Question 1

You invest $10,000 in the market at the beginning of the year, and by the end of the year your account is worth $15,000. During the year the market return was 10%. Does this mean that the market is inefficient?

Accepted Answer

The answer of You invest $10,000 in the market at...

Question 2

Delta Co. announced its merger plans on February 6 and had a daily return of 0.6 percent. Edwards Co. announced its merger plans on February 8 and had a daily return of 0.7 percent. Francis Co. announced its merger plans on February 7 and had a daily return of 0.4 percent. The daily market return for February 6^th through the 8^th was 0.2, 0.5, and -0.1, respectively. What is the combined cumulative abnormal return for the announcement date? A) 0.8 percent B) 0.9 percent C) 1.0 percent D) 1.1 percent E) 1.2 percent

Accepted Answer

To calculate the cumulative abnormal return (CAR) for each company, we need to subtract the market return from the daily return on the announcement date:

Delta Co. CAR = 0.6% - 0.2% = 0.4%
Edwards Co. CAR = 0.7% - 0.5% = 0.2%
Francis Co. CAR = 0.4% - (-0.1%) = 0.5%

To get the combined CAR for the announcement date, we simply add up the CARs for each company:

CAR = 0.4% + 0.2% + 0.5% = 1.1%

Therefore, the correct answer is (D) 1.1 percent.

Question 3

If the market is semistrong-form efficient is it also weak form efficient?
 If the market is weak-form efficient is it also semistrong-form efficient?

Accepted Answer

The answer of If the market is semistrong-form efficient is...

Question 4

Describe an example of a market which is weak-form but not strong-form efficient.

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The answer of Describe an example of a market which...

Question 5

If the market is __________ form efficient, it is also __________ form efficient.
A) strong; semiweak
B) weak; semistrong
C) semistrong; strong
D) weak; strong
E) semistrong; weak

Accepted Answer

If the market is semistrong form efficient, it means that all publicly available information is already reflected in the stock prices. In this case, if it is also weak form efficient, it means that not only publicly available information but also historical price and volume data are already incorporated into the stock prices. Therefore, E is the correct answer as it implies that both types of information are already impounded in the stock prices.

Question 6

Over the past 5 days, the common stock of Chelsee & Company had daily returns of 0.2, -0.3, -0.7, 0.1, and 0.2 percent, respectively. For the same 5 days, the market had daily returns of 0.2, 0.1, -0.3, 0.0, and 0.3 percent, respectively. What is the cumulative abnormal return on Chelsee stock for this time period?
A) -0.8 percent
B) -0.4 percent
C) 0.0 percent
D) 0.2 percent
E) 0.4 percent

Accepted Answer

The cumulative abnormal return is calculated by subtracting the market return from the stock return for each day and then summing these differences: (0.2-0.2) + (-0.3-0.1) + (-0.7+0.3) + (0.1-0.0) + (0.2-0.3) = 0 - 0.4 - 0.4 + 0.1 - 0.1 = -0.8 percent.

Question 7

The following is the daily returns for both the overall market and for Dagwood Industries. What is the cumulative abnormal return on Dagwood stock for these 5 days?

$$\begin{array} { l c c } 
\underline{\text { Date }} & \underline{\text { Market Return (\%) }} &\underline{ \text { Dagwood Return (\%) }} \
 3 / 15 & 0.3 \% & 0.4 \% \
3 / 16 & - 0.1 & 0.2 \
3 / 17 & 0.2 & 0.8 \
3 / 18 & 0.3 & 0.5 \
3 / 19 & - 0.6 & - 0.4
\end{array}$$
A) 0.8 percent
B) 1.0 percent
C) 1.2 percent
D) 1.4 percent
E) 1.6 percent

Accepted Answer

The answer of The following is the daily returns for...

Question 8

List and discuss the three forms of market efficiency.

Accepted Answer

The answer of List and discuss the three forms of...

Question 9

If financial markets are highly efficient:
A) technical analysis will produce superior results.
B) fundamental analysis will provide better results.
C) market efficiency will be increased by analysts trying to analyze securities.
D) stock prices will always rise instantaneously with the release of new information.
E) none of the above.

Accepted Answer

The answer of If financial markets are highly efficient:
A) technical...

