Question 1

The principle that investors slowly adjust their beliefs to new information is referred to as
A)conservatism.
B)stockholder disinterest.
C)reversal.
D)insider trading.
E)continuation.

Accepted Answer

The principle that investors slowly adjust their beliefs to new information is referred to as conservatism. This means that investors are slow to update their beliefs or opinions based on new information or evidence, and may initially underestimate the impact of new information on the value or prospects of a particular company or investment.

Question 2

Which one of these would generally be considered the most rational action for a tax-paying investor?
A)Trading frequently
B)Selling their losing and holding their winning securities
C)Throwing darts to select their portfolio holdings
D)Holding a less than fully diversified portfolio of securities
E)Ignoring taxes when making investment decisions

Accepted Answer

Selling losing securities can provide tax benefits through capital loss deductions, while holding onto winning securities can defer capital gains taxes. This strategy is commonly known as tax-loss harvesting and is considered a rational action for tax-paying investors. Trading frequently (A) can increase transaction costs and trigger short-term capital gains taxes. Throwing darts to select portfolio holdings (C) is not a rational investment strategy. Holding a less than fully diversified portfolio (D) can increase risk and is not considered a rational action. Ignoring taxes (E) can result in missed opportunities for tax savings and is not considered a rational approach for tax-paying investors.

Question 3

Serial correlation
A)indicates a reversal in the direction of returns when the coefficient is positive.
B)involves the relationship of one stock's returns over various time periods.
C)indicates a tendency toward reversal when its coefficient is positive.
D)measures the cumulative difference between the returns on two similar securities.
E)measures the current relationship between the returns on two securities.

Accepted Answer

Serial correlation refers to the relationship between a stock's returns over different time periods. It is also known as autocorrelation. It measures how closely the past values of a time series are related to its current or future values. If there is a positive serial correlation, it means that the direction of returns tends to be reversed over time. This can have implications for investment strategies and risk management.

Question 4

If markets are strong-form efficient,then event studies should show that new information affects a related stock's price
A)for a single day.
B)only when the new information relates to a dividend payment.
C)over a range of days with the overreactions exactly offsetting the underreactions.
D)only if the information is company specific.
E)by a very minimal amount,if any.

Accepted Answer

If markets are strong-form efficient, then all available information, including insider information, is already reflected in stock prices. As a result, new information should only affect the stock price for a single day before being fully incorporated into the market's price. Therefore, choice A is the best option.

Question 5

Which one of these serial correlation values is the strongest indicator of price continuation?
A)-0.5
B)-0.25
C)0
D)+0.25
E)+0.5

Accepted Answer

A positive serial correlation value is an indicator that prices are more likely to continue in the same direction, therefore a larger positive value (+0.5) is a stronger indicator than a smaller positive value (+0.25) or a negative value (-0.5 or -0.25). Choice E has the highest positive value.

Question 6

Even though no final conclusion is currently warranted,a number of research papers,including those of Fama and French,have argued that
A)there is no noticeable difference in the returns of growth versus value stocks.
B)growth stocks outperform value stocks.
C)stocks with high book-value-to-stock-price ratios outperform stocks with low ratios.
D)no observable differences in returns can be associated with varying price-earnings ratios.
E)stocks with low earnings-to-price ratios outperform stocks with high ratios.

Accepted Answer

According to the statