an ine/ #. ( only $. ( an (( only C. (( an ((( only %. (, (( an (((

'. $an foun that, on aerage, the risk-a;uste returns of s!all fir!s . #. was higher than the risk-a;uste returns of large fir!s $. was the sa!e as the risk-a;uste returns of large fir!s C. was lower than the risk-a;uste returns of large fir!s %. was negatie

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+. (f the .&. capital !arkets are not n ot infor!ationally efficient . #. the !arkets cannot be allocationally efficient $. then syste!atic risk oes not !atter C. then no type of analysis can be use to generate abnor!al returns %. then returns !ust follow a rano! walk

. @#ctie inest!ent !anage!ent !ay generate g enerate aitional returns at ti!es of about 0.1?. Howeer, the stanar eiation of the typical well iersifie portfolio is about '0?, so it is ery ifficult to statistically ientify any increase in perfor!ance.@ Een if true, this state!ent is an e/a!ple of the  proble! in eciing how efficient the !arkets are. #. !agnitue $. selection bias C. lucky eent %. allocation

*. %e$ont an Thaler A1)8*B foun that the poorest perfor!ing stocks in one ti!e perio e/perience  perfor!ance in the following perio an the best perfor!ing stocks in one ti!e perio e/perience  perfor!ance in the following ti!e perio. #. goo, goo $. goo, poor C. poor, goo %. poor, poor

2. 6.M. eyes put all his !oney in one stock an the stock ouble in alue in a !atter of !onths. He i this three ti!es in a row with three ifferent stocks. 6.M. got his picture on the front page of the Wall &treet 6ournal. Howeer the paper neer !entione the thousans of inestors who !ae si!ilar bets on other stocks an lost !ost of their !oney. This is an e/a!ple of the  proble! in eciing how efficient the !arkets are. #. !agnitue $. selection bias C. lucky eent %. s!all fir!

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5. Most tests of se!i-strong efficiency are . #. esigne to test whether insie infor!ation can be b e use to generate abnor!al returns $. base on technical traing rules C. unable to generate any eience of !arket ano!alies %. ;oint tests of !arket efficiency an the risk a;ust!ent !easure

8. The  effect !ay e/plain !uch of the s!all fir! ano!aly. (. 6anuary effect ((. neglecte effect (((. li4uiity effect #. ( only $. (( only C. (( an ((( only %. (, (( an (((

). &tuies show that the bi-ask sprea for the least li4ui stocks !ay be as high as . #. +? $. *? C. )? %. 1'?

*0. The broaest infor!ation set is inclue in the #. weak for! efficiency argu!ent $. se!i-strong for! efficiency argu!ent C. strong for! efficiency argu!ent %. technical analysis traing !etho

*1. The 9a!a an 9rench eience that high book to !arket fir!s outperfor! low book to !arket fir!s een after a;usting for beta !eans . #. high book to !arket fir!s are unerprice $. low book to !arket fir!s are unerprice C. either high book to !arket fir!s are unerprice or the book to !arket ratio is a pro/y for a syste!atic risk factor %. high book to !arket fir!s hae !ore post earnings rift

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*'. #ccoring to results by &eyhun . #. inestors cannot usually earn abnor!al returns by following insie traes after knowlege of the traes are !ae public $. inestors can usually earn abnor!al returns by following insie traes after knowlege of the traes are !ae public C. inestors cannot earn abnor!al returns by following insie traes before knowlege of the traes are !ae public %. inestors cannot earn abnor!al returns by traing before insiers

*+. (f the aily returns on the stock !arket are nor!ally istribute with a !ean of 0.0*? 0.0* ? an a stanar eiation of 1.00?, the probability that the stock !arket woul hae ha e a return of -'+.00? or worse on one particular ay Aas it i on $lack MonayB is appro/i!ately . #. 0.0? $. 0.1? C. 1.0? %. 10.0?

*. #ccoring to the se!i-strong for! of the efficient !arkets hypothesis  . #. stock prices o not rapily a;ust to new infor!ation $. future changes in stock prices cannot canno t be preicte fro! any infor!ation that is publicly pu blicly aailable C. corporate insiers shoul hae no better inest!ent perfor!ance than other inestors een if allowe to trae freely %. arbitrage between futures an cash !arkets shoul not prouce e/traorinary profits

**. The ter! rano! walk is use in inest!ents to refer to . #. stock price changes that are rano! but preictable $. stock prices that respon slowly to both ol an new infor!ation C. stock price changes that are rano! an unpreictable %. stock prices changes that follow the pattern of past price changes

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*2. (!portant characteristicAsB of !arket efficiency is that . (. there are no arbitrage opportunities ((. security prices react 4uickly to new infor!ation (((. actie traing strategies will not consistently outperfor! passie strategies #. ( only $. (( only C. ( an ((( only %. (, (( an (((

*5. &tock !arket analysts hae tene to be  in their reco!!enations to inestors. #. slightly oerly opti!istic $. oerwhel!ingly opti!istic C. slightly oerly pessi!istic %. oerwhel!ingly pessi!istic p essi!istic

