Deck 8: Stock Price Behaviour and Market Efficiency

Question 1

A market in which past prices and volume are of no use in beating the market is __________ -form efficient

A) weak
B) semi-weak
C) semistrong
D) strong
E) technical

Answer 1

A

Question 2

Which of the following is NOT one of the economics foundations of market efficiency?

A) Investor rationality
B) Arbitrage
C) Independent deviations from rationality
D) Asymmetric information

Answer 2

D

Question 3

A market in which information of any kind, public or private, is of no use in beating the market is __________ -form efficient.

A) weak
B) semi-weak
C) semistrong
D) strong
E) technical

Answer 3

D

Question 4

A(n) __________ is a method of research that studies the effect that news announcements have on stock prices.

A) Event study
B) Efficient hypothesis
C) Random walk
D) Market watch
E) Pure play

Question 5

The tendency for Monday to have a negative return is the __________ effect.

A) point-and-figure
B) January
C) harami
D) support
E) day-of-the-week

Question 6

The observation that stocks price behaviour is that of a "random walk" is related to the __________ version of the efficient market hypothesis.

A) semi-weak form
B) semi-strong form
C) event-form
D) weak-form
E) Malkiel theorem

Question 7

The hypothesis that investors cannot consistently earn positive excess returns is known as the __________ hypothesis.

A) Technical analysis
B) Market efficiency
C) Risk-return
D) Fundamental analysis
E) Market breadth

Question 8

In an efficient market, stocks with similar risks will:

A) have the same market price.
B) pay similar dividends.
C) yield the market rate of return.
D) produce abnormal returns.
E) have similar rates of return.

Question 9

The driving forces leading markets to be efficient is:

A) Arbitrage and asymmetric information
B) Competition and the profit motive
C) Abnormal returns and the central limit theorem
D) Volatility and the nature of risk averse investors
E) Irrationality and government anti-trust legislation

Question 10

The return on a stock that remains after the overall market returns have been removed is called the __________ return

A) Excess
B) Distinct
C) Abnormal
D) Subjective
E) Efficient

Question 11

When a stock price fluctuates, but follows no discernible pattern of movement over time, the stock price is said to be a(n)

A) Deviated pattern
B) Dispersed flow
C) Efficient movement
D) Overreaction and correction
E) Random walk

Question 12

With a clear relationship as a tipper and a tipee, buying or selling securities in an attempt to make profit is a(n) __________.

A) Over-counter trading
B) Off-floor trading
C) Legal trading
D) Insider trading
E) Irrational trading

Question 13

A sudden and significant decline in overall market prices is called a(n)

A) Crash
B) Dive
C) Recession
D) Rebound
E) Adjustment

Question 14

When market prices are much higher than fundamental or rational analysis would tend to support, the market is said to be in a(n):

A) Fantasy land
B) Cloud
C) Inverted state
D) Bubble
E) Winner's state

Question 15

A market in which publicly available information is of no use in beating the market is __________ -form efficient.

A) weak
B) semi-weak
C) semistrong
D) strong
E) technical

Question 16

Small stocks tend to have the largest returns in __________.

A) March
B) January
C) September
D) August
E) October

Question 17

The rules established by the NYSE that control trading when the DJIA declines by more than a specified amount on any trading day are referred to as:

A) Stop-loss limits
B) Market timers
C) Crash helmets
D) Circuit breakers
E) Trade barriers

Question 18

The difference between what an investment earned and the return on other investments with the same level of risk is known as the _________ return.

A) Excess
B) Market
C) Superior
D) Top
E) Strong

Question 19

If you know information about a company that will have a significant effect on the company's stock price once the information is released, you have knowledge that is referred to as __________ information

A) Excess profit
B) Public
C) Abnormal
D) Market effect
E) Material no-public

Question 20

A person who decides to buy or sell securities based on publicly available information and analysis is called a(n) __________ trader.

A) Public
B) Informed
C) Noisy
D) Inside
E) Block

Question 21

Stocks A, B, and C have identical risks. Stock A earns an annual return of 9.9 percent as compared to 9.6 percent returns on stocks B and C. Given this, you can correctly assume that:

A) Stock A is overpriced.
B) the market return is 9.75 percent.
C) Stock A represents the smallest-sized firm.
D) Stock A has a positive excess return.
E) Stocks B and C represent firms that are in the process of merging.

