Deck 5: Efficient Capital Markets, Behavioral Finance, and Technical Analysis

Question 1

When considering markets in Europe, it is inappropriate to assume a level of efficiency similar to that for U.S. markets.

Answer 1

False

Question 2

Even when fees and costs are considered, most mutual fund managers outperform the aggregate market.

Answer 2

False

Question 3

Studies concerning quarterly earnings reports indicate that information in quarterly statements is of value and can provide an above-average, risk-adjusted return.

Answer 3

True

Question 4

In tests of the semistrong-form EMH, it is not necessary to use risk-adjusted rates of return.

Question 5

An efficient market requires a large number of profit-maximizing investors.

Question 6

The weak-form efficient market hypothesis assumes all publicly available information is reflected in current stock prices.

Question 7

Studies examining stock splits support the semistrong-form efficient market hypothesis.

Question 8

Tests have shown that if small filters are used in simulating trading rules, these trading rules have produced above average returns after transactions costs are factored in.

Question 9

The weak form of the efficient market hypothesis contends that technical trading rules are of little value.

Question 10

If the efficient market hypothesis is true, price changes are independent and biased.

Question 11

The strong form of the efficient market hypothesis contends that only insiders can earn abnormal returns.

Question 12

There is little evidence from studies examining initial public offerings (IPOs) that suggest markets are semistrong-form efficient.

Question 13

There is empirical evidence that low P/E stocks have outperformed high P/E stocks for some historical time periods.

Question 14

The weak form of the efficient market hypothesis contends that stock prices fully reflect all public and private information.

Question 15

Technical analysis and the efficient market hypothesis have a consistent set of assumptions concerning stock market behavior.

Question 16

The random walk hypothesis contends that stock prices occur randomly.

Question 17

Results from studies on the effects of unexpected world events have consistently indicated that the price change is so rapid that it takes place between the close of one day and the opening of the next day.

Question 18

Prices in efficient capital markets fully reflect all available information and rapidly adjust to new information.

Question 19

Results of initial public offering (IPOs) studies tend to support the semi-strong EMH because it appears that prices adjusted rapidly after initial underpricing.

Question 20

Results of studies concerning corporate insider trading indicate that corporate insiders generally enjoy above-average returns.

Question 21

Because technicians are suspicious of financial statements, they consider it advantageous not to depend on them.

Question 22

Contrary trading rules assert that investors tend to be wrong except at market peaks and troughs.

Question 23

The majority of technicians follow many trading rules and attempt to arrive at a consensus among their rules.

Question 24

Two major classes of technicians include the contrarians and those who "follow the smart money"

Question 25

Fusion investing is the integration of two elements of investment valuation-fundamental value and investor sentiment.

Question 26

The T-Bill-Eurodollar yield spread widens during periods of international crisis.

Question 27

Fundamentalists contend that past price movements will indicate future price movements.

Question 28

Technical analysts believe that security prices do not adjust rapidly.

Question 29

The use of trading rules requires a great deal of subjective judgment.

Question 30

Recent studies indicate that due to lower transaction costs, intraday patterns of returns and volume persisted and result in profitable momentum trading strategies.

Question 31

Behavioral finance considers how various psychological traits affect how individuals or groups act as investors, analysts, and portfolio managers.

Question 32

An increase in debit balances in brokerage accounts is viewed by technicians as a bullish sign.

Question 33

An investor who can do a superior job of estimating intrinsic value can consistently make superior market timing (asset allocation) decisions or acquire undervalued securities and generate above-average returns.

Question 34

One of the potential disadvantages of technical analysis is that it can lead to investing too early, even before fundamental analysts do.

Question 35

For technical trading rules to consistently generate superior returns, the market would have to be inefficient.

Question 36

The confidence index increases as the yield on lower grade bonds decreases, everything else being constant.

Question 37

The prospect theory contends that utility depends on deviations from moving reference points rather than absolute wealth.

Question 38

If a technical trading rule is successful, then more traders use it, causing the rule to become even more successful.

Question 39

A high put/call ratio indicates a pervasive bearish attitude by sophisticated investors, so it is a bearish indicator.

Question 40

To take advantage of long-run price movements in an efficient market, you must do a superior job of estimating the relevant variables that cause these long-run movements.

Question 41

An increase in debit balances means more investing by naive investors and would be a bearish indicator.

Question 42

According to the strong-form efficient market hypothesis, stock prices fully reflect

A) all security market information only.
B) all public information only.
C) all public and private information.
D) all private information only.
E) limited public and private information.

