Question 1

The various lessons of market efficiency are: 
I. Markets have no memory
II. Trust market prices
III. Read the entrails
IV. There are no financial illusions 
V. The do-it yourself alternative 
VI. Seen one stock, seen them all
A) I and II only
B) I, II, III and IV only
C) I, II, III, IV and V only
D) I, II, III, IV, V and VI

Accepted Answer

The answer of The various lessons of market efficiency are:...

Question 2

In order to test the efficient-market hypothesis in the semi-strong form, researchers have used (the):
A) Estimation of the serial correlation (autocorrelation) for securities and markets
B) Measurement of the performance of mutual fund managers over the years
C) Measurement of how rapidly security prices adjust to different news items
D) All of the above

Accepted Answer

The answer of In order to test the efficient-market hypothesis...

Question 3

The following are anomalies associated with market efficiency except: 
I. the small-firm effect
II. the earnings announcement puzzle
III. the new-issue puzzle
IV. trading rules based on patterns
A) I only
B) I and II only
C) I, II, and III only
D) IV only

Accepted Answer

The small-firm effect, earnings announcement puzzle, and new-issue puzzle are all anomalies associated with market efficiency. However, trading rules based on patterns are not an anomaly but rather fall under the category of technical analysis, which assumes that historical price and volume data contains useful information for predicting future stock prices.

Question 4

The semi-strong form of efficiency deals with the following type of information:
A) insider information
B) publicly available information
C) privileged information
D) all of the above

Accepted Answer

The semi-strong form of efficiency deals with publicly available information, meaning that all available information from public sources is already reflected in the current price of the security. Insider or privileged information would fall under the strong form of efficiency, where even non-public information is reflected in the current price.

Question 5

Adjusted stock return is calculated as:
A) actual stock return-expected stock return
B) return on stock-return on market
C) return on stock for the current period-return on stock for the previous period
D) none of the above

Accepted Answer

The answer of Adjusted stock return is calculated as:
A) actual...

Question 6

In order to test the efficient-market hypothesis in the weak form, researchers have used the following methods except:
A) Estimation of the serial correlation (autocorrelation) for securities and markets
B) Measurement of the profitability of trading rules used by technical analysts
C) Measurement of how rapidly security prices adjust to different news items
D) All of the above are methods used for testing weak-form market efficiency

Accepted Answer

The answer of In order to test the efficient-market hypothesis...

Question 7

The semi-strong form of has been tested by measuring how rapidly security prices react various news items like:
I. earnings announcements 
II. dividend announcements 
III. news of takeovers
IV. macroeconomic information
A) I and II only
B) I, II and III only
C) IV only
D) I, II, III and IV

Accepted Answer

The semi-strong form of market efficiency states that all publicly available information is incorporated into stock prices. The testing of this form has been done by measuring how quickly security prices react to various news items like earnings and dividend announcements, news of takeovers, and macroeconomic information. Therefore, option D is the correct choice as it includes all four types of news items.

Question 8

Strong-form efficiency implies that mutual fund managers:
A) Buy the index that maximizes diversification and minimizes cost of managing portfolios
B) Actively seek under performing stocks and buy them
C) Fund mangers can consistently earn superior returns year after year
D) None of the above

Accepted Answer

The answer of Strong-form efficiency implies that mutual fund managers:
A)...

Question 9

Abnormal stock return is calculated as:
A) actual stock return-expected stock return
B) return on stock-return on market
C) return on stock for the current period-return on stock for the previous period
D) none of the above

Accepted Answer

Abnormal stock return is calculated as the difference between the actual stock return and the expected stock return. Expected stock return is the return that is predicted by a model, such as the Capital Asset Pricing Model (CAPM), based on the risk of the stock and the overall risk of the market. Therefore, option A is the correct choice. Option B is the calculation for the beta of a stock, and option C is the calculation for the stock's return over time.

