Question 1

Following the theory of the "efficient market hypothesis" all of the following are true EXCEPT
A) securities are typically in equilibrium, meaning they are fairly priced and their expected returns equal their required returns.
B) since stocks are fully and fairly price, it follows that investors should not waste their time trying to find and capitalize on miss- priced (under- or over- valued) securities.
C) insider trading scandals have proven that stocks are not fully and fairly priced; as a result, it would be worthwhile for investors should spend time searching for mispriced (over- or under- valued) stocks.
D) at any point in time, security prices fully reflect all public information available about the firm and its securities, and these prices react swiftly to new information.

Accepted Answer

The efficient market hypothesis assumes that securities are typically in equilibrium and fully and fairly priced, meaning that their expected returns equal their required returns. It also assumes that security prices fully reflect all public information available about the firm and its securities, and these prices react swiftly to new information. However, the efficient market hypothesis does not suggest that insider trading scandals prove that stocks are not fully and fairly priced. In fact, the efficient market hypothesis suggests that insider information should be reflected in security prices, and any abnormal returns from using insider information would be quickly eliminated by market forces. Therefore, it does not suggest that investors should spend time searching for mispriced securities if they believe in the efficient market hypothesis.

Question 2

In an efficient market, stock prices adjust quickly to new public information.

Accepted Answer

In an efficient market, all available information is reflected in the stock price, and thus any new public information will be quickly incorporated into the stock price. This implies that it is difficult for an individual to consistently outperform the market by investing based on publicly available information alone.

Question 3

It has been found that the share values of firms whose shares are traded publicly in an efficient marketplace is
A) generally positively affected by diversification, because of the reduction in risk.
B) generally not affected by diversification, unless greater returns are expected.
C) generally negatively affected by diversification, because of the increase in risk.
D) generally negatively affected by diversification, because of the increase in the required rate of return.

Accepted Answer

The efficient market hypothesis states that securities prices fully reflect all available information, so the price of a firm's shares should not be significantly affected by an individual investor's decision to diversify their portfolio. Therefore, diversification generally does not have a significant impact on the share values of publicly traded firms. However, it may still be a useful tool for investors to manage their portfolio risk.

Question 4

Which two of the following are implications of the efficient market hypothesis (EMH) for companies?
A) Large quantities of new shares can be sold without moving the price.
B) Signals from price movements should be taken seriously.
C) The timing of security issues must be fine- tuned.

Accepted Answer

The answer of Which two of the following are implications...

Question 5

Which three of the following accurately describe insider trading?
A) It is likely to be profitable.
B) It is trading on privileged information.
C) It is any trading in shares of the company by its employees.
D) It is illegal.

Accepted Answer

Insider trading is often profitable because it involves trading based on non-public, privileged information. It is illegal when it involves buying or selling securities based on material, non-public information. Not all trading by employees is considered insider trading; it is only illegal when it involves misuse of confidential information.

Question 6

Which of the following best describes 'strong- form efficiency'?
A) All relevant information, including that which is privately held, is reflected in the share price.
B) Share prices fully reflect information available only to certain shareholders.
C) Share prices fully reflect all the relevant, publicly available information.
D) Share prices fully reflect all information contained in past price movements.

Accepted Answer

Strong-form efficiency states that all relevant information, including that which is privately held, is reflected in the share price. This means that no investor, regardless of their level of access to information, can consistently generate abnormal returns by using private information.

Question 7

Which three of the following are implications of the efficient market hypothesis (EMH) for companies?
A) Large quantities of new shares can be sold without moving the price.
B) Signals from price movements should be taken seriously.
C) The timing of security issues must be fine- tuned.
D) Focus on substance, not on short- term appearances

Accepted Answer

The answer of Which three of the following are implications...

Question 8

Which three of the following are benefits of an efficient market?
A) It encourages share buying.
B) It helps to allocate resources.
C) Share prices are based on partial information.
D) It gives correct signals to company managers.

Accepted Answer

The answer of Which three of the following are benefits...

Question 9

Economically rational buyers and sellers use their assessment of an asset's risk and return to determine its value. Relative to this concept, which of the following is true?
A) To a seller the asset's value represents the maximum sale price.
B) To a buyer the asset's value represents the minimum price that he or she would pay to acquire it.
C) The interaction of buyers and sellers can result in a value that differs from the stock's true value.
D) To a buyer the asset's value represents the maximum price that he or she would pay to acquire it.

Accepted Answer

The answer of Economically rational buyers and sellers use their...

Question 10

Which of the following best describes 'strong- form efficiency'?
A) All relevant information, including that which is privately held, is reflected in the share price.
B) Share prices fully reflect all the relevant, publicly available information.
C) Share prices fully reflect information available only to certain shareholders.
D) Share prices fully reflect all information contained in past price movements.

Accepted Answer

Strong-form efficiency is the highest level of market efficiency. It states that all relevant information, including that which is privately held, is reflected in the current share price. This means that even insider information cannot be used to consistently outperform the market.

Question 11

According to the efficient market theory,
A) prices of actively traded stocks can only be under- valued in an efficient market.
B) prices of actively traded stocks can be under- or over- valued in an efficient market, and bear searching out.
C) prices of actively traded stocks do not differ from their true values in an efficient market.
D) prices of actively traded stocks can only be over- valued in an efficient market.

