Question 1

Which of the following describes a strong- form efficient market?

Accepted Answer

A strong-form efficient market implies that share prices reflect all available information, including both public and private information. This is the highest level of efficiency in the market. Choices B and C only refer to partial information efficiency levels. Choice D is incorrect as strong-form efficiency is a valid concept in finance.

Question 2

Market efficiency refers to how quickly securities prices may react to what?

Accepted Answer

Market efficiency refers to the speed and accuracy with which securities prices reflect all available information, including new dividend, cash flow, and earnings information. Therefore, all the above options are correct.

Question 3

On 1 July 2006 Maxicorp Holdings Ltd announced an increase in EPS for 20% for the financial year 2005/2006.This increase was already predicted by market analysts.What will be the likely impact upon Maxicorp's share price immediately after this announcement?

Accepted Answer

Since the increase in EPS was already predicted by market analysts, it is likely that the information was already factored into the share price, leading to no significant immediate change after the announcement.

Question 4

According to Aitken,Brown,Frino and Walter (1995),how long should it take for the share price of large stocks to fully impound new earnings information?

Accepted Answer

According to Aitken, Brown, Frino, and Walter (1995), it should take about 30 minutes for the share price of large stocks to fully impound new earnings information.

Question 5

Which of the following describes a semi- strong form efficient market?

Accepted Answer

Semi-strong form efficient market means that share prices reflect all publicly available information. It is a step up from the weak form efficient market which only takes into account past price information. The strong form efficient market hypothesis states that share prices reflect all information, including insider information, but this has been debated and is not widely accepted as true.

Question 6

When price movements follow an unpredictable pattern it is known as what?

Accepted Answer

A random walk describes the phenomenon of unpredictable price movements. A head and shoulders chart and a straddle are specific trading strategies and do not reflect the general nature of price movements.

Question 7

A mechanical trading rule that generates a buy signal if the price of the security moves by more than a pre- established percentage from its previous lowest price and a sell signal if it again moves by the same percentage from its previous highest price is known as what?

Accepted Answer

This is known as a filter rule, as it uses a percentage filter to generate buy and sell signals. Technical and fundamental rules are broader categories that can encompass a variety of trading strategies, while a block rule refers to a specific order size or trade execution strategy.

Question 8

Assuming semi- strong form efficiency,which of the following statements is incorrect?

Accepted Answer

Semi-strong form efficiency assumes that all publicly available information is already reflected in the stock price. Therefore, managers who have access to non-public information cannot consistently earn abnormal returns, as the market will quickly adjust to reflect this information once it becomes public. Statements A, B, and C are correct under semi-strong form efficiency as they all relate to the inability to consistently earn abnormal returns based on publicly available information.

Question 9

In a strong- form efficient market,which of the following may still allow a trader to generate abnormal returns?

Accepted Answer

In a strong-form efficient market, all public and private information is already reflected in the stock prices. As a result, no trader can generate abnormal returns based on any publicly available or insider information. The only way to generate profits in a strong-form efficient market is through random luck or illegal activities like insider trading. Therefore, none of the options provided would allow a trader to generate abnormal returns in a strong-form efficient market.

Question 10

Ball (1978)attempted to determine whether can be used to generate profits.

Accepted Answer

Ball (1978) attempted to determine whether trading rules can be used to generate profits.

Question 11

Repeated patterns or seasonal behaviours in stock prices are known as what?

Accepted Answer

The repeated patterns or seasonal behaviors in stock prices are commonly known as anomalies. These anomalies can be both regular and irregular, so both options A and B are partially correct. Therefore, the best choice is E, which includes both A and C.

Question 12

The study by Aitken,Brown,Frino and Walter (1995)into speed of adjustment following earnings announcements found that which type of stocks had the longest period of adjustment?

Accepted Answer

The study found that small stocks had the longest period of adjustment, which suggests that these stocks are less liquid and take longer to incorporate new information into their prices.

Question 13

Which of the following statements is correct?

Accepted Answer

Market efficiency theory, particularly the Efficient Market Hypothesis (EMH), allows for the presence of some irrational investors as long as their actions are random and thus cancel each other out, allowing prices to reflect all available information. This means that even in a market considered efficient, not every participant must be rational, as the market can still function efficiently if irrational behaviors are random and diverse.

Question 14

The theory of market efficiency assumes that:

Accepted Answer

The theory of market efficiency assumes that investors are always rational. This means that investors make decisions based on all available information, and that market prices reflect all relevant information at any given time. It is important to note, however, that the theory of market efficiency has been the subject of much debate and criticism, and that many economists and investors do not believe that markets are always perfectly efficient.

Question 15

When the market adjusts to new information,investors will buy shares where:

Accepted Answer

When the market adjusts to new information, investors will buy shares where the expected return is more than the required return. This is because investors are looking for a higher return on their investment, and if the expected return is lower than the required return, it would not be a profitable investment. Option A is not necessarily true as there may still be uncertainty about future returns even when the market adjusts to new information. Option C is not profitable for investors as the expected return is lower than the required return. Therefore, the best choice is B.

Question 16

Ball (1978)tested a trading strategy known as _____________

Accepted Answer

Ball (1978) focused on testing a trading strategy known as filter rules, which involve using technical indicators to identify when to enter or exit a trade. The other options (B) Gann analysis, (C) Margin analysis, and (D) Retracement rules are not related to the specific strategy tested in the study.

Question 17

Which of the following is not a previously identified market anomaly?

Accepted Answer

The answer of Which of the following is not a...

Question 18

According to the theory of market efficiency,

Accepted Answer

The theory of market efficiency argues that in an efficient market, prices of actively traded shares will reflect all available information, making them equal to their true values. In other words, the prices will be neither overvalued nor undervalued, but will accurately reflect the intrinsic value of the company.

Question 19

Aitken and Frino (1996)examined the price reactions to 'block trades' on the ASX.They found it takes on average _____________ trades for the market to impound the information contained in such transactions.

Accepted Answer

Aitken and Frino (1996) found that it takes on average 3 trades for the market to impound the information contained in block trades on the ASX.

Question 20

On 6 January 2009 Fine Textiles (FTX)Ltd announces its interim dividend payment.The interim dividend paid will be 20 per cent lower than last year.The market had expected a decline of 30 per cent relative to last year.What will be the likely impact of this news on Fine Textile's share price?

Accepted Answer

Since the actual dividend decrease is less severe than the market expected (20% vs. the anticipated 30%), investors might view this as positive news, potentially leading to an increase in Fine Textile's share price.

Quiz 10: The Pricing Efficiency of Capital Markets