Deck 8: The Capital Markets and Market Efficiency

Question 1

Capital markets trade securities with a life of

A) less than one year
B) more than one year
C) more than ten years
D) more than fifteen years

Answer 1

more than one year

Question 2

The most important function of the capital markets is the ___ function.

A) economic
B) continuous pricing
C) fair price
D) taxation

Answer 2

economic

Question 3

Which function of the capital markets facilitates the flow of capital from savers to borrowers?

A) Economic
B) Continuous pricing
C) Fair price
D) Taxation

Answer 3

Economic

Question 4

Which function of the capital markets enables market participants to get accurate, up-to-date price information?

A) Economic
B) Continuous pricing
C) Fair price
D) Taxation

Question 5

The ______ function of the capital markets removes the fear of buying or selling at an unreasonable price.

A) economic
B) continuous pricing
C) fair price
D) taxation

Question 6

Fair pricing of securities is associated with the

A) fair pricing theory
B) separation theorem
C) central limit theorem
D) efficient market hypothesis

Question 7

The weak form of the efficient market hypothesis states that _____ are of no use in predicting future stock prices.

A) balance sheets
B) earnings reports
C) charts
D) annual reports

Question 8

People who employ charting techniques in the analysis of securities are called

A) operational security analysts
B) fundamental security analysts
C) informational security analysts
D) technical security analysts

Question 9

To an investment professional, which of the following is most important?

A) Past prices
B) Past and present prices
C) Future prices
D) Present and future prices

Question 10

A means of investigating the weak form of market efficiency is via a _____ test.

A) runs
B) charting
C) subjective
D) psychological

Question 11

How many runs are in the following sequence? HHHTTTHTHTHHHTTH

A) 6
B) 7
C) 8
D) 9

Question 12

The _____ form of the efficient market hypothesis states that security prices fully reflect all relevant publicly available information.

A) weak
B) semi-strong
C) strong
D) semi-efficient

Question 13

Inside information is associated with the ____ form of market efficiency.

A) weak
B) semi-strong
C) strong
D) semi-efficient

Question 14

The notion that some stocks are priced more efficiently than others is associated with the

A) weak form of the EMH
B) semi-strong form of the EMH
C) strong form of the EMH
D) semi-efficient market hypothesis

Question 15

The random walk idea says that

A) stock prices move randomly
B) interest rates change randomly
C) the stock market averages change randomly
D) the news arrives randomly

Question 16

In finance, the term _____ is associated with an unexplained result that deviates from that expected by finance theory.

A) anomaly
B) paradigm
C) inefficiency
D) abnormal profit

Question 17

There is some evidence that ___ PE stocks outperform stocks with ____ PEs.

A) high, lower
B) low, higher
C) extreme, more normal
D) median, more unusual

Question 18

The small firm effect states that

A) firms with low capitalizations outperform larger firms
B) firms with high capitalizations outperform smaller firms
C) firms with average capitalizations outperform average size firms
D) firms with large or small capitalizations outperform average size firms

Question 19

Stock returns are inexplicably high in

A) January
B) May
C) September
D) November

Question 20

A subfield of physics that is being applied to finance is

A) quantum mechanics
B) chaos theory
C) angular momentum
D) harmonic motion

Question 21

The first five Fibonacci numbers are 1, 1, 2, 3, and 5. What is the sixth?

A) 6
B) 8
C) 12
D) Cannot be determined

Question 22

Leonardo Fibonacci discovered the sequence of numbers that bears his name while exploring

A) the stars
B) the behavior of ants
C) scores of dart contests
D) the reproduction rates of rabbits

Question 23

Which of the following is NOT one of the three primary functions of capital markets?

A) Economic function
B) Continuous pricing function
C) Social welfare function
D) Fair price function

Question 24

The small firm effect means that

A) small firms affect the market more than large firms
B) small firms affect the market less than large firms
C) low capitalization stocks tend to have a higher risk-adjusted return
D) low capitalization stocks tend to have a lower risk-adjusted return

Question 25

The neglected firm effect means

A) stocks with a small security analyst following have a higher return
B) stocks with a large security analyst following have a higher return
C) stocks that investment managers monitor frequently have a higher return
D) stocks that investment managers monitor infrequently have a higher return

Question 26

The overreaction effect states that for stocks that experience extreme long-term gains or losses

A) past winners significantly outperform past losers
B) past losers significantly outperform past winners
C) security analysts tend to exaggerate the impact of new information
D) security analysts tend to dampen the impact of new information

Question 27

The day of the week effect states that the returns on

A) Tuesday and Thursday are higher than Monday, Wednesday, and Friday
B) Monday, Wednesday, and Friday are higher than Tuesday and Thursday
C) Monday are lower than returns on Wednesday and Friday
D) Monday are higher than returns on Wednesday and Friday