Question 10

Tests regarding stock splits or dividends are usually tests of the __________ form of market efficiency.
A) Weak
B) Semi-strong
C) Strong
D) Semi-efficient
E) none of the above.

Accepted Answer

Tests regarding stock splits or dividends usually involve publicly available information, which falls under the semi-strong form of market efficiency. The weak form of market efficiency does not assume that publicly available information is already incorporated into stock prices, while the strong form assumes that not only publicly available but also private information is already reflected in stock prices. Therefore, semi-strong efficiency is the appropriate form of market efficiency for tests involving events like stock splits or dividends.

Question 11

Run tests are used for investigating the weak form of market efficiency. How many runs are in the following sequence?
A) 6
B) 7
C) 8
D) 9
E) 10

Accepted Answer

The answer of Run tests are used for investigating the...

Question 12

A technical analyst teaches you a trading rule called a "Hoo-Yah." This strategy has produced a 15 percent annual return for the past five years, while the market return has been 12 percent. Which of the following is not true?
A) The return may not be as good as advertised since it is not adjusted for risk
B) This may be a data snooping problem.
C) While the trading rule worked in the past, there is no guarantee it will work in the future.
D) If the trading rule works consistently, it is evidence against semistrong-form market efficiency.
E) All of the above are true.

Accepted Answer

All the statements provided are true regarding the scenario described. A) highlights the importance of risk adjustment in evaluating returns. B) suggests the possibility of overfitting the strategy to past data, which may not predict future performance. C) is a caution against assuming past performance guarantees future results. D) points out that if a trading rule consistently outperforms the market, it challenges the semistrong-form of market efficiency, which posits that all publicly available information is already reflected in stock prices, making it impossible to consistently achieve higher returns.

Question 13

Baker Drugs announced FDA approval for a new drug on August 3^rd. Treynor Co. announced FDA approval for their new drug on August 6. No other information was released around his time period. What is the combined cumulative abnormal return for the 5 day period commencing 2 days prior to the FDA approval announcement date? Use the following data to answer this question. $$\begin{array} { l l c c } \underline{\text { Date } }& \begin{array} { l } \text { Market } \ \underline{\text { Return }} \% \end{array} & \begin{array} { c } \text { Baker Drugs } \ \underline{\text { Return } }\% \end{array} & \begin{array} { c } \text { Treynor Co. } \ \underline{\text { Return }} \% \end{array} \ 8 / 1 & 0.1 \% & 0.1 \% & 0.0 \ 8 / 2 & - 0.4 & - 0.1 & - 0.5 \ 8 / 3 & 0.3 & 0.9 & 0.2 \ 8 / 6 & 0.1 & 0.5 & 0.8 \ 8 / 7 & - 0.2 & - 0.4 & 0.3 \ 8 / 8 & 0.1 & - 0.1 & 0.2 \ 8 / 9 & 0.2 & 0.1 & - 0.1 \end{array}$$ A) 1.6 percent B) 1.8 percent C) 2.2 percent D) 2.4 percent E) 2.6 percent

Accepted Answer

The cumulative abnormal return (CAR) is calculated by summing the daily abnormal returns (AR) over the event window. The AR for each day is the stock return minus the market return. For Baker Drugs, the event window is from 8/1 to 8/7, and for Treynor Co., it is from 8/4 to 8/8. Calculating AR for each day and summing them gives a combined CAR of 2.2 percent.

Quiz 8: Stock Price Behaviour and Market Efficiency

You invest $10,000 in the market at the beginning of the year, and by the end of the year your account is worth $15,000. During the year the market return was 10%. Does this mean that the market is inefficient?

If the market is semistrong-form efficient is it also weak form efficient? If the market is weak-form efficient is it also semistrong-form efficient?

Describe an example of a market which is weak-form but not strong-form efficient.

If the market is form efficient, it is also form efficient.

List and discuss the three forms of market efficiency.

If financial markets are highly efficient:

Tests regarding stock splits or dividends are usually tests of the __________ form of market efficiency.

Run tests are used for investigating the weak form of market efficiency. How many runs are in the following sequence?

A technical analyst teaches you a trading rule called a "Hoo-Yah." This strategy has produced a 15 percent annual return for the past five years, while the market return has been 12 percent. Which of the following is not true?