*8. #ssu!e that a co!pany announces une/pectely high earnings in a particular 4uarter. (n an efficient !arket one !ight e/pect . #. an abnor!al price change i!!eiately following the announce!ent $. an abnor!al price increase before the announce!ent C. an abnor!al price ecrease after the announce!ent %. no abnor!al price change before or after the announce!ent

*). # !arket ano!aly refers to . #. an e/ogenous shock to the !arket that is sharp but not persistent $. a price or olu!e eent ee nt that is inconsistent with historical price or olu!e trens C. a traing or pricing structure that interferes with efficient buying an selling of securities %. price behaior that iffers fro! the behaior preicte by the efficient !arket hypothesis

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20. Which of the following contraicts the proposition that the stock !arket is weakly efficient" #. Fer '*? of !utual funs outperfor! the !arket on aerage. $. (nsiers earn abnor!al traing profits. C. Eery 6anuary, the stock !arket earns aboe nor!al returns. %. #pplications of technical traing rules fail to earn a bnor!al returns.

21. Which of the following woul iolate the efficient !arket hypothesis" #. (ntel has consistently generate large profits for years. $. 7rices for stocks before stock splits show on aerage consistently positie abnor!al returns. C. Earning abnor!al returns after a fir! announces surprise earnings. %. High earnings growth stocks fail to generate higher returns for inestors than low earnings growth stocks.

2'. Which of the following stock price obserations o bserations woul appear to contraict the weak for! of the efficient !arket hypothesis" #. The aerage rate of return is significantly greater than ero. $. The correlation between the !arket return one week an the return the following week is ero. C. =ou coul hae consistently !ae superior returns by buying stock after a 10? rise in price an selling after a 10? fall. %. =ou coul hae consistently !ae superior returns by forecasting future earnings perfor!ance with your new Crystal $all forecast !ethoology. !ethoology.

2+. The se!i-strong for! of the efficient !arket hypothesis i!plies that   generate abnor!al returns an  generate abnor!al returns. #. Technical analysis cannot funa!ental analysis can $. Technical analysis can funa!ental analysis can C. Technical analysis can funa!ental analysis cannot %. Technical analysis cannot funa!ental analysis cannot

8-1


2. #n i!plication of the efficient !arket hypothesis is that  . #. high beta stocks are consistently oerprice $. low beta stocks are consistently oerprice C. nonero alphas will 4uickly isappear %. growth stocks are better buys than alue stocks

2*. 9una!ental ine/ing refers to . #. inesting in ine/ stocks in proportion to the stock:s funa!ental alue $. inesting in ine/ stocks in proportion to the stock:s !arket alue C. inesting an e4ual ollar a!ount in ine/ stocks %. inesting in an e4ual a!ount shares in each of the ine/ stocks

22. Tests of !utual fun perfor!ance inicate that funs with  ten to hae poorer perfor!ance. #. !ore funs in the fa!ily $. higher e/pense an turnoer ratios C. lower !anage!ent fees %. larger asset sie

25. Galue stocks !ay proie inestors with better returns than growth stocks if . (. alue stocks are out of faor with inestors ((. prices of growth stocks inclue pre!iu!s for oerly opti!istic growth leels (((. alue stocks are likely to generate positie earnings surprises. #. ( only $. (( only C. ( an ((( only %. (, (( an (((

28. Galue stocks usually e/hibit  price-to-book ratios an  price-to-earnings ratios. #. low, low $. low, high C. high, low %. high, high

8-1*


2). rowth stocks usually e/hibit  price-to-book ratios an  price-to-earnings ratios. #. low, low $. low, high C. high, low %. high, high

50. # ay trae with an aerage stock holing perio of uner 8 !inutes !ight be !ost closely associate with which traing philosophy" #. EMH $. 9una!ental analysis C. &trong for! !arket efficiency %. Technical analysis

51. # technical analyst is !ost likely to be affiliate with which inest!ent philosophy" #. #ctie !anage!ent $. $uy an hol C. 7assie inest!ent %. (ne/ funs

5'. &o!eone who inests in the Ganguar (ne/ *00 !utual fun coul !ost accurately be escribe as using what approach" #. #ctie !anage!ent $. #rbitrage C. 9una!ental analysis %. 7assie inest!ent

5+. Eience by $lake, Elton an ruber inicates that on aerage actiely !anage bon funs #. outperfor! passie fi/e-inco!e ine/es . $. uner perfor! passie fi/e-inco!e ine/es by a wie !argin C. perfor! as well as passie fi/e-inco!e ine/es %. uner perfor! passie fi/e-inco!e ine/es by an a!ount e4ual to fun e/penses

8-12


5. (nsiers are able to profitably trae an earn abnor!al returns prior to the announce!ent announce !ent of positie news. This is a iolation of which for! of efficiency" #. Weak for! efficiency $. &e!i-strong for! efficiency C. &trong for! efficiency %. Technical analysis