Question 43

A rise in the Confidence Index published by Barron's is an indication that investors will purchase more lower-quality bonds.

Question 44

When the 50-day MA line crosses the 200-day MA line from above, it is considered a buy signal.

Question 45

The relative strength ratio for a stock can be computed by dividing the value of the S&P 500 stock index by the price of a stock.

Question 46

If 10 percent of the stocks are selling above their 200-day moving average, the market is considered to be oversold.

Question 47

If the aggregate market is rising but the breadth index is declining, then it is a bearish signal.

Question 48

According to the semistrong-form efficient market hypothesis, which of the following types of information are fully reflected in stock prices?

A) rates of return, trading volume, and news about the economy
B) dividend and earnings announcements
C) rates of return, trading volume, and block trades
D) earnings announcements and rates of return
E) All of these are correct.

Question 49

The Dow Theory contends that stock price movements are similar to the movement of tides, waves, and ripples.

Question 50

Which statement is true concerning alternative efficient market hypothesis?

A) The weak hypothesis encompasses the semi-strong hypothesis.
B) The weak hypothesis encompasses the strong hypothesis.
C) The semi-strong hypothesis encompasses the weak hypothesis.
D) The strong hypothesis relates only to public information.
E) The semi-strong hypothesis encompasses the strong hypothesis.

Question 51

A trading rule which signals purchase of a stock if it rises X percent and sale of a stock if it falls X percent is known as a

A) breakout.
B) short sale.
C) sieve.
D) filter.
E) relative strength.

Question 52

A resistance level is the price range at which the technician would expect an increase in the demand of stock and a price reversal.

Question 53

According to the weak-form efficient market hypothesis, which of the following types of information are fully reflected in stock prices?

A) rates of return, trading volume, and news about the economy
B) dividend and earnings announcements
C) rates of return, trading volume, and block trades
D) earnings announcements and rates of return
E) insider information

Question 54

Which of the following would be inconsistent with an efficient market?

A) Information arrives randomly and independently.
B) Stock prices adjust rapidly to new information.
C) Price changes are independent.
D) Price changes are random.
E) Price adjustments are biased.

Question 55

A support level is the price range at which the technician would expect an increase in the supply of stock and a price reversal.

Question 56

If the 50-day moving average line crosses the 200-day moving average line from below on good volume, then this would be a bullish signal.

Question 57

The breadth of the market measures the daily volume for a particular market.

Question 58

The weak form of the efficient market hypothesis states that

A) successive price changes are dependent.
B) successive price changes are independent.
C) successive price changes are biased.
D) successive price changes depend on trading volume.
E) properly specified trading rules are of value.

Question 59

Candlestick charts indicate the price change from open to close by shading whether the market went down or up for the day.

Question 60

The Confidence Index increases as the yield on lower grade bonds decreases, everything else being constant.

Question 61

The performance of four major groups of investors has been studied in connection with tests of the strong-form of the efficient market hypothesis. These include all of the following EXCEPT

A) professional money managers.
B) stock exchange specialists.
C) securities Exchange officers.
D) security analysts.
E) corporate insiders.

Question 62

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
R_it = return for stock i during period t
R_mt = return for the aggregate market during period t

-Refer to Exhibit 5.2. What is the abnormal rate of return for Stock ABC when you consider its systematic risk measure (beta)?

A) 2.4 percent
B) 1.5 percent
C) -1.5 percent
D) 2.0 percent
E) -3.2 percent

Question 63

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
R_it = return for stock i during period t
R_mt = return for the aggregate market during period t

-Refer to Exhibit 5.1. What is the abnormal rate of return for Stock E when you consider its systematic risk measure (beta)?

A) 2.0 percent
B) 1.2 percent
C) 4.0 percent
D) -1.05 percent
E) -8.5 percent

Question 64

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
R_it = return for stock i during period t
R_mt = return for the aggregate market during period t

-Refer to Exhibit 5.1. What is the abnormal rate of return for Stock E during period t using only the aggregate market return (ignore differential systematic risk)?

A) 4.0 percent
B) 2.0 percent
C) 1.2 percent
D) -1.05 percent
E) -8.5 percent

Question 65

The January anomaly refers to the phenomenon where stock prices

A) decline in December.
B) decline in January.
C) rise in January.
D) decline in December and rise in January.
E) rise in December and decline in January.

Question 66

In tests of the semistrong-form efficient market hypothesis, an adjustment for market effects is carried out by

A) calculating the historical return.
B) calculating the market rate of return.
C) calculating the abnormal rate of return.
D) calculating the cross-sectional return.
E) calculating the monthly return.

Question 67

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
R_it = return for stock i during period t
R_mt = return for the aggregate market during period t

-Refer to Exhibit 5.2. What is the abnormal rate of return for Stock ABC during period t using only the aggregate market return (ignore differential systematic risk)?

A) 3.2 percent
B) 2.4 percent
C) 1.3 percent
D) -1.5 percent
E) 2.0 percent

Question 68

In order to confirm the weak-form efficient market hypothesis, an examination of stock price runs over time would reveal that stock price changes over time were

A) highly positively correlated.
B) moderately positively correlated.
C) highly negatively correlated.
D) moderately negatively correlated.
E) not correlated.

Question 69

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
R_it = return for stock i during period t
R_mt = return for the aggregate market during period t

-Refer to Exhibit 5.2. What is the abnormal rate of return for Stock XYZ when you consider its systematic risk measure (beta)?

A) 2.0 percent
B) -1.5 percent
C) 2.4 percent
D) 1.3 percent
E) -3.2 percent

Question 70

Banz and Reinganum found that small firms consistently outperformed large firms. This anomaly is referred to as the

A) large firm effect.
B) size effect.
C) small firm effect.
D) earnings effect.
E) growth firm effect.

Question 71

Which of the following has NOT been involved in a direct test of the semi-strong form of the efficient market hypothesis?

A) stock splits
B) new Issues
C) exchange listing
D) accounting changes
E) NYSE specialists' returns

Question 72

Abnormal returns associated with rankings by a major advisory service are associated with

A) the earnings effect.
B) the Value-Line Enigma.
C) the Value-Line Effect.
D) the Standard and Poor's Anomaly.
E) the rankings anomaly.

Question 73

Examples of anomalies providing contrary evidence to the semi-strong efficient market hypothesis include studies of all of the following EXCEPT

A) quarterly earnings reports.
B) price earnings ratios.
C) total market value.
D) stocks ranked by Standard & Poor's.
E) the January effect.

Question 74

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
R_it = return for stock i during period t
R_mt = return for the aggregate market during period t

-Refer to Exhibit 5.1. What is the abnormal rate of return for Stock C when you consider its systematic risk measure (beta)?

A) 4.0 percent
B) 1.2 percent
C) 2.0 percent
D) -1.05 percent
E) -8.5 percent

Question 75

Researchers have found a positive relationship between default spread and stock returns in the long run because a large default spread implies a

A) high risk premium and higher expected returns.
B) high risk premium and lower expected returns.
C) low risk premium and higher expected returns.
D) low risk premium and lower expected returns.
E) low risk premium and the same expected returns.

Question 76

The opportunity to take advantage of the downward pressure on stock prices that result from end-of-the-year tax selling is known as the

A) End-of-the-Year Effect.
B) December Anomaly.
C) End-of-the-Year Anomaly.
D) January Anomaly.
E) New Year Anomaly.

Question 77

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
R_it = return for stock i during period t
R_mt = return for the aggregate market during period t

-Refer to Exhibit 5.1. What is the abnormal rate of return for Stock C during period t using only the aggregate market return (ignore differential systematic risk)?

A) 4.0 percent
B) 1.2 percent
C) -1.05 percent
D) 2.0 percent
E) -8.5 percent

Question 78

Some studies have attempted to determine whether it is possible to predict future returns for a stock based on publicly available quarterly earnings reports. The results of these studies indicate

A) stock prices adjust to reflect quarterly earnings reports.
B) stock prices do not adjust to reflect quarterly earnings reports.
C) support for the semistrong-EMH.
D) stock prices adjust if earnings reports are released in January.
E) stock prices do not adjust if earnings reports are released in January.

Question 79

In an event study the objective is to

A) determine whether it is possible to predict stock prices.
B) determine how fast stock prices adjust to news.
C) examine the cross-sectional distributions of returns.
D) conduct a time series analysis of returns.
E) determine normal P/E ratios.

Question 80

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
R_it = return for stock i during period t
R_mt = return for the aggregate market during period t

-Refer to Exhibit 5.2. What is the abnormal rate of return for Stock XYZ during period t using only the aggregate market return (ignore differential systematic risk)?

A) -3.2 percent
B) 2.4 percent
C) 2.0 percent
D) 1.3 percent
E) -1.5 percent