Question 1

Which form of market efficiency would most likely offer the greatest profit potential to an outstanding professional stock analyst?

Accepted Answer

Weak form efficiency suggests that past trading information is already reflected in stock prices, but it does not account for all available information. Therefore, an outstanding professional stock analyst could potentially exploit other forms of information (such as unpublished financial reports or industry trends) to achieve greater profits, which is less feasible in more efficient markets where such information is already priced in.

Question 2

One year ago, you purchased a stock at a price of $38.22 a share. Today, you sold the stock and realized a total loss of 11.09 percent on your investment. Your capital gain was -$4.68 a share. What was your dividend yield?

Accepted Answer

The dividend yield can be calculated by understanding that the total loss includes both the capital loss and the dividend received. The capital loss per share is $4.68, which is 11.09% of the initial investment. This means the initial investment was $38.22 per share. The total loss (11.09%) of $38.22 is $4.23. Since the capital loss is $4.68, and the total loss is $4.23, it implies a positive dividend was received to make up the difference. The dividend received per share is $4.68 - $4.23 = $0.45. The dividend yield is then calculated as the dividend received divided by the initial investment price: ($0.45 / $38.22) * 100 = 1.18%. However, due to rounding in the calculation, the closest answer provided is 1.15 percent.

Question 3

Which one of the following is the most likely reason why a stock price might not react at all on the day that new information related to the stock's issuer is released? Assume the market is semistrong form efficient.

Accepted Answer

If the information was already expected, then the market has already priced it in and there would not be much of a reaction on the day of the announcement. This is a common reason why a stock price may not react to new information in an efficient market.

Question 4

Individual investors who continually monitor the financial markets seeking mispriced securities:

Accepted Answer

Individual investors who continually monitor the financial markets seeking mispriced securities contribute to making the markets more efficient. As investors purchase undervalued securities, their prices increase, while overvalued securities decline, closing the gap between the current price and the intrinsic value of the asset. This reduces the likelihood of finding mispriced securities in the future, making markets more efficient. While there are successes, finding and exploiting mispricings is challenging, and investors may not earn abnormal profits consistently. The use of historical data alone may not provide adequate information for effective evaluation.

Question 5

Six months ago, you purchased 300 shares of stock in Global Trading at a price of $26.19 a share. The stock pays a quarterly dividend of $.12 a share. Today, you sold all of your shares for $27.11 per share. What is the total amount of your dividend income on this investment?

Accepted Answer

The stock pays a quarterly dividend of $0.12 per share. Over six months, there are two quarters, so the total dividend per share is $0.12 * 2 = $0.24. For 300 shares, the total dividend income is 300 * $0.24 = $72.

Question 6

You own 850 shares of Western Feed Mills stock valued at $53.15 per share. What is the dividend yield if your total annual dividend income is $1,256?

Accepted Answer

Dividend Yield = (Annual Dividend Income / Total Value of Investment) x 100

Total Value of Investment = Number of shares x Value per share
Total Value of Investment = 850 x $53.15
Total Value of Investment = $45,197.50

Dividend Yield = ($1,256 / $45,197.50) x 100
Dividend Yield = 0.0278 x 100
Dividend Yield = 2.78%

Therefore, the answer is B.

Question 7

Which one of the following statements is correct concerning market efficiency?

Accepted Answer

In an efficient market, prices reflect all available information. Therefore, when a firm issues new shares, the price at which these shares are sold should be fair, meaning it accurately reflects the firm's value based on the available information. This is a fundamental principle of market efficiency, which posits that it's impossible to consistently achieve higher returns on a risk-adjusted basis than the market overall because prices already incorporate all known information.

Question 8

Efficient financial markets fluctuate continuously because:

Accepted Answer

Efficient financial markets react quickly to new information, causing prices to fluctuate continuously. As new information becomes available, investors make adjustments to their beliefs about the value of securities, leading to changes in prices. Other choices are not the primary reason behind the continuous fluctuations in efficient financial markets.