5*. (n an efficient !arket an for an inestor that beliees in a passie approach ap proach to inesting, what is the pri!ary uty of a portfolio !anager" #. #ccounting for results $. %iersification C. (entifying uneralue stocks %. Do nee for a portfolio !anager

52. Which of the following is not a topic relate to the ebate oer !arket efficiency" #. (7F results $. Iucky eent issue C. Magnitue issue %. &election bias

55. Which 9ielity Magellan portfolio !anager is often reference as an e/ception to the general conclusion of efficient !arkets" #. 6eff Ginik $. 7eter Iynch C. 3obert &tansky %. Willia! Hayes

58. The tenency of poorly perfor!ing stocks an well perfor!ing stocks in one perio p erio to continue their perfor!ance into the ne/t perio is calle the . #. fa effect $. !artingale effect C. !o!entu! effect %. reersal effect

8-15


5). Which of the following is not a concept relate to e/plaining abnor!al e/cess stock returns" #. 6anuary effect $. Deglecte fir! effect C. 7
80. The lack of ae4uate traing olu!e in stock that !ay ulti!ately lea to its ability to prouce e/cess returns is referre to as the . #. 6anuary effect $. li4uiity effect C. neglecte fir! effect %. 7
81. 9una!ental analysis eter!ines that the price of a fir!:s stock is too low, gien its intrinsic alue. The infor!ation use in the analysis is aailable to all !arket participants, yet the price oes not see! to react. The stock oes not trae on a !a;or e/change. What concept !ight e/plain the ability to prouce e/cess e/ce ss returns on this stock" #. 6anuary effect $. Deglecte fir! effect C. 7
8'. When testing !utual fun perfor!ance oer ti!e one !ust be careful of , which !eans that a certain percentage of poorer perfor!ing funs fail oer ti!e which !akes the perfor!ance of re!aining funs see! !ore consistent oer ti!e. #. suriorship bias $. lucky eent bias C. !agnitue bias %. !ean reersion bias

8-18


8+. Most eience inicates that .&. stock !arkets are . #. reasonably weak for! an se!i-strong for! efficient $. strong for! efficient C. reasonably weak for! but not se!i- or strong for! efficient %. neither weak for!, se!i- or strong for! efficient

8. Which of the following state!ents is
8*. #ccoring to Markowit an other proponents of !oern portfolio theory which of the following actiities woul not be e/pecte to prouce any benefits" #. %iersification $. (nesting in Treasury bills C. (nesting in stocks of utility co!panies %. Engaging in actie portfolio !anage!ent to enhance returns

82. #ccoring to results by &eyhun the !ain reason why inestors cannot earn ea rn e/cess returns by following insie traes after they beco!e public is . #. risk pre!iu! $. transaction costs C. the &EC late isclosure rule %. the stock reersal effect

Chapter 08 The Efficient Market Hypothesis #nswer ey

Multiple Choice Questions

8-1)


1. Which of the following beliefs woul not preclue charting as a !etho of portfolio !anage!ent" #. The #. The !arket is strong for! efficient. $. The $. The !arket is se!i-strong for! efficient. C. The C. The !arket is weak for! efficient. D. &tock prices follow recurring patterns.

Difficulty: Medium

'. (n a 1)*+ stuy of stock prices, Maurice enall foun that . pa tterns in stock prices A. there were no preictable patterns $. stock $. stock prices e/hibite strong serial autocorrelation C. ay C. ay to ay stock prices followe consistent trens %. funa!ental %. funa!ental analysis coul be use to generate abnor!al returns

Difficulty: Easy

+. The weak for! of the EMH states that  !ust be reflecte in the current stock price. A. all past infor!ation incluing security price an olu!e ata $. all $. all publicly aailable infor!ation C. all C. all infor!ation incluing insie infor!ation %. all %. all costless infor!ation

Difficulty: Easy

. The se!i-strong for! of the EMH states that  !ust be reflecte in the current stock price. #. all #. all security price an olu!e ata B. all publicly aailable infor!ation C. all C. all infor!ation incluing insie infor!ation %. all %. all costless infor!ation

Difficulty: Easy

8-'0


*. The strong for! of the EMH states that  !ust be reflecte in the current stock price. #. all #. all security price an olu!e ata $. all $. all publicly aailable infor!ation C. all infor!ation incluing insie infor!ation %. all %. all costless infor!ation

Difficulty: Easy

2. 3ano! price !oe!ents inicate . #. irrational #. irrational !arkets $. that $. that prices cannot e4ual funa!ental alues C. that C. that technical analysis to uncoer trens can be 4uite useful D. that !arkets are functioning efficiently

Difficulty: Medium

5. When the !arket risk pre!iu! rises, stock prices will . #. rise #. rise B. fall C. recoer C. recoer %. hae %. hae e/cess olatility

Difficulty: Medium

8. The s!all fir! in 6anuary effect is strongest . A. early in the !onth $. in $. in the !ile of the !onth C. late C. late in the !onth %. in %. in een nu!bere years

