Deck 8: The Efficient Market Hypothesis

Question 1

The strong form of the EMH states that ________ must be reflected in the current stock price.

A) all security price and volume data
B) all publicly available information
C) all information including inside information
D) all costless information

Answer 1

C

Question 2

The tendency when the ______ performing stocks in one period are the best performers in the next and the current ________ performers are lagging the market later is called the reversal effect.

A) worst, best
B) worst, worst
C) best, worst
D) best, best

Answer 2

A

Question 3

__________ is the return on a stock beyond what would be predicted from market movements alone.

A) A normal return
B) A subliminal return
C) An abnormal return
D) An excess return

Answer 3

C

Question 4

The small firm in January effect is strongest ________.

A) early in the month
B) in the middle of the month
C) late in the month
D) in even numbered years

Question 5

You believe that stock prices reflect all information that can be derived by examining market trading data such as the history of past stock prices,trading volume or short interest but you do not believe stock prices reflect all publicly available or inside information.You are a proponent of ____________.

A) semi-strong
B) strong
C) weak
D) perfect

Question 6

The semi-strong form of the EMH states that ________ must be reflected in the current stock price.

A) all security price and volume data
B) all publicly available information
C) all information including inside information
D) all costless information

Question 7

If you believe in the __________ form of the EMH,you believe that stock prices reflect all relevant information including information that is available only to insiders.

A) semi-strong
B) strong
C) weak
D) perfect

Question 8

If you believe in the __________ form of the EMH,you believe that stock prices reflect all publicly available information but not information that is available only to insiders.

A) semi-strong
B) strong
C) weak
D) perfect

Question 9

The primary objective of fundamental analysis is to identify __________.

A) well run firms
B) poorly run firms
C) mis-priced stocks
D) high P/E stocks

Question 10

Evidence suggests that there may be _______ momentum and ________ reversal patterns in stock price behavior.

A) short-run, short-run
B) long-run, long-run
C) long-run, short-run
D) short-run, long run

Question 11

Stock prices that are stable over time _______.

A) indicate that prices are useful indicators of true economic value
B) indicate that the market is not incorporating new information into current stock prices
C) ensure that an economy allocates its resources efficiently
D) indicates that returns follow a random walk process

Question 12

In a 1953 study of stock prices,Maurice Kendall found that ________.

A) there were no predictable patterns in stock prices
B) stock prices exhibited strong serial autocorrelation
C) day to day stock prices followed consistent trends
D) fundamental analysis could be used to generate abnormal returns

Question 13

Proponents of the EMH typically advocate __________.

A) a conservative investment strategy
B) a liberal investment strategy
C) a passive investment strategy
D) an aggressive investment strategy

Question 14

Which of the following is not a method employed by followers of technical analysis?

A) Charting
B) Relative strength analysis
C) Earnings forecasting
D) Trading around support and resistance levels

Question 15

When the market risk premium rises,stock prices will ________.

A) rise
B) fall
C) recover
D) have excess volatility

Question 16

Which of the following is not a method employed by fundamental analysts?

A) Analyzing the Fed's next interest rate move
B) Relative strength analysis
C) Earnings forecasting
D) Estimating the economic growth rate

Question 17

Which of the following beliefs would not preclude charting as a method of portfolio management?

A) The market is strong form efficient.
B) The market is semi-strong form efficient.
C) The market is weak form efficient.
D) Stock prices follow recurring patterns.

Question 18

The weak form of the EMH states that ________ must be reflected in the current stock price.

A) all past information including security price and volume data
B) all publicly available information
C) all information including inside information
D) all costless information

Question 19

Random price movements indicate ________.

A) irrational markets
B) that prices cannot equal fundamental values
C) that technical analysis to uncover trends can be quite useful
D) that markets are functioning efficiently

Question 20

Most of the stock price response to a corporate earnings or dividend announcement occurs within ________________.

A) about 30 seconds
B) about 10 minutes
C) 6 months
D) 2 years

Question 21

Most people would readily agree that the stock market is not _________.

A) weak form efficient
B) semi-strong form efficient
C) strong form efficient
D) efficient at all

Question 22

In a recent study,Fama and French found that the return on the aggregate stock market was __________ when the dividend yield was higher.

A) higher
B) lower
C) unaffected
D) more skewed

Question 23

Fundamental analysis is likely to yield best results for _______.

A) NYSE stocks
B) neglected stocks
C) stocks that are frequently in the news
D) fast growing companies

Question 24

You are an investment manager who is currently managing assets worth $6 billion.You believe that active management of your fund could generate between an additional one tenth of 1% return on the portfolio.If you want to make sure your active strategy adds value,how much can you spend on security analysis?