Question 9

West Wind Tours stock is currently selling for $52.30 a share. The stock has a dividend yield of 2.48 percent. How much dividend income will you receive per year if you purchase 600 shares of this stock?

Accepted Answer

The answer of West Wind Tours stock is currently selling...

Question 10

One year ago, you purchased a stock at a price of $43.20 per share. The stock pays quarterly dividends of $.18 per share. Today, the stock is selling for $45.36 per share. What is your capital gain on this investment?

Accepted Answer

The capital gain is calculated by subtracting the purchase price from the selling price. So, $45.36 - $43.20 = $2.16.

Question 11

Which one of the following statements related to market efficiency tends to be supported by current evidence?

Accepted Answer

Current evidence suggests that markets tend to respond quickly to new information, indicating a high level of efficiency. Options A, B, C, and D are all incorrect as they suggest market inefficiency, which is not supported by current evidence.

Question 12

You are aware that your neighbor trades stocks based on confidential information he overhears at his workplace. This information is not available to the general public. This neighbor continually brags to you about the profits he earns on these trades. Given this, you would tend to argue that the financial markets are at best ________ form efficient.

Accepted Answer

This neighbor's ability to consistently make profits based on confidential information not available to the general public suggests that the financial markets are not semistrong form efficient. Semistrong form efficiency assumes that all publicly available information is reflected in the prices of securities, but this neighbor's profits demonstrate that private information can still be used to gain an advantage.

Question 13

You just sold 427 shares of stock at a price of $19.07 a share. You purchased the stock for $18.83 a share and have received total dividends of $614. What is the total capital gain on this investment?

Accepted Answer

The answer of You just sold 427 shares of stock...

Question 14

The U.S. Securities and Exchange Commission periodically charges individuals with insider trading and claims those individuals have made unfair profits. Given this, you would be most apt to argue that the markets are less than ________ form efficient.

Accepted Answer

Insider trading suggests that all information, especially non-public information, is not fully reflected in stock prices, indicating that markets are less than strong form efficient.

Question 15

Which one of the following statements best defines the efficient market hypothesis?

Accepted Answer

The efficient market hypothesis posits that all available information is already reflected in securities' prices, making it impossible to consistently achieve higher returns than the overall market. Therefore, any new investment in the market would have a net present value of zero, as it is priced perfectly according to all known information. This means investors cannot consistently achieve abnormal returns through market timing or stock selection.

Question 16

Assume all stock prices fairly reflect all of the available information on those stocks. Which one of the following terms best defines the stock market under these conditions?

Accepted Answer

This scenario describes the Efficient Market Hypothesis (EMH), which posits that stock prices fully reflect all available information, making it impossible to consistently achieve higher returns.

Question 17

One year ago, you purchased 200 shares of SL Industries stock at a price of $18.97 a share. The stock pays an annual dividend of $1.42 per share. Today, you sold all of your shares for $17.86 per share. What is your total dollar return on this investment?

Accepted Answer

The answer of One year ago, you purchased 200 shares...

Question 18

Which one of the following is most indicative of a totally efficient stock market?

Accepted Answer

A totally efficient stock market would result in zero net present values for all stock investments, as stock prices would accurately reflect all available information and future expectations. This means that investors would be unable to consistently earn extraordinary returns or identify undervalued stocks, and there would be no arbitrage opportunities. Realizing negative returns on a routine basis would also not be indicative of a totally efficient stock market.

Question 19

Inside information has the least value when financial markets are:

Accepted Answer

Strong form efficiency assumes that all public and private information is reflected in the stock prices. Therefore, inside information has the least value when financial markets are strong form efficient.

Question 20

Evidence seems to support the view that studying public information to identify mispriced stocks is:

Accepted Answer

The answer of Evidence seems to support the view that...

Quiz 12: Some Lessons from Capital Market History