Question 1

There is evidence for a stock market that rates of return on shares tend to be lower Monday compared with other days of the week. Which of the following is true?&#10;A)If conventional wisdom is that rates of return should be approximately the same each day, this is evidence of an anomaly.&#10;B)If conventional wisdom is that rates of return should be affected by events on Saturdays and Sundays, this is evidence that the market is weak-form inefficient.&#10;C)The evidence shows that asset markets are semi-strong-form inefficient but may be weak-form efficient.&#10;D)The evidence shows that noise-traders dominate the market.

Accepted Answer

An anomaly is a trend in the markets that violates conventional wisdom, which is the prediction of the "orthodox" model of efficiency market hypothesis.
Key Takeaway: A market anomaly is a distortion in price or return in the market. Some well-known anomalies: Calendar effects (the January effect and Monday blues weather) and firm-size effects. The effects of an anomaly should diminish as the market is made aware of them.

Question 2

Under which of the following conditions can price discrepancies remain, once arbitrage opportunities have been exhausted?&#10;A)There must be market friction and institutional constraints on trading activities.&#10;B)Assets are divisible.&#10;C)Market is in equilibrium.&#10;D)The market is frictionless.

Accepted Answer

In order for price discrepancies to remain once arbitrage opportunities have been exhausted, there must be market friction and institutional constraints on trading activities such as taxes or limits on holding. Market frictions are transaction costs and institutional constraints are regulations on trading. Price discrepancies cannot remain in a frictionless market when there are no transaction costs and no taxes and assets are perfectly divisible.
Key Takeaway: Always remember to factor in transaction costs and regulatory constraints in any business actions you take.

Question 3

Tom wants to hold an asset. What determines his demand to do so?&#10;A)His preferences.&#10;B)The price of other assets.&#10;C)His budget (wealth) constraint.&#10;D)All of the above.

Accepted Answer

The determinants of Tom's demand to hold an asset are: his preferences, the prices of other alternatives, and his budget constraint. An asset is defined as anything tangible or intangible that is owned by a business or company.
Key Takeaway: Tom wants to hold an asset because he expects to earn future benefit from it. Asset can be intangible: patents, trademarks, goodwill; or tangible: real estate and equipment.

Question 4

Current assets...&#10;A)Are important to company's creditors.&#10;B)Are insignificant since investors only interested in long term assets.&#10;C)Are a source of fund for a company's day-to-day operations.&#10;D)Can be converted into cash in less than a year.

Accepted Answer

Current assets are important to a company's creditors. If the company goes into bankruptcy, its current asset can easily be converted into cash and pay the debt to the company's creditors. Current assets are also a source of funds for the company's daily operations.
Key Takeaway: Current assets are the sum of cash and cash equivalents, inventories, account receivables, and other assets.

Question 5

Tom wants to sell his house, but it will take at least two months before the transaction occurs. This asset is&#10;A)Unattractive.&#10;B)Risky.&#10;C)Unsellable.&#10;D)Illiquid.

Accepted Answer

The house is an illiquid asset. It cannot easily be sold or exchanged for cash without a substantial loss in value.
Key Takeaway: Liquidity refers to the easiness with which an asset or security can be bought or sold in the market without affecting the asset's price. It is safer to invest in liquid assets than in illiquid ones because it is easier for an investor to get the liquid assets converted into cash.

Deck 1: Anomaly, Arbitrage, and Asset