Question 1

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

Accepted Answer

Stock market information is widely available, meaning that many investors have access to the same data and can make similar investment decisions. This makes it difficult for individual investors to consistently outperform the market in the long run through stock picking.

Question 2

Which statement is consistent with the efficient markets hypothesis?

Accepted Answer

The efficient markets hypothesis suggests that it is difficult or impossible for investors to consistently outperform the market, leading to the majority of stock mutual funds underperforming stock composite indexes. Option B is too extreme and not necessarily true, while option C is a false statement. Option D goes against the efficient markets hypothesis, which suggests that market prices always fully reflect all available information, making technical analysis ineffective in consistently beating the market.

Question 3

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

If a company announces financial difficulties, investors will be less likely to want to buy shares of its stock, which would decrease demand and shift the demand curve to the left. This would result in a lower equilibrium price for the stock.

Question 4

The field of technical analysis:

Accepted Answer

While technical analysis may be useful in identifying short-term trends and patterns in the market, it has not been able to consistently beat the market in the long run. Many studies have found that relying solely on technical analysis is not a reliable strategy for achieving long-term investment success.

Question 5

In the stock market, profiting from inside information:

Accepted Answer

The answer of In the stock market, profiting from inside...

Question 6

The efficient markets hypothesis implies that an investor:

Accepted Answer

The efficient markets hypothesis suggests that all publicly available information is already reflected in the current market prices. Therefore, any attempts to outperform the market systematically will not succeed.

Question 7

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 every transaction requires someone to buy and someone to sell. Statement II is generally considered true, as the stock price tends to reflect all public information available. However, statement III is false because the stock market already prices in anticipated events, and it is difficult to predict the impact of a single product release on the stock price. Buying a stock solely based on a single anticipated event is considered speculation and not a sound investment strategy.

Question 8

An efficient stock market means that:

Accepted Answer

An efficient stock market means that all public information is already reflected in stock prices, making it difficult for investors to consistently outperform the market by using that information. This also means that traders with inside information cannot outperform market averages, as the information would already be reflected in the stock prices. The speed at which new information is reflected in stock prices can vary, but in general an efficient market means that it is reflected relatively quickly.

Question 9

Technical analysis:

Accepted Answer

Technical analysis looks for patterns in stock prices, such as trends, support and resistance levels, and chart patterns. It is primarily focused on predicting price movements rather than beating market averages. While it may be useful for predicting when stocks will stay above certain price thresholds, it is not a guaranteed method for doing so.

Question 10

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

The efficiency of financial markets implies that publicly available information, such as investment advice, is quickly reflected in asset prices, making it difficult to profit from such advice. Therefore, buying stock in a certain company or sector of the economy based solely on investment advice may not result in a profitable investment.

Question 11

Someone who is using information outside the efficient markets hypothesis:

Accepted Answer

The answer of Someone who is using information outside the...

Question 12

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 answer of Based on the efficient markets hypothesis, which...

Question 13

When Chernobyl melted down in the Soviet Union, the:

Accepted Answer

The answer of When Chernobyl melted down in the Soviet...

Question 14

The efficient markets hypothesis states that:

Accepted Answer

The efficient markets hypothesis states that the price of assets already reflects all publicly available information. This means that the market is efficient and there are no opportunities for investors to earn excess returns by simply using public information.

Question 15

According to the efficient markets hypothesis,:

Accepted Answer

According to the efficient markets hypothesis, no investor can consistently outperform the stock market indexes. This theory suggests that all available information is already incorporated into the current market price of a security, making it impossible to consistently achieve abnormal returns. Therefore, the hypothesis implies that it is difficult to consistently beat the market without inside information or luck.

Question 16

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

When a highly successful supply firm announces a merger with ABC Company, it is perceived as positive news for the company's future growth and profitability. This leads to increased confidence and optimism among investors, which leads to a higher demand for the stock. As a result, the demand for ABC Company's stock would shift to the right, causing the stock price to increase.

Question 17

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 18

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

If there is a rumor that ABC Company is set to merge with another very profitable company, it is likely that investor confidence in the company would increase, leading to an increase in demand for the stock. This would cause the demand for the stock to shift to the right.

Question 19

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

Statement I is true because the stock market can be volatile and a long-term investment strategy can help investors weather short-term market fluctuations. Statement II is true because buying stocks after a dip can lead to a lower cost basis and potentially higher returns if the market rebounds. Statement III is true because investing in stocks inherently involves risk. Therefore, the best answer is C: I and III only.

Question 20

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

Accepted Answer

The efficient markets hypothesis states that stock prices reflect all publicly available information, including past and current market data, economic reports, and company financial data. Therefore, it suggests that the movement in a stock price reflects the incorporation of all available information at any given time. However, it does not predict the direction of future stock prices with certainty as new information can always emerge.

Quiz 10: Stock Markets and Personal Finance