Question 10

One important implication of the efficient markets hypothesis is that:
A) investors should hold a diversified portfolio and avoid active trading.
B) investors can benefit by engaging in day trading.
C) investors should trade actively help to ensure the highest overall gain in their portfolios.
D) all of the above.

Accepted Answer

The efficient markets hypothesis suggests that all available information is already reflected in stock prices, making it difficult for investors to consistently outperform the market through active trading. Therefore, holding a diversified portfolio is a recommended strategy to reduce risk while still achieving returns similar to the overall market. Day trading or actively trading is not advised as it may lead to significant transaction costs without adding significant value to the overall portfolio.

Question 11

In order to test the strong form of market efficiency, researchers have: 
I. examined the recommendations of professional security analysts
II. performance of mutual funds 
III. performance of pension funds
A) I only
B) I and II only
C) I, II, and III only
D) II and III only

Accepted Answer

The answer of In order to test the strong form...

Question 12

If the abnormal return for a stock during the first week is +5% and during the second week is +3%, what is the abnormal return for the two-week period?
A) 5%
B) 3%
C) 8.15%
D) None of the above

Accepted Answer

To calculate the abnormal return for a two-week period, we simply add the abnormal returns for each week. Therefore, the abnormal return for the two-week period is (0.05 + 0.03) = 0.08 or 8%. However, we need to convert this decimal to a percentage to get the answer in percentage terms. Therefore, the abnormal return for the two-week period is 8% or 8.15% (rounded to two decimal places). The correct answer is C.

Question 13

The annual expected dividend on the S&P index was about 154.6. If the dividend is expected to grow at a steady rate of 8% a year and the required annual rate of return is 10%, what is the value of the index?
A) 1193
B) 1700
C) 7730
D) None of the above

Accepted Answer

Using the dividend discount model, we can calculate the value of the index as follows:
Value of Index = Annual Dividend / (Required Rate of Return - Dividend Growth Rate)
Value of Index = 154.6 / (0.10 - 0.08) = 7730
Therefore, the value of the index is 7730. Option C is the correct answer.

Question 14

The "event study" methodology is used in the test of:
A) weak form efficiency
B) semi-strong form efficiency
C) strong form efficiency
D) none of the above

Accepted Answer

The "event study" methodology is used to test semi-strong form efficiency. This methodology examines the impact of an unexpected event on a firm's stock price to determine if the market has fully and immediately adjusted to the new information. If the market is semi-strong form efficient, the stock price should immediately reflect all publicly available information, including unexpected events.

Question 15

Analysis of past monthly movements in IBM's stock price produces the following estimates: α = 2. 5% and β = 1. 6. If the market index subsequently rises by 12% in one month and IBM's stock price increases by 20%, what is the abnormal change in IBM's stock price?
A) +1.7%
B) +8%
C) -1.7%
D) None of the above

Accepted Answer

The answer of Analysis of past monthly movements in IBM's...

Question 16

Analysis of past monthly movements in Wal-Mart's stock price has produced the following estimates: α = -0.45% and β = 0. 5. If the market index subsequently rises by 5% one month and Wal-Mart's stock price rises by 3%, what is the abnormal change in Wal- Mart's stock price?
A) -0.95%
B) +0.95%
C) +0.05%
D) None of the above

Accepted Answer

The abnormal change in Wal-Mart's stock price can be calculated as:
Abnormal change = Actual change - Expected change
Expected change = α + β × (market index change)
Expected change = -0.45% + 0.5 × 5% = 1.55%
Actual change = 3%
Abnormal change = 3% - 1.55% = 1.45%
Therefore, the abnormal change in Wal-Mart's stock price is +1.45%, which is closest to option B (+0.95%).

Question 17

If the markets are efficient, which of the following investors should have above normal return on assets over time?
A) Those who choose their stocks by throwing darts at a list of stocks found in the financial pages of a newspaper.
B) Analysts who spend considerable time evaluating the best stocks to buy.
C) Mutual fund managers who manage other people's money for a living.
D) None of the above

Accepted Answer

If the markets are efficient, it means that stock prices reflect all available and relevant information. In such a scenario, no investor should be able to consistently outperform the market over time, regardless of their investment strategy or level of expertise. Therefore, none of the options listed should have an above-normal return on assets over time.