Difficulty: Medium

8-'1


). Eience suggests that there !ay be  !o!entu! an  reersal patterns in stock price behaior. #. short-run, #. short-run, short-run $. long-run, $. long-run, long-run C. long-run, C. long-run, short-run D. short-run, long run

Difficulty: Medium

10. 7roponents of the EMH typically aocate . #. a #. a conseratie inest!ent strategy $. a $. a liberal inest!ent strategy C. a passie inest!ent strategy %. an %. an aggressie inest!ent strategy

Difficulty: Easy

11. &tock prices that are stable oer ti!e . #. inicate #. inicate that prices are useful inicators of true econo!ic alue B. inicate that the !arket is not incorporating new infor!ation into current stock prices C. ensure C. ensure that an econo!y allocates its resources efficiently %. inicates %. inicates that returns follow a rano! walk process

Difficulty: Hard

1'. The tenency when the  perfor!ing stocks in one perio are the best perfor!ers in the ne/t an the current cu rrent  perfor!ers are lagging the !arket later is calle the reersal effect. A. worst, best $. worst, $. worst, worst C. best, C. best, worst %. best, %. best, best

Difficulty: Medium

8-''


1+. Which of the following is not a !etho e!ploye by followers of technical analysis" #. Charting #. Charting $. 3elatie $. 3elatie strength analysis C. Earnings forecasting %. Traing %. Traing aroun support an resistance leels

Difficulty: Easy

1. Which of the following is not a !etho e!ploye by funa!ental analysts" an alysts" #. #nalying #. #nalying the 9e:s ne/t interest rate !oe B. 3elatie strength analysis C. Earnings C. Earnings forecasting %. Esti!ating %. Esti!ating the econo!ic growth rate

Difficulty: Easy

1*. The pri!ary ob;ectie of funa!ental analysis is to ientify . #. well #. well run fir!s $. poorly $. poorly run fir!s C. !is-price stocks %. high %. high 7
Difficulty: Easy

12. (f you beliee in the  for! of the EMH, you beliee that stock prices reflect all publicly aailable infor!ation but not infor!ation that is aailable only to insiers. A. se!i-strong $. strong $. strong C. weak C. weak %. perfect %. perfect

Difficulty: Easy

8-'+


15. (f you beliee in the  for! of the EMH, you beliee that stock prices reflect all releant infor!ation incluing infor!ation that is aailable only to insiers. #. se!i-strong #. se!i-strong B. strong C. weak C. weak %. perfect %. perfect

Difficulty: Easy

18. Most of the stock price response to a corporate earnings or iien announce!ent occurs within . #. about #. about +0 secons B. about 10 !inutes C. 2 C. 2 !onths %. ' %. ' years

Difficulty: Medium

1).  is the return on a stock beyon what woul be preicte fro! !arket !oe!ents alone. #. # #. # nor!al return $. # $. # subli!inal return C. #n abnor!al return %. #n %. #n e/cess return

Difficulty: Easy

8-'


'0. =ou beliee that stock prices reflect all infor!ation that can be erie by e/a!ining !arket traing ata such as the history of past stock prices, traing olu!e or short interest but you o not beliee stock prices reflect all publicly aailable or insie infor!ation. =ou are a proponent of . #. se!i-strong #. se!i-strong $. strong $. strong C. weak %. perfect %. perfect

Difficulty: Easy

'1. =ou are an inest!ent !anager who is currently !anaging assets worth >2 billion. =ou beliee that actie !anage!ent of your fun coul generate between an aitional one tenth of 1? return on the portfolio. (f you want to !ake sure your actie strategy as alue, how !uch can you spen on security analysis" #. >1',000,000 #. >1',000,000 B. >2,000,000 C. >+,000,000 C. >+,000,000 %. >0 %. >0 A0.001BA>2 billionB J >2,000,000

Difficulty: Easy

''. # !utual fun which atte!pts to hol 4uantities of shares in proportion to their representation in the !arket is calle a  fun. #. stock #. stock B. ine/ C. hege C. hege %. !oney %. !oney !arket

Difficulty: Easy

8-'*


'+. Choosing stocks by searching for preictable p reictable patterns in stock prices is calle . #. funa!ental #. funa!ental analysis B. technical analysis C. ine/ C. ine/ !anage!ent %. rano! %. rano! walk inesting

Difficulty: Easy

'. Which of the following is not an a n issue that is central to the ebate regaring !arket efficiency" #. The #. The !agnitue issue B. The ta/ loss selling issue C. The C. The lucky eent issue %. The %. The selection bias issue

Difficulty: Easy

'*. Most people woul reaily agree that the stock !arket is not . #. weak #. weak for! efficient $. se!i-strong $. se!i-strong for! efficient C. strong for! efficient %. efficient %. efficient at all

Difficulty: Easy

'2. &!all fir!s hae tene to earn abnor!al returns pri!arily in . A. the !onth of 6anuary $. the $. the !onth 6uly C. the C. the trough of the business cycle %. the %. the peak of the business cycle