Question 22

Ruth has taken two approaches to trading stocks. First, she found what she thought was a repetitive pattern in ABC Co.'s historical prices. Secondly, she found that using the financial statements of LKO Co. to compute changes in the return on equity would help predict the future stock price for that firm. She traded using both strategies. Ruth earned excess profit on market is at least __________ efficient but less than __________ efficient.

A) weak-form; mild-form
B) mild-form; semi-strong form
C) weak-form; semi-strong form
D) semi-strong form; full-form
E) semi-strong form; strong-form

Question 23

Which of the following is not a reason that it is difficult to test market efficiency?

A) The dumb luck problem.
B) The investor behavior problem.
C) The risk-adjustment problem.
D) The relevant information problem.
E) The data snooping problem.

Question 24

If markets are efficient, asset allocation is __________ important and security selection is __________ important.

A) more; more
B) more; less
C) less; less
D) less; more
E) Market efficiency is unrelated to asset allocation or security selection.

Question 25

Arbitrage traders

A) Can only function in efficient markets
B) Tend to be irrational investors
C) Is a term applied to all investors who buy stock and resell it at a higher price
D) Make the market more efficient
E) Trade only those securities that are under-priced

Question 26

If the financial markets are __________ efficient, then laws prohibiting insider trading are unnecessary.

A) mild-form
B) weak-form
C) historical-form
D) semi-strong form
E) strong-form

Question 27

Efficient markets

A) Provide excess profit to rational investors
B) Fully reflect relevant information
C) Need to have limited daily trading
D) Prevent sudden movements in stock prices
E) Tend to exist when competition is restricted

Question 28

You have a routine of studying the cash flows of public firms based on their quarterly financial statements. From your studies, you have determined that the market undervalues increases in a firm's operating cash flows and thus, you have been able to earn excess profits by trading on this information. This indicates that the market is less than __________ efficient.

A) weak-form
B) historical-form
C) semi-strong form
D) full-form
E) mild-form

Question 29

Strong-form market efficiency implies that __________ information is reflected in market prices.

A) only past price
B) all past, present, and future
C) both private and public
D) public, but not private,
E) financial, but not economic,

Question 30

Stocks A, B and C have the same risks. Stock A earns an annual return of 12% and Stock B and C earn returns of 11%. Stock A

A) Is overpriced
B) Is efficiently priced
C) Must be a smaller company stock
D) Has a positive excess return
E) Must be owned primarily by pessimistic investors

Question 31

A method of investigating the __________ -form of market efficiency is via a __________ test.

A) Weak; event study
B) Semi-weak; psychological
C) Weak; run
D) Semi-strong; autocorrelation
E) Strong; subjective

Question 32

Fair pricing of securities is a notion of.

A) Purchasing power parity
B) Efficient market hypothesis
C) Central limit theorem
D) Irrationality
E) Separation theorem

Question 33

The term "independent deviations from rationality" implies that irrational investors

A) Dominate the market place
B) Guarantee an inefficient market
C) Independently offset the actions of rational investors
D) Behave differently from one another
E) Act together to offset the actions of rational investors

Question 34

Which of the following can lead to market efficiency?
I) Market timing
II) Investor rationality
III) Arbitrage
IV) Independent deviation from rationality

A) I and III
B) II and IV
C) II, III and IV
D) I, II and III
E) I, II, III and IV

Question 35

The "efficiency" referred to in the efficient market hypothesis is __________ efficiency.

A) Information
B) Taxation
C) Operational
D) Monetary
E) All of the above

Question 36

Rational investors

A) Cause stocks with similar risks to have similar expected returns
B) Always tend to undervalue stocks
C) Tend to be either overly optimistic or overly pessimistic
D) Are all arbitrage traders
E) Must include all investors if the market is to be efficient

Question 37

If the stock market is efficient, then stocks with similar risks will

A) Be priced similarly
B) Pay similar dividends
C) Produce excess returns
D) Produce abnormal returns
E) Have similar rates of returns

Question 38

Two weeks ago Ace Electronics announced that it had developed a new chip design which was being considered by major companies for use in future smart phone development. At the close of trading the day before the announcement, Ace common stock closed at $20. On the day following the announcement, Ace closed at $21. Two days after the announcement the stock closed at $22.50. Four days after the announcement the stock traded at $23. Last week, Ace stock traded at $26, a level it has maintained since then. This is an example of a(n):

A) over-reaction and correction.
B) underpricing.
C) delayed reaction.
D) pre-activity action.
E) efficient market reaction.