Accepted Answer

The efficient market theory states that in an efficient market, prices of actively traded stocks reflect their true values and do not differ from them. Therefore, there is no chance for stocks to be under or overvalued in an efficient market.

Question 12

Which two options best describe how new information is incorporated into share prices in an efficient market?
A) Rapidly
B) Rationally
C) Through official channels
D) Gradually

Accepted Answer

In an efficient market, new information is incorporated into share prices rapidly and rationally. This means that as soon as information becomes available, it is taken into account by investors and reflected in the share price. The market is able to process and interpret information quickly and make adjustments accordingly, leading to efficient pricing. There is no requirement for the information to come through official channels, and the speed at which the market adjusts to new information can vary depending on the nature and significance of the information. However, the overall trend is towards rapid and rational adjustment of share prices in response to new information.

Question 13

Which of the following best describes the term 'weak- form efficiency'?
A) Share prices fully reflect all information contained in past price movements.
B) Share prices fully reflect all the relevant, publicly available information.
C) All relevant information, including that which is privately held, is reflected in the share price.
D) Share prices fully reflect information available only to certain shareholders.

Accepted Answer

Weak-form efficiency, part of the Efficient Market Hypothesis, suggests that all past trading information is already reflected in stock prices, meaning that analyzing past price movements or volume data will not give an investor any advantage in predicting future price movements.

Question 14

Efficient market hypothesis is the theory describing the behavior of an assumed "perfect" market in which securities are typically in equilibrium, security prices fully reflect all public information available and react swiftly to new information, and, because stocks are fairly priced, investors need not waste time looking for mispriced securities.

Accepted Answer

The efficient market hypothesis states that security prices reflect all public information available at a given time and reacts quickly to new information. As a result, investors cannot consistently achieve returns in excess of average market returns on a risk-adjusted basis.

Question 15

If the expected return is less than the required return, investors will sell the asset, because it is not expected to earn a return commensurate with its risk.

Accepted Answer

Investors typically seek investments that at least meet or exceed the required return for the level of risk associated with the asset. If the expected return is less than the required return, the asset is considered to not compensate adequately for its risk, leading investors to sell it.

Question 16

In an inefficient market, stock prices adjust quickly to new public information.

Accepted Answer

In an inefficient market, stock prices do not adjust quickly or accurately to new public information.

Question 17

What is X in the formula X = Share price ? Earnings per share
A) Price- earning ratio
B) Dividend cover
C) Dividend yield
D) Share dividend

Accepted Answer

X is the price-earning ratio, which is calculated by dividing the share price by the earnings per share. It is a measure of how much investors are willing to pay for each dollar of earnings generated by a company.

Question 18

If expected return is less than required return on an asset, rational investors will
A) buy the asset, since price is expected to increase.
B) sell the asset, which will drive the price up and cause the expected return to reach the level of the required return.
C) sell the asset, which will drive the price down and cause the expected return to reach the level of the required return.
D) buy the asset, which will drive the price up and cause expected return to reach the level of the required return.

Accepted Answer

If the expected return is less than the required return, rational investors will sell the asset, which will decrease the price of the asset. As the price decreases, the expected return will increase until it reaches the required return. Therefore, the best choice is to sell the asset, which is represented by choice C.

Question 19

Which of the following is an implication of the efficient market hypothesis (EMH) for investors?
A) For the vast majority of people public information cannot be used to earn abnormal returns.
B) Investors need to press for a greater volume of timely information.
C) Effective EMH will always ensure higher levels of dividend for alert investors.
D) The perception of a fair game market could be improved by more constraints and deterrents placed on insider dealers.

Accepted Answer

The answer of Which of the following is an implication...

Question 20

If the expected return is above the required return on an asset, rational investors will
A) buy the asset, which will drive the price up and cause expected return to reach the level of the required return.
B) sell the asset, which will drive the price up and cause the expected return to reach the level of the required return.
C) sell the asset, which will drive the price down and cause the expected return to reach the level of the required return.
D) sell the asset, since price is expected to decrease.

Accepted Answer

Rational investors will buy the asset with the expectation of earning higher returns than required. This increased demand for the asset will drive the price up, leading to a decrease in expected returns, eventually bringing it down to the required return level.

Quiz 14: Value-Based Management

Following the theory of the "efficient market hypothesis" all of the following are true EXCEPT

In an efficient market, stock prices adjust quickly to new public information.

It has been found that the share values of firms whose shares are traded publicly in an efficient marketplace is

Which two of the following are implications of the efficient market hypothesis (EMH) for companies?

Which three of the following accurately describe insider trading?

Which of the following best describes 'strong- form efficiency'?

Which three of the following are implications of the efficient market hypothesis (EMH) for companies?

Which three of the following are benefits of an efficient market?

Economically rational buyers and sellers use their assessment of an asset's risk and return to determine its value. Relative to this concept, which of the following is true?

Which of the following best describes 'strong- form efficiency'?

According to the efficient market theory,

Which two options best describe how new information is incorporated into share prices in an efficient market?

Which of the following best describes the term 'weak- form efficiency'?

If the expected return is less than the required return, investors will sell the asset, because it is not expected to earn a return commensurate with its risk.

In an inefficient market, stock prices adjust quickly to new public information.

What is X in the formula X = Share price ? Earnings per share

If expected return is less than required return on an asset, rational investors will

Which of the following is an implication of the efficient market hypothesis (EMH) for investors?

If the expected return is above the required return on an asset, rational investors will