A) $12,000,000
B) $6,000,000
C) $3,000,000
D) $0

Question 25

Proponents of the EMH think technical analysts __________.

A) should focus on relative strength
B) should focus on resistance levels
C) should focus on support levels
D) are wasting their time

Question 26

Joe bought a stock at $57 per share.The price promptly fell to $55.Joe held on to the stock until it again reached $57 and then he sold once he had eliminated his loss.If other investors do the same to establish a trading pattern this would contradict _______.

A) the strong-form EMH
B) the weak-form EMH
C) technical analysis
D) the semistrong-form EMH

Question 27

Fama and French (1991)and Reinganum (1988)found that firms with __________ market/book ratios had higher stock returns.

A) high
B) low
C) medium
D) paired

Question 28

Choosing stocks by searching for predictable patterns in stock prices is called ________.

A) fundamental analysis
B) technical analysis
C) index management
D) random walk investing

Question 29

"Buy a stock if its price moves up by 2% more than the Dow Average," is an example of a _________________.

A) filter rule
B) market anomaly
C) fundamental approach
D) passive trading strategy

Question 30

Jaffee found that stock prices __________ after insiders intensively bought shares and __________ after insiders intensively sold shares.

A) decreased, decreased
B) decreased, increased
C) increased, decreased
D) increased, increased

Question 31

A mutual fund which attempts to hold quantities of shares in proportion to their representation in the market is called a __________ fund.

A) stock
B) index
C) hedge
D) money market

Question 32

Which of the following is not an issue that is central to the debate regarding market efficiency?

A) The magnitude issue
B) The tax loss selling issue
C) The lucky event issue
D) The selection bias issue

Question 33

Fama and French have suggested that many market anomalies can be explained as manifestations of ____________.

A) regulatory effects
B) high trading costs
C) information asymmetry
D) varying risk premiums

Question 34

You believe that you can earn 2% more on your portfolio if you engage in full time stock research.However,the additional trading costs and tax liability from active management will cost you about 0.5%.You have a $800,000 stock portfolio.What is the most you can afford to spend on your research?

A) $4,000
B) $8,000
C) $12,000
D) $16,000

Question 35

Basu found that firms with high P/E ratios __________.

A) earned higher average returns than firms with low P/E ratios
B) earned the same average returns as firms with low P/E ratios
C) earned lower average returns than firms with low P/E ratios
D) had higher dividend yields than firms with low P/E ratios

Question 36

Small firms have tended to earn abnormal returns primarily in __________.

A) the month of January
B) the month July
C) the trough of the business cycle
D) the peak of the business cycle

Question 37

Evidence supporting semi-strong form market efficiency suggests that investors should _________________________.

A) rely on technical analysis to select securities
B) rely on fundamental analysis to select securities
C) use a passive trading strategy such as purchasing an index fund or an ETF
D) select securities by throwing darts at the financial pages of the newspaper

Question 38

According to recent research securities markets fully adjust to earnings announcements _______.

A) instantly
B) in 1 day
C) in 1 week
D) gradually over time

Question 39

When stock returns exhibit positive serial correlation,this means that __________ returns tend to follow ___________ returns.

A) positive; positive
B) positive; negative
C) negative; positive
D) positive; zero

Question 40

You are looking to invest in one of three stocks.Stock A has high expected earnings growth,Stock B has only modest expected earnings growth and Stock C is expected to generate poor earnings growth.Which stock is likely to generate the greatest alpha for you?

A) Stock A
B) Stock B
C) Stock C
D) You cannot tell from the information given

Question 41

Studies show that the bid-ask spread for the least liquid stocks may be as high as ______.

A) 3%
B) 5%
C) 9%
D) 12%

Question 42

According to results by Seyhun __________.

A) investors cannot usually earn abnormal returns by following inside trades after knowledge of the trades are made public
B) investors can usually earn abnormal returns by following inside trades after knowledge of the trades are made public
C) investors cannot earn abnormal returns by following inside trades before knowledge of the trades are made public
D) investors cannot earn abnormal returns by trading before insiders

Question 43

A market anomaly refers to _______.

A) an exogenous shock to the market that is sharp but not persistent
B) a price or volume event that is inconsistent with historical price or volume trends
C) a trading or pricing structure that interferes with efficient buying and selling of securities
D) price behavior that differs from the behavior predicted by the efficient market hypothesis

Question 44

Banz found that,on average,the risk-adjusted returns of small firms __________.

A) was higher than the risk-adjusted returns of large firms
B) was the same as the risk-adjusted returns of large firms
C) was lower than the risk-adjusted returns of large firms
D) was negative

Question 45

The _________ effect may explain much of the small firm anomaly.
I)January effect
II)neglected effect
III)liquidity effect

A) I only
B) II only
C) II and III only
D) I, II and III

Question 46

Assume that a company announces unexpectedly high earnings in a particular quarter.In an efficient market one might expect _____________.

A) an abnormal price change immediately following the announcement
B) an abnormal price increase before the announcement
C) an abnormal price decrease after the announcement
D) no abnormal price change before or after the announcement

Question 47

If the daily returns on the stock market are normally distributed with a mean of 0.05% and a standard deviation of 1.00%,the probability that the stock market would have a return of -23.00% or worse on one particular day (as it did on Black Monday)is approximately __________.

A) 0.0%
B) 0.1%
C) 1.0%
D) 10.0%

Question 48

J.M.Keyes put all his money in one stock and the stock doubled in value in a matter of months.He did this three times in a row with three different stocks.J.M.got his picture on the front page of the Wall Street Journal.However the paper never mentioned the thousands of investors who made similar bets on other stocks and lost most of their money.This is an example of the ________ problem in deciding how efficient the markets are.

A) magnitude
B) selection bias
C) lucky event
D) small firm

Question 49

"Active investment management may generate additional returns at times of about 0.1%.However,the standard deviation of the typical well diversified portfolio is about 20%,so it is very difficult to statistically identify any increase in performance." Even if true,this statement is an example of the _________ problem in deciding how efficient the markets are.

A) magnitude
B) selection bias
C) lucky event
D) allocation

Question 50

According to the semi-strong form of the efficient markets hypothesis ____________.

A) stock prices do not rapidly adjust to new information
B) future changes in stock prices cannot be predicted from any information that is publicly available
C) corporate insiders should have no better investment performance than other investors even if allowed to trade freely
D) arbitrage between futures and cash markets should not produce extraordinary profits

Question 51

Most tests of semi-strong efficiency are _________.

A) designed to test whether inside information can be used to generate abnormal returns
B) based on technical trading rules
C) unable to generate any evidence of market anomalies
D) joint tests of market efficiency and the risk adjustment measure

Question 52

If the U.S.capital markets are not informationally efficient ______.

A) the markets cannot be allocationally efficient
B) then systematic risk does not matter
C) then no type of analysis can be used to generate abnormal returns
D) then returns must follow a random walk

Question 53

The Fama and French evidence that high book to market firms outperform low book to market firms even after adjusting for beta means _________.

A) high book to market firms are underpriced
B) low book to market firms are underpriced
C) either high book to market firms are underpriced or the book to market ratio is a proxy for a systematic risk factor
D) high book to market firms have more post earnings drift

Question 54

Important characteristic(s)of market efficiency is that _________________.
I)there are no arbitrage opportunities
II)security prices react quickly to new information
III)active trading strategies will not consistently outperform passive strategies

A) I only
B) II only
C) I and III only
D) I, II and III

Question 55

The broadest information set is included in the

A) weak form efficiency argument
B) semi-strong form efficiency argument
C) strong form efficiency argument
D) technical analysis trading method

Question 56

Stock market analysts have tended to be ___________ in their recommendations to investors.

A) slightly overly optimistic
B) overwhelmingly optimistic
C) slightly overly pessimistic
D) overwhelmingly pessimistic

Question 57

DeBondt and Thaler (1985)found that the poorest performing stocks in one time period experienced __________ performance in the following period and the best performing stocks in one time period experienced __________ performance in the following time period.

A) good, good
B) good, poor
C) poor, good
D) poor, poor

Question 58

Which of the following contradicts the proposition that the stock market is weakly efficient?

A) Over 25% of mutual funds outperform the market on average.
B) Insiders earn abnormal trading profits.
C) Every January, the stock market earns above normal returns.
D) Applications of technical trading rules fail to earn abnormal returns.

Question 59

Even if the markets are efficient,professional portfolio management is still important because it provides investors with _________.
I)low cost diversification
II)provides a portfolio with a specified risk level
III)provides better risk adjusted returns than an index

A) I only
B) I and II only
C) II and III only
D) I, II and III

Question 60

The term random walk is used in investments to refer to ______________.