Question 39

Which of the following are ineffective strategies for producing excess returns if the market is strong-form efficient?
I) graphing past prices searching for patterns
II) developing strategic relationships to gain pertinent inside information
III) studying the latest analyst's reports
IV) analyzing a firm's financial statements

A) I and III only
B) I and IV only
C) I, II, and III only
D) II, III, and IV only
E) I, II, III, and IV

Question 40

For an investor to consistently "beat the market",

A) He would have to do excessive trading
B) He has to do excessive research
C) The market would have to be inefficient
D) The market would have to in a period of excessive volatility
E) The market would have to be relatively stable

Question 41

The Wayward Co. announced last week that their unpopular CEO resigned. In response to this announcement, Wayward's stock price increased from $18 a share to $23 a share and has remained constant at that level. This is an example of a(n):

A) over-reaction and correction.
B) inefficient market.
C) delayed reaction.
D) pre-activity action.
E) efficient market reaction.

Question 42

You are the chief financial officer of GOL Industries. On multiple occasions, you have engaged in insider trading but have never been able to earn any abnormal returns. Which form of market efficiency most likely exists given your situation?

A) Mild-form
B) weak-form
C) historical-form
D) Semi-strong form
E) strong-form

Question 43

Which one of the following is probably your best investment strategy as long as the market is at least semi-strong form efficient?

A) invest based on the advice of a technical analyst
B) invest based on the advice of a fundamental analyst
C) invest only in your employer's firm
D) invest in an index fund
E) invest in a value fund which is actively managed by a professional money manager

Question 44

If the market is __________ -form efficient, the stock price will react rapidly when relevant news that changes the market expectations concerning a company is announced.

A) weak
B) semi-weak
C) semistrong
D) strong
E) asymmetric

Question 45

If the market is efficient, then the cumulative abnormal return should remain close to __________ percent.

A) - 10
B) 0
C) 10
D) 50
E) 100

Question 46

You discover that if you purchase a stock after it has declined for three days in a row you will make a profit. If this is true, the market is not __________ -form efficient.

A) weak
B) semistrong
C) technical
D) strong
E) semiweak

Question 47

The historical tendency of equity mutual funds to have a lower average return than the market may indicate the market is __________ form efficient.

A) weak
B) semistrong
C) not semistrong
D) strong
E) not weak

Question 48

An inside trader is any person who __________ and then trades that company's stock without adhering to the Ontario Securities Commission (OSC) guidelines.

A) knows any one of a firm's directors or officers
B) analyzes a firm's financial reports
C) works for a company
D) has non-public company information which will significantly affect the stock price
E) works for a financial firm which analyzes a particular company

Question 49

If you believe that stock market prices follow a random walk, then:

A) historical price information provides no benefit in predicting future prices.
B) there is no financial benefit from investing in the stock market.
C) having inside information will not lead to excess profits.
D) studying past price movements will lead to excess profits.
E) you also believe the market is strong-form efficient.

Question 50

You examine financial statements of companies and determine that if the ROE of a company the previous year increases, the stock will have an excess return this year. This would indicate that the market is __________ -form efficient.

A) weak
B) semistrong
C) not semistrong
D) strong
E) not weak

Question 51

In an efficient market, daily abnormal returns:

A) are very volatile.
B) tend to relate to news announcements made within the past 10 trading days.
C) relate only to news announcements made during the past 2 trading days.
D) relate only to news announcements made after the close of the previous trading day.
E) exist only if non-public information is used for trading purposes.

Question 52

Discoveries of buying shares of stock at the closing price on a given day and selling them before noon on the following day, you can generate an excess return.

A) This is a violation of weak-form market efficiency
B) This is a violation of semi-weak-form market efficiency
C) This is a violation of semistrong-form market efficiency
D) This is a violation of strong-form market efficiency
E) This does not violate market efficiency.

Question 53

The common stock of Repeat Company has increased in value every spring for the past five years and then decreased back to its original value every fall. If the market is weak-form efficient, then:

A) knowing the past trends of the stock's price will not produce excess returns in today's market.
B) trading on the past pricing trends of the firm will produce excess returns.
C) having this knowledge can yield abnormal returns.
D) the market is inefficient in respect to this information.
E) no excess profits can be earned on this stock.

Question 54

Which one of the following sets of stock prices best illustrates the random walk price theory?

A) 12, 13, 13, 14, 15, 9, 8, 9, 9
B) 11, 7, 10, 10, 8, 13, 14, 6, 13
C) 9, 9, 10, 10, 8, 8, 7, 7, 6
D) 7, 7, 7, 7, 9, 9, 9, 9, 10
E) 10, 10, 11, 11, 11, 11, 12

Question 55

If the market is efficient only in regard to past prices, the market is said to be __________ efficient.

A) mild-form
B) weak-form
C) historical-form
D) semi-strong form
E) strong-form

Question 56

If the market is semi-strong form efficient, then technical analysts __________ earn excess returns and fundamental analysts __________ earn excess returns.

A) can; can
B) can; cannot
C) cannot; can
D) cannot; cannot
E) Answers cannot be determined based on the information provided.

Question 57

The Beta Company had a complete management changeover recently. Your finance professor is currently studying Beta's stock price for the two weeks prior to and the two weeks after the changeover to ascertain how the market reacted to the change in management. Your professor is conducting a(n):

A) management survey.
B) market analysis.
C) event study.
D) auditing review.
E) trend study.

Question 58

An individual who trades based on information he or she has read in the financial press, analysis gathered from financial statements, and analyst's projections is a(n):

A) inside trader.
B) outside trader.
C) informed trader.
D) illegal trader.
E) legal inside trader.

Question 59

You would like to know how the market reacts when a Canadian firm acquires a foreign subsidiary. To determine this you could conduct:

A) financial analysis.
B) field testing.
C) risk analysis.
D) an event study.
E) a market survey.

Question 60

Last week, Janus Plastics announced that they had developed a new plastic container that was stronger and more durable and also easier to recycle. In response to this announcement, Janus' stock price rose from $23 a share to a high of $36 a share and then settled back to $27 a share. This is an example of a(n):

A) over-reaction and correction.
B) post-activity reaction.
C) delayed reaction.
D) pre-activity action.
E) efficient market reaction.

Question 61

Which one of the following is most apt to be considered insider trading?

A) Stu overhears Martha say that she is being promoted to sales manager.
B) Cathy compiles the financial statements and knows that net income for the latest quarter is significantly below analyst's forecasts.
C) Wes is an outside auditor and has found what he believes are significant accounting irregularities in a company's financial reports.
D) Theresa buys stock in ABC after she overhears a conversation between the firm's president and his wife concerning a proposed acquisition.
E) Lester buys shares of stock in his firm through his company retirement plan on a regular monthly basis.

Question 62

Which one of the following best describes the current understanding of market efficiency?

A) short-term stock price movements are easy to predict
B) markets overreact to unanticipated events in a manner which can be used to earn excess returns
C) the market appears to be highly inefficient
D) short-term market movements are difficult, if not impossible, to predict accurately
E) markets tend to react slowly to unanticipated announcements

Question 63

Since the day-of-the-week effect was identified in the early 1980s, the effect has:

A) increased significantly.
B) increased slightly.
C) remained relatively constant.
D) diminished somewhat.
E) disappeared.

Question 64

If the markets are efficient, then asset allocation is __________ and security selection is __________.

A) still important; less important
B) still important; still important
C) still important; extremely critical
D) not important; less important
E) not important; still important

Question 65

Which day of the week has historically had the highest return?

A) Monday
B) Tuesday
C) Wednesday
D) Thursday
E) Friday

Question 66

Martha is a researcher for DL Medicals (DLM). She tells her boyfriend, Dan, about a patent application for a new drug which is about ready to be approved. This drug reverses the aging process. Dan can be charged with insider trading if he:

A) continues to hold the shares he already has in DLM.
B) shares this information with his mother who is not involved in the market.
C) sells his current shares in DLM immediately after the news is announced to the public.
D) provides this information to a friend who will trade the stock and split the profits with Dan.
E) buys shares in DLM immediately after the news is announced and then sells those shares within 7 trading days.

Question 67

Which one of the following relates to the relevant information problem encountered when testing market efficiency?

A) ascertaining how historical prices relate to current stock prices
B) determining whether a market reaction was appropriate or overstated
C) correctly estimating the risk level of a security
D) determining what undocumented information existed on any particular trading day
E) identifying patterns that occur over time in the pricing of a particular security

Question 68

Which one of the following items is most apt to be considered material non-public information? Assume that none of this information is known publicly

A) Peter knows that Paul, a factory worker, is planning on resigning tomorrow.
B) Susie knows that her employer is planning on firing a receptionist on Friday.
C) Katie knows that her firm's sales are continuing their pattern of increasing by 5 percent annually.
D) Nick knows that his fellow engineers have developed an efficient, inexpensive, alternative fuel.
E) As the CFO, Ian knows that his firm will be able to continue the past growth rate in their dividend.

Question 69

The January effect:

A) applies to the entire stock market.
B) is diminishing and does not occur every year.
C) occurs every year but only in small-company stocks.
D) is unaffected by institutional investors.
E) is totally offset by the October effect.

Question 70

If the financial markets are efficient, then:

A) your investment return is highly dependent upon your security selection.
B) holding a diversified, low-cost, passively-managed portfolio is probably your best investment strategy.
C) you should adopt an investment strategy based on market timing.
D) having a professional manager who actively trades your portfolio is most likely your best
E) you should hire a professional money manager, regardless of the cost to do so.

Question 71

The January effect has often been attributed to:

A) New Year's resolutions.
B) the feeling associated with a new calendar year.
C) tax loss selling.
D) earnings announcements.
E) corporate tax years.

Question 72

Studies indicate that the Vanguard 500 Index fund tends to:

A) under-perform most professional money managers.
B) produce a return equal to that of professional managers.
C) outperform the average professional money manager, but only over the short-term.
D) outperform most professional money managers especially over longer-periods of time.
E) support the argument that the stock market is inefficient.

Question 73

Moving money in and out of the market based on your market expectations is called __________ and tends to lead to returns that are __________ than the overall market return, assuming that the market is efficient.

A) asset allocation; higher
B) asset allocation; lower
C) market timing; higher
D) market timing; lower
E) security selection; higher

Question 74

Which day of the week should you expect, on average, to earn the lowest daily rate of return?

A) Monday
B) Tuesday
C) Wednesday
D) Thursday
E) Friday

Question 75

In an efficient market, market timing tends to lead to:

A) underperforming the market.
B) excess profits.
C) superior returns but only if you are a professional money manager.
D) a rate of return statistically equivalent to that of the overall market.
E) abnormal returns that vary from superior to inferior over time.

Question 76

Jennifer is the CFO of a major chemical firm. She has 35,000 shares of the firm's stock and wishes to sell 50 percent of those shares to diversify her holdings. She follows both her firm's and the OSC's guidelines and proceeds with the sale of 17,500 shares. Within a week of her sale, the price of her firm's stock declines by 40 percent. Jennifer's stock trade is:

A) subject only to fines and penalties under the insider trading laws.
B) illegal and could subject her to jail time.
C) legal.
D) subject to reversal by the OSC.
E) subject to a forfeiture of her profits to the OSC.

Question 77

Which one of the following is false regarding the January effect?

A) It indicates the stock returns appear to be higher in January than in other months of the year
B) It may be related to the size effect
C) It may refute the strong form of the efficiency market hypothesis
D) It may contradict the semi-strong form from market efficiency
E) None of the above

Question 78

Martha Stewart in a famous US court case served jail time because she was found guilty of:

A) earning excess profits.
B) insider trading.
C) securities fraud.
D) obstructing justice.
E) being a tipper.

Question 79

Which one of the following statements is correct?

A) Company insiders are not permitted to trade their employer's securities.
B) Only tippers can be accused of illegal insider trading.
C) Tippees are permitted to trade securities based on information they know is private.
D) Trading on private information which you just happen to overhear is legal.
E) Any trading based on information known to be private is illegal.

Question 80

Which one of the following time periods correctly describes an identified calendar anomaly?

A) week including April 15^th
B) middle two weeks of each month
C) last day of each month and the first three days of the following month
D) first 10 days of October
E) Friday of each week