Difficulty: Easy

8-'2


'5. 9a!a an 9rench hae suggeste that !any !arket ano!alies can be e/plaine as !anifestations of . #. regulatory #. regulatory effects $. high $. high traing costs C. infor!ation C. infor!ation asy!!etry D. arying risk pre!iu!s

Difficulty: Medium

'8. 7roponents of the EMH think technical analysts . #. shoul #. shoul focus on relatie strength $. shoul $. shoul focus on resistance leels C. shoul C. shoul focus on support leels D. are wasting their ti!e

Difficulty: Easy

'). Eience supporting se!i-strong for! !arket efficiency suggests that inestors shoul . #. rely #. rely on technical analysis to select securities $. rely $. rely on funa!ental analysis to select securities C. use a passie traing strategy such as purchasing an ine/ fun or an ET9 %. select %. select securities by throwing arts at the financial pages of the newspaper

Difficulty: Easy

+0. @$uy a stock if its price !oes up by '? !ore than the %ow #erage,@ is an e/a!ple of a . A. filter rule $. !arket $. !arket ano!aly C. funa!ental C. funa!ental approach %. passie %. passie traing strategy

Difficulty: Easy

8-'5


+1. 6affee foun that stock prices    after insiers intensiely bought shares an  after insiers intensiely sol shares. #. ecrease, #. ecrease, ecrease $. ecrease, $. ecrease, increase C. increase, ecrease %. increase, %. increase, increase

Difficulty: Medium

+'. (n a recent stuy, 9a!a an 9rench foun that the return on the aggregate stock !arket was  when the iien yiel was higher. A. higher $. lower $. lower C. unaffecte C. unaffecte %. !ore %. !ore skewe

Difficulty: Medium

++. 9a!a an 9rench A1))1B an 3einganu! A1)88B foun that fir!s with  !arket
Difficulty: Medium

+. 6oe bought a stock at >*5 per share. The price pro!ptly fell to >**. 6oe hel on to the stock until it again reache >*5 an then he sol once he ha eli!inate his loss. (f other inestors o the sa!e to establish a traing pattern this woul contraict . #. the #. the strong-for! EMH B. the weak-for! EMH C. technical C. technical analysis %. the %. the se!istrong-for! EMH

Difficulty: Medium

8-'8


+*. #ccoring to recent research securities !arkets fully a;ust to earnings announce!ents . #. instantly #. instantly $. in $. in 1 ay C. in C. in 1 week D. graually oer ti!e

Difficulty: Medium

+2. When stock returns e/hibit positie serial correlation, this !eans that   returns ten to follow  returns. A. positie positie $. positie $. positie negatie C. negatie C. negatie positie %. positie %. positie ero

Difficulty: Easy

+5. $asu foun that fir!s with high 7
Difficulty: Medium

+8. 9una!ental analysis is likely to yiel best results for  . #. D=&E #. D=&E stocks B. neglecte stocks C. stocks C. stocks that are fre4uently in the news %. fast %. fast growing co!panies

Difficulty: Medium

8-')


+). =ou are looking to inest in one of three stocks. &tock # has high e/pecte earnings growth, &tock $ has only !oest e/pecte earnings growth an &tock C is e/pecte to generate poor earnings growth. Which stock is likely to generate the greatest alpha for you" #. &tock #. &tock # $. &tock $. &tock $ C. &tock C. &tock C D. =ou cannot tell fro! the infor!ation gien

Difficulty: Medium

0. =ou beliee that you can earn '? !ore on your portfolio if you engage in full ti!e stock research. Howeer, the aitional traing costs an ta/ liability fro! actie !anage!ent will cost you about 0.*?. =ou hae a >800,000 stock portfolio. What is the !ost you can affor to spen on your research" #. >,000 #. >,000 $. >8,000 $. >8,000 C. >1',000 %. >12,000 %. >12,000 A0.0' - 0.00*BA>800,000B J >1',000

Difficulty: Medium

1. Een if the !arkets are efficient, professional portfolio !anage!ent is still i!portant because it proies inestors with . (. low cost iersification ((. proies a portfolio with a specifie risk leel (((. proies better risk a;uste returns than an ine/ #. ( #. ( only B. ( an (( only C. (( C. (( an ((( only %. (, %. (, (( an (((

Difficulty: Medium

8-+0


'. $an foun that, on aerage, the risk-a;uste returns of s!all fir!s . A. was higher than the risk-a;uste returns of large fir!s $. was $. was the sa!e as the risk-a;uste returns of large fir!s C. was C. was lower than the risk-a;uste returns of large fir!s %. was %. was negatie

Difficulty: Medium

+. (f the .&. capital !arkets are not n ot infor!ationally efficient . A. the !arkets cannot be allocationally efficient $. then $. then syste!atic risk oes not !atter C. then C. then no type of analysis can be use to generate abnor!al returns %. then %. then returns !ust follow a rano! walk