Question 18

Studies on behavioral finance have been developed using:
A) market evidence
B) economic evidence
C) psychological evidence
D) none of the above

Accepted Answer

Behavioral finance studies the influence of human psychology on the financial decisions and behavior of investors. Hence, studies on behavioral finance have been developed using psychological evidence.

Question 19

A lawyer works for a firm that advises corporate firms planning to sue other corporations for antitrust damages. He finds that he can "beat the market" by short selling the stock of the firm that will be sued. This finding is in violation of the:
A) Weak form market efficiency
B) Semi-strong form market efficiency
C) Strong form market efficiency
D) None of the above

Accepted Answer

The answer of A lawyer works for a firm that...

Question 20

Which of the following observations would provide evidence against the strong form of efficient market theory?
I. Mutual fund managers do not on average make superior returns
II. In any year approximately 50% of all pension funds outperform the market
III. Managers who trade in their own firm's stocks make superior returns
A) I only
B) II only
C) III only
D) I and II only

Accepted Answer

The strong form of efficient market theory suggests that all public and private information is already incorporated into stock prices, so no one, including company insiders, should be able to consistently earn superior returns. Observation III contradicts this, as it suggests that managers who trade in their own firm's stocks can earn superior returns, which would not be possible in a strong form efficient market. Observations I and II are consistent with efficient market theory, as they suggest that mutual fund managers and pension funds are not overall able to outperform the market on a consistent basis.

Quiz 11: Efficient Markets and Behavioral Finance

The various lessons of market efficiency are: I. Markets have no memory II. Trust market prices III. Read the entrails IV. There are no financial illusions V. The do-it yourself alternative VI. Seen one stock, seen them all

In order to test the efficient-market hypothesis in the semi-strong form, researchers have used (the) :

The following are anomalies associated with market efficiency except: I. the small-firm effect II. the earnings announcement puzzle III. the new-issue puzzle IV. trading rules based on patterns

The semi-strong form of efficiency deals with the following type of information:

Adjusted stock return is calculated as:

In order to test the efficient-market hypothesis in the weak form, researchers have used the following methods except:

The semi-strong form of has been tested by measuring how rapidly security prices react various news items like: I. earnings announcements II. dividend announcements III. news of takeovers IV. macroeconomic information

Strong-form efficiency implies that mutual fund managers:

Abnormal stock return is calculated as:

One important implication of the efficient markets hypothesis is that:

In order to test the strong form of market efficiency, researchers have: I. examined the recommendations of professional security analysts II. performance of mutual funds III. performance of pension funds

If the abnormal return for a stock during the first week is +5% and during the second week is +3%, what is the abnormal return for the two-week period?

The annual expected dividend on the S&P index was about 154.6. If the dividend is expected to grow at a steady rate of 8% a year and the required annual rate of return is 10%, what is the value of the index?

The "event study" methodology is used in the test of:

Analysis of past monthly movements in IBM's stock price produces the following estimates: α = 2. 5% and β = 1. 6. If the market index subsequently rises by 12% in one month and IBM's stock price increases by 20%, what is the abnormal change in IBM's stock price?

Analysis of past monthly movements in Wal-Mart's stock price has produced the following estimates: α = -0.45% and β = 0. 5. If the market index subsequently rises by 5% one month and Wal-Mart's stock price rises by 3%, what is the abnormal change in Wal- Mart's stock price?

If the markets are efficient, which of the following investors should have above normal return on assets over time?

Studies on behavioral finance have been developed using:

A lawyer works for a firm that advises corporate firms planning to sue other corporations for antitrust damages. He finds that he can "beat the market" by short selling the stock of the firm that will be sued. This finding is in violation of the: