Deck 4: Efficient Capital Markets

Question 1

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) None of the above (all statements are false).

Answer 1

C

Question 2

Behavioural finance differs from the standard model of finance because behavioural finance

A) precludes the impact of investor psychology.
B) includes the impact of investor psychology.
C) accepts the Efficient Markets Hypothesis.
D) rejects the idea of market anomalies.
E) none of the above.

Answer 2

B

Question 3

Fusion investing is the integration of the following elements of investment valuation:

A) fundamental value and investor sentiment.
B) fads and fashions.
C) technical analysis and investor sentiment.
D) historical prices and returns.
E) transaction costs and fundamental value.

Answer 3

A

Question 4

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 5

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 only.
D) all of the above.
E) none of the above.

Question 6

Fusion investing refers to the combination of

A) technical analysis and fundamental analysis.
B) behavioural analysis and technical analysis.
C) fundamental analysis and investor sentiment.
D) technical analysis and investor sentiment.
E) all of the above

Question 7

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

Question 8

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 9

The results of return prediction studies have found

A) limited success predicting short-horizon returns. b. limited success predicting long-horizon returns.
C) good success predicting long-horizon returns.
D) a and b.
E) a and c.

Question 10

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) a high risk premium and lower expected returns.
C) a low risk premium and higher expected returns.
D) a low risk premium and lower expected returns.
E) none of the above.

Question 11

A portfolio manager without superior analytical skills should

A) determine and quantify the risk preferences of a client.
B) minimise transaction costs.
C) maintain the specified risk level.
D) ensure that the portfolio is completely diversified.
E) all of the above.

Question 12

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 13

Escalation bias refers to the situation where

A) investors have a propensity to sell winners too soon and hang on to losers too long.
B) investors ignore bad news and overemphasise good news.
C) investors tend to follow the herd.
D) investors put more money into a failure rather than into a success.
E) investors are all noise traders.

Question 14

The implication of efficient capital markets and a lack of superior analysts have led to the introduction of

A) balanced funds.
B) naive funds.
C) January funds.
D) index funds.
E) futures options.

Question 15

A 'runs test' on successive stock price changes which supports the efficient market hypothesis would show the actual number of runs

A) falls into the range expected of a random series.
B) falls into the range expected of a dependent series.
C) is small.
D) is large.
E) would approximate N/2.