A) stock price changes that are random but predictable
B) stock prices that respond slowly to both old and new information
C) stock price changes that are random and unpredictable
D) stock prices changes that follow the pattern of past price changes

Question 61

Evidence by Blake,Elton and Gruber indicates that on average actively managed bond funds

A) outperform passive fixed-income indexes __________.
B) under perform passive fixed-income indexes by a wide margin
C) perform as well as passive fixed-income indexes
D) under perform passive fixed-income indexes by an amount equal to fund expenses

Question 62

Value stocks may provide investors with better returns than growth stocks if _______.
I)value stocks are out of favor with investors
II)prices of growth stocks include premiums for overly optimistic growth levels
III)value stocks are likely to generate positive earnings surprises.

A) I only
B) II only
C) I and III only
D) I, II and III

Question 63

The tendency of poorly performing stocks and well performing stocks in one period to continue their performance into the next period is called the ________________.

A) fad effect
B) martingale effect
C) momentum effect
D) reversal effect

Question 64

A technical analyst is most likely to be affiliated with which investment philosophy?

A) Active management
B) Buy and hold
C) Passive investment
D) Index funds

Question 65

Tests of mutual fund performance indicate that funds with ______________ tend to have poorer performance.

A) more funds in the family
B) higher expense and turnover ratios
C) lower management fees
D) larger asset size

Question 66

Someone who invests in the Vanguard Index 500 mutual fund could most accurately be described as using what approach?

A) Active management
B) Arbitrage
C) Fundamental analysis
D) Passive investment

Question 67

Fundamental indexing refers to ________.

A) investing in index stocks in proportion to the stock's fundamental value
B) investing in index stocks in proportion to the stock's market value
C) investing an equal dollar amount in index stocks
D) investing in an equal amount shares in each of the index stocks

Question 68

Which of the following is not a topic related to the debate over market efficiency?

A) IPO results
B) Lucky event issue
C) Magnitude issue
D) Selection bias

Question 69

In an efficient market and for an investor that believes in a passive approach to investing,what is the primary duty of a portfolio manager?

A) Accounting for results
B) Diversification
C) Identifying undervalued stocks
D) No need for a portfolio manager

Question 70

Value stocks usually exhibit ___ price-to-book ratios and ___ price-to-earnings ratios.

A) low, low
B) low, high
C) high, low
D) high, high

Question 71

An implication of the efficient market hypothesis is that __________.

A) high beta stocks are consistently overpriced
B) low beta stocks are consistently overpriced
C) nonzero alphas will quickly disappear
D) growth stocks are better buys than value stocks

Question 72

A day trade with an average stock holding period of under 8 minutes might be most closely associated with which trading philosophy?

A) EMH
B) Fundamental analysis
C) Strong form market efficiency
D) Technical analysis

Question 73

Insiders are able to profitably trade and earn abnormal returns prior to the announcement of positive news.This is a violation of which form of efficiency?

A) Weak form efficiency
B) Semi-strong form efficiency
C) Strong form efficiency
D) Technical analysis

Question 74

The semi-strong form of the efficient market hypothesis implies that ____________ generate abnormal returns and ____________ generate abnormal returns.

A) Technical analysis cannot; fundamental analysis can
B) Technical analysis can; fundamental analysis can
C) Technical analysis can; fundamental analysis cannot
D) Technical analysis cannot; fundamental analysis cannot

Question 75

The lack of adequate trading volume in stock that may ultimately lead to its ability to produce excess returns is referred to as the ____________________.

A) January effect
B) liquidity effect
C) neglected firm effect
D) P/E effect

Question 76

Growth stocks usually exhibit ___ price-to-book ratios and ___ price-to-earnings ratios.

A) low, low
B) low, high
C) high, low
D) high, high

Question 77

Which of the following stock price observations would appear to contradict the weak form of the efficient market hypothesis?

A) The average rate of return is significantly greater than zero.
B) The correlation between the market return one week and the return the following week is zero.
C) You could have consistently made superior returns by buying stock after a 10% rise in price and selling after a 10% fall.
D) You could have consistently made superior returns by forecasting future earnings performance with your new Crystal Ball forecast methodology.

Question 78

Which of the following would violate the efficient market hypothesis?

A) Intel has consistently generated large profits for years.
B) Prices for stocks before stock splits show on average consistently positive abnormal returns.
C) Earning abnormal returns after a firm announces surprise earnings.
D) High earnings growth stocks fail to generate higher returns for investors than low earnings growth stocks.

Question 79

Which Fidelity Magellan portfolio manager is often referenced as an exception to the general conclusion of efficient markets?

A) Jeff Vinik
B) Peter Lynch
C) Robert Stansky
D) William Hayes

Question 80

Which of the following is not a concept related to explaining abnormal excess stock returns?

A) January effect
B) Neglected firm effect
C) P/E effect
D) Preferred stock effect