Question 1

The efficient markets hypothesis implies that an investor:

Accepted Answer

The efficient markets hypothesis states that all relevant information is already reflected in the stock prices, making it impossible for an investor to systematically outperform the market over time. Therefore, choice A is the correct answer. Choices B, C, and D are incorrect as they do not align with the implications of the efficient markets hypothesis.

Question 2

About the only way to beat a well-functioning market and make money in the short run is:
I. through the efficient markets hypothesis.
II. if one has insider information.
III. through extreme speed and foresight.

Accepted Answer

The answer of About the only way to beat a...

Question 3

In the stock market, profiting from inside information:

Accepted Answer

Profiting from inside information typically involves acting quickly before the information becomes public, often by buying or selling large quantities of stock to capitalize on the anticipated price movement.

Question 4

When Chernobyl melted down in the Soviet Union, the:

Accepted Answer

The Chernobyl disaster led to increased concerns about nuclear safety, which affected agricultural products like potatoes due to fears of contamination, leading to a price increase.

Question 5

Consider the market for ABC Company's stock. What should happen to the stock for ABC Company after a merger with a highly successful supply firm is announced?

Accepted Answer

A highly successful supply firm merger would likely be seen as positive news for ABC Company, which could lead to an increase in demand for the stock from investors hoping to capitalize on the potential benefits of the merger. This would shift the demand curve for the stock to the right, resulting in an increase in the stock price.

Question 6

One of the problems with investment advice that claims you should buy stock in a certain company or sector of the economy is that:

Accepted Answer

If investment advice claims you should buy stock in a certain company or sector of the economy, chances are that other investors have already learned about and acted on that information, causing asset prices to be adjusted accordingly. This means that the advice may no longer be profitable or valuable.

Question 7

The field of technical analysis:

Accepted Answer

While technical analysis can provide insights into market trends and behavior, numerous studies have shown that it is not consistently effective in beating the market. Factors such as sudden market shifts and unexpected news events can make it difficult for technical analysis to accurately predict stock prices.

Question 8

Technical analysis:

Accepted Answer

Technical analysis looks for chart patterns and trends in stock prices, which can provide insights into possible future price movements. However, research has shown that technical analysis alone cannot consistently beat the market averages. It is also not necessarily useful for predicting specific price thresholds, but rather for identifying possible trends in the market.

Question 9

Someone who is using information outside the efficient markets hypothesis:

Accepted Answer

The efficient markets hypothesis suggests that all available information is already reflected in stock prices. In choice C, the auditor has access to non-public, insider information that is not yet reflected in the stock price, which is outside the efficient markets hypothesis.

Question 10

The efficient markets hypothesis states that:

Accepted Answer

The efficient markets hypothesis (EMH) states that all publicly available information is already reflected in the price of assets. This means that it is impossible to consistently outperform the market by using only publicly available information since the market has already incorporated that information into its pricing. However, the EMH does not imply that markets are perfectly efficient or that there can be no such thing as insider trading.

Question 11

Which statement is consistent with the efficient markets hypothesis?

Accepted Answer

The efficient markets hypothesis suggests that all stock prices fully reflect all available information and that it is impossible to consistently outperform the market through stock picking or market timing. Therefore, option A, which states that the majority of stock mutual funds cannot outperform stock composite indexes, is consistent with the efficient markets hypothesis. Option B goes too far in suggesting that no mutual funds can ever outperform, while option C is simply incorrect. Option D suggests that it is possible to beat the market through technical analysis, which goes against the efficient markets hypothesis.

Question 12

According to the efficient markets hypothesis,:

Accepted Answer

According to the efficient markets hypothesis, the market always incorporates all available information and therefore, no investor can consistently outperform the stock market indexes. This means that over time, any outperformance by one investor would be offset by underperformance by another. Therefore, actively trying to beat the market by picking individual stocks or timing the market is not likely to be successful in the long run.

Question 13

Consider the market for ABC Company's stock. What should happen to the stock for this company if there is a rumor that the company is set to merge with another very profitable company?

Accepted Answer

The rumor of a merger with a profitable company would create a positive expectation about the future performance of ABC Company, which would increase the demand for its stock. As more investors seek to buy shares of ABC Company, the demand curve would shift to the right, resulting in a higher equilibrium price and quantity of the stock traded. The supply of the stock would not be affected by the rumor, as it depends on the company's decision to issue new shares or not, which is unlikely to be influenced by a mere rumor.

Question 14

What does the efficient markets hypothesis tell us about the movement in a stock price?

Accepted Answer

The efficient markets hypothesis asserts that the stock prices always quickly and accurately incorporate all publicly available information, such as news, financial reports, and analyst ratings, which leads to its movement. Therefore, option C is the correct answer.

Answer: A, B, D are incorrect 
 The efficient markets hypothesis doesn't provide any specific predictions on how a stock's price will move in the future because it suggests that all relevant information is already incorporated into the current stock price. Therefore, options A and D are incorrect. Moreover, the efficient market hypothesis assumes that the market participants have access to complete and accurate information, including both buyers and sellers. Hence, option B is also incorrect.

Question 15

Based on the efficient markets hypothesis, which of the following mutual funds has the better chance of beating the market in the long run?

Accepted Answer

The efficient markets hypothesis suggests that it is nearly impossible to consistently outperform the market because all available information is already reflected in stock prices. Therefore, no mutual fund or individual has a better chance of beating the market in the long run.

Question 16

An efficient stock market means that:

Accepted Answer

An efficient stock market is one where stock prices reflect all relevant public information about a company, making it difficult for investors to outperform the market. Traders with inside information would also find it difficult to outperform market averages in an efficient market, and new information would be quickly reflected in stock prices. Therefore, option A is the best choice as it encompasses all these characteristics of an efficient market.

Question 17

One reason why stock picking cannot work well in the long run is that:

Accepted Answer

Stock market information is widely available to all investors, making it difficult for anyone to consistently outperform the market over the long run by picking individual stocks. The fact that stock market information is widely available means that it gets quickly incorporated into stock prices, leaving little room for investors to gain an edge by uncovering new information. Additionally, even if an investor has a unique piece of information about a company, it is often difficult to act on it before the rest of the market catches up.

Question 18

Stocks are a good investment if:
I. one is prepared to hold them for a while through market fluctuations.
II. one can buy them immediately after prices have fallen.
III. one is not averse to risk.

Accepted Answer

Option I is a wise strategy for investing, as it allows investors to wait out market downturns rather than panic and sell their stocks at a loss. Option II is also a good tactic, as buying stocks at lower prices can lead to better returns over the long term. However, option III is not necessary for all investors, as some may prefer less risk or more conservative investments. Ultimately, it depends on the individual's investment goals and risk tolerance. Therefore, options I and III are favorable investment strategies, while option II is a good opportunity to seize when it arises.

Question 19

Consider the market for ABC Company's stock. What should happen in this market after an announcement that the company is having financial difficulties?

Accepted Answer

The announcement of financial difficulties will decrease investor confidence and make the stock less attractive, leading to a decrease in demand and a shift to the left in the demand curve.

Question 20

Which of the following statements is TRUE?
I. For every transaction in the stock market there is a buyer and a seller.
II. At any point in time, the price of a stock tends to reflect all available public information about the company's future prospects.
III. A revolutionary cancer treatment pill will be released next year. An investor will get rich by buying stock in that company now.

Accepted Answer

Statement I is true because in every transaction there must be a buyer and a seller. 
Statement II is also true because stock prices reflect all available public information which includes future prospects. 
However, statement III is false because the certainty of the release of the cancer treatment pill and its subsequent success is uncertain and not based on the information available in the market. Therefore, the idea that an investor can get rich by buying the stock is speculative and not based on facts.

Quiz 23: Stock Markets and Personal Finance