Difficulty: Medium

. @#ctie inest!ent !anage!ent !ay generate g enerate aitional returns at ti!es of about 0.1?. Howeer, the stanar eiation of the typical well iersifie portfolio is about '0?, so it is ery ifficult to statistically ientify any increase in perfor!ance.@ Een if true, this state!ent is an e/a!ple of the  proble! in eciing how efficient the !arkets are. A. !agnitue $. selection $. selection bias C. lucky C. lucky eent %. allocation %. allocation

Difficulty: Medium

*. %e$ont an Thaler A1)8*B foun that the poorest perfor!ing stocks in one ti!e perio e/perience  perfor!ance in the following perio an the best perfor!ing stocks in one ti!e perio e/perience  perfor!ance in the following ti!e perio. #. goo, #. goo, goo B. goo, poor C. poor, C. poor, goo %. poor, %. poor, poor

Difficulty: Medium

8-+1


2. 6.M. eyes put all his !oney in one stock an the stock ouble in alue in a !atter of !onths. He i this three ti!es in a row with three ifferent stocks. 6.M. got his picture on the front page of the Wall &treet 6ournal. Howeer the paper neer !entione the thousans of inestors who !ae si!ilar bets on other stocks an lost !ost of their !oney. This is an e/a!ple of the  proble! in eciing how efficient the !arkets are. #. !agnitue #. !agnitue $. selection $. selection bias C. lucky eent %. s!all %. s!all fir!

Difficulty: Medium

5. Most tests of se!i-strong efficiency are . #. esigne #. esigne to test whether insie infor!ation can be b e use to generate abnor!al returns $. base $. base on technical traing rules C. unable C. unable to generate any eience of !arket ano!alies D. ;oint tests of !arket efficiency an the risk a;ust!ent !easure

Difficulty: Medium

8. The  effect !ay e/plain !uch of the s!all fir! ano!aly. (. 6anuary effect ((. neglecte effect (((. li4uiity effect #. ( #. ( only $. (( $. (( only C. (( C. (( an ((( only D. (, (( an (((

Difficulty: Medium

8-+'


). &tuies show that the bi-ask sprea for the least li4ui stocks !ay be as high as . #. +? #. +? B. *? C. )? C. )? %. 1'? %. 1'?

Difficulty: Hard

*0. The broaest infor!ation set is inclue in the #. weak #. weak for! efficiency argu!ent $. se!i-strong $. se!i-strong for! efficiency argu!ent C. strong for! efficiency argu!ent %. technical %. technical analysis traing !etho

Difficulty: Easy

*1. The 9a!a an 9rench eience that high book to !arket fir!s outperfor! low book to !arket fir!s een after a;usting for beta !eans . #. high #. high book to !arket fir!s are unerprice $. low $. low book to !arket fir!s are unerprice C. either high book to !arket fir!s are unerprice or the book to !arket ratio is a pro/y for a syste!atic risk factor %. high %. high book to !arket fir!s hae !ore post earnings rift

Difficulty: Medium

*'. #ccoring to results by &eyhun . A. inestors cannot usually earn abnor!al returns by following insie traes after knowlege of the traes are !ae public $. inestors $. inestors can usually earn abnor!al returns by following insie traes after knowlege of the traes are !ae public C. inestors C. inestors cannot earn abnor!al returns by following insie traes before knowlege of the traes are !ae public %. inestors %. inestors cannot earn abnor!al returns by traing before insiers

Difficulty: Hard

8-++


*+. (f the aily returns on the stock !arket are nor!ally istribute with a !ean of 0.0*? 0.0* ? an a stanar eiation of 1.00?, the probability that the stock !arket woul hae ha e a return of -'+.00? or worse on one particular ay Aas it i on $lack MonayB is appro/i!ately . A. 0.0? $. 0.1? $. 0.1? C. 1.0? C. 1.0? %. 10.0? %. 10.0? 7rob J 1 - DKA.'+00 - .000*B<.01L 0 ≈

Difficulty: Medium

*. #ccoring to the se!i-strong for! of the efficient !arkets hypothesis  . #. stock #. stock prices o not rapily a;ust to new infor!ation canno t be preicte fro! any infor!ation that is publicly pu blicly B. future changes in stock prices cannot aailable C. corporate C. corporate insiers shoul hae no better inest!ent perfor!ance than other inestors een if allowe to trae freely %. arbitrage %. arbitrage between futures an cash !arkets shoul not prouce e/traorinary profits

Difficulty: Easy

**. The ter! rano! walk is use in inest!ents to refer to . #. stock #. stock price changes that are rano! but preictable $. stock $. stock prices that respon slowly to both ol an new infor!ation C. stock price changes that are rano! an unpreictable %. stock %. stock prices changes that follow the pattern of past price changes

Difficulty: Easy

8-+


*2. (!portant characteristicAsB of !arket efficiency is that . (. there are no arbitrage opportunities ((. security prices react 4uickly to new infor!ation (((. actie traing strategies will not consistently outperfor! passie strategies #. ( #. ( only $. (( $. (( only C. ( C. ( an ((( only D. (, (( an (((

Difficulty: Easy

*5. &tock !arket analysts hae tene to be  in their reco!!enations to inestors. #. slightly #. slightly oerly opti!istic B. oerwhel!ingly opti!istic C. slightly C. slightly oerly pessi!istic %. oerwhel!ingly %. oerwhel!ingly pessi!istic p essi!istic

Difficulty: Medium

*8. #ssu!e that a co!pany announces une/pectely high earnings in a particular 4uarter. (n an efficient !arket one !ight e/pect . A. an abnor!al price change i!!eiately following the announce!ent $. an $. an abnor!al price increase before the announce!ent C. an C. an abnor!al price ecrease after the announce!ent %. no %. no abnor!al price change before or after the announce!ent

Difficulty: Easy

*). # !arket ano!aly refers to . #. an #. an e/ogenous shock to the !arket that is sharp but not persistent $. a $. a price or olu!e eent ee nt that is inconsistent with historical price or olu!e trens C. a C. a traing or pricing structure that interferes with efficient buying an selling of securities D. price behaior that iffers fro! the behaior preicte by the efficient !arket hypothesis

Difficulty: Medium

8-+*


20. Which of the following contraicts the proposition that the stock !arket is weakly efficient" #. Fer #. Fer '*? of !utual funs outperfor! the !arket on aerage. $. (nsiers $. (nsiers earn abnor!al traing profits. C. Eery 6anuary, the stock !arket earns aboe nor!al returns. %. #pplications %. #pplications of technical traing rules fail to earn abnor!al a bnor!al returns.

Difficulty: Medium

21. Which of the following woul iolate the efficient !arket hypothesis" #. (ntel #. (ntel has consistently generate large profits for years. $. 7rices $. 7rices for stocks before stock splits show on aerage consistently positie abnor!al returns. C. Earning abnor!al returns after a fir! announces surprise earnings. %. High %. High earnings growth stocks fail to generate higher returns for inestors than low earnings growth stocks.

Difficulty: Medium

2'. Which of the following stock price obserations o bserations woul appear to contraict the weak for! of the efficient !arket hypothesis" #. The #. The aerage rate of return is significantly greater than ero. $. The $. The correlation between the !arket return one week an the return the following week is ero. 10 ? rise in C. =ou coul hae consistently !ae superior returns by buying stock after a 10? price an selling after a 10? fall. %. =ou %. =ou coul hae consistently !ae superior returns by forecasting future earnings perfor!ance with your new Crystal $all forecast !ethoology. !ethoology.

Difficulty: Medium

8-+2


2+. The se!i-strong for! of the efficient !arket hypothesis i!plies that   generate abnor!al returns an  generate abnor!al returns. #. Technical #. Technical analysis cannot funa!ental analysis can $. Technical $. Technical analysis can funa!ental analysis can C. Technical C. Technical analysis can funa!ental analysis cannot D. Technical analysis cannot funa!ental analysis cannot

Difficulty: Medium

2. #n i!plication of the efficient !arket hypothesis is that  . #. high #. high beta stocks are consistently oerprice $. low $. low beta stocks are consistently oerprice C. nonero alphas will 4uickly isappear %. growth %. growth stocks are better buys than alue stocks

Difficulty: Medium

2*. 9una!ental ine/ing refers to . A. inesting in ine/ stocks in proportion to the stock:s funa!ental alue $. inesting $. inesting in ine/ stocks in proportion to the stock:s !arket alue C. inesting C. inesting an e4ual ollar a!ount in ine/ stocks %. inesting %. inesting in an e4ual a!ount shares in each of the ine/ stocks

Difficulty: Medium

22. Tests of !utual fun perfor!ance inicate that funs with  ten to hae poorer perfor!ance. #. !ore #. !ore funs in the fa!ily B. higher e/pense an turnoer ratios C. lower C. lower !anage!ent fees %. larger %. larger asset sie

Difficulty: Easy

8-+5


25. Galue stocks !ay proie inestors with better returns than growth stocks if . (. alue stocks are out of faor with inestors ((. prices of growth stocks inclue pre!iu!s for oerly opti!istic growth leels (((. alue stocks are likely to generate positie earnings surprises. #. ( #. ( only $. (( $. (( only C. ( C. ( an ((( only D. (, (( an (((

Difficulty: Medium

28. Galue stocks usually e/hibit  price-to-book ratios an  price-to-earnings ratios. A. low, low $. low, $. low, high C. high, C. high, low %. high, %. high, high

Difficulty: Medium

2). rowth stocks usually e/hibit  price-to-book ratios an  price-to-earnings ratios. #. low, #. low, low $. low, $. low, high C. high, C. high, low D. high, high

Difficulty: Medium

50. # ay trae with an aerage stock holing perio of uner 8 !inutes !ight be !ost closely associate with which traing philosophy" #. EMH #. EMH $. 9una!ental $. 9una!ental analysis C. &trong C. &trong for! !arket efficiency D. Technical analysis

Difficulty: Easy

8-+8


51. # technical analyst is !ost likely to be affiliate with which inest!ent philosophy" A. #ctie !anage!ent $. $uy $. $uy an hol C. 7assie C. 7assie inest!ent %. (ne/ %. (ne/ funs

Difficulty: Easy

5'. &o!eone who inests in the Ganguar (ne/ *00 !utual fun coul !ost accurately be escribe as using what approach" #. #ctie #. #ctie !anage!ent $. #rbitrage $. #rbitrage C. 9una!ental C. 9una!ental analysis D. 7assie inest!ent

Difficulty: Easy

5+. Eience by $lake, Elton an ruber inicates that on aerage actiely !anage bon funs #. outperfor! #. outperfor! passie fi/e-inco!e ine/es . $. uner $. uner perfor! passie fi/e-inco!e ine/es by a wie !argin C. perfor! C. perfor! as well as passie fi/e-inco!e ine/es D. uner perfor! passie fi/e-inco!e ine/es by an a!ount e4ual to fun e/penses

Difficulty: Medium

5. (nsiers are able to profitably trae an earn abnor!al returns prior to the announce!ent announce !ent of positie news. This is a iolation of which for! of efficiency" #. Weak #. Weak for! efficiency $. &e!i-strong $. &e!i-strong for! efficiency C. &trong for! efficiency %. Technical %. Technical analysis

Difficulty: Medium

8-+)


5*. (n an efficient !arket an for an inestor that beliees in a passie approach ap proach to inesting, what is the pri!ary uty of a portfolio !anager" #. #ccounting #. #ccounting for results B. %iersification C. (entifying C. (entifying uneralue stocks %. Do %. Do nee for a portfolio !anager

Difficulty: Medium

52. Which of the following is not a topic relate to the ebate oer !arket efficiency" A. (7F results $. Iucky $. Iucky eent issue C. Magnitue C. Magnitue issue %. &election %. &election bias

Difficulty: Medium

55. Which 9ielity Magellan portfolio !anager is often reference as an e/ception to the general conclusion of efficient !arkets" #. 6eff #. 6eff Ginik B. 7eter Iynch C. 3obert C. 3obert &tansky %. Willia! %. Willia! Hayes

Difficulty: Medium

58. The tenency of poorly perfor!ing stocks an well perfor!ing stocks in one perio p erio to continue their perfor!ance into the ne/t perio is calle the . #. fa #. fa effect $. !artingale $. !artingale effect C. !o!entu! effect %. reersal %. reersal effect

Difficulty: Medium

8-0


5). Which of the following is not a concept relate to e/plaining abnor!al e/cess stock returns" #. 6anuary #. 6anuary effect $. Deglecte $. Deglecte fir! effect C. 7
Difficulty: Easy

80. The lack of ae4uate traing olu!e in stock that !ay ulti!ately lea to its ability to prouce e/cess returns is referre to as the . #. 6anuary #. 6anuary effect B. li4uiity effect C. neglecte C. neglecte fir! effect %. 7
Difficulty: Easy

81. 9una!ental analysis eter!ines that the price of a fir!:s stock is too low, gien its intrinsic alue. The infor!ation use in the analysis is aailable to all !arket participants, yet the price oes not see! to react. The stock oes not trae on a !a;or e/change. What concept !ight e/plain the ability to prouce e/cess e/ce ss returns on this stock" #. 6anuary #. 6anuary effect B. Deglecte fir! effect C. 7
Difficulty: Medium

8-1


8'. When testing !utual fun perfor!ance oer ti!e one !ust be careful of , which !eans that a certain percentage of poorer perfor!ing funs fail oer ti!e which !akes the perfor!ance of re!aining funs see! !ore consistent oer ti!e. A. suriorship bias $. lucky $. lucky eent bias C. !agnitue C. !agnitue bias %. !ean %. !ean reersion bias

Difficulty: Medium

8+. Most eience inicates that .&. stock !arkets are . A. reasonably weak for! an se!i-strong for! efficient $. strong $. strong for! efficient C. reasonably C. reasonably weak for! but not se!i- or strong for! efficient %. neither %. neither weak for!, se!i- or strong for! efficient

Difficulty: Medium

8. Which of the following state!ents is
Difficulty: Medium

8*. #ccoring to Markowit an other proponents of !oern portfolio theory which of the following actiities woul not be e/pecte to prouce any benefits" #. %iersification #. %iersification $. (nesting $. (nesting in Treasury bills C. (nesting C. (nesting in stocks of utility co!panies D. Engaging in actie portfolio !anage!ent to enhance returns

Difficulty: Easy

8-'


82. #ccoring to results by &eyhun the !ain reason why inestors cannot earn ea rn e/cess returns by following insie traes after they beco!e public is . A. risk pre!iu! $. transaction $. transaction costs C. the C. the &EC late isclosure rule %. the %. the stock reersal effect

Difficulty: Hard

8-+

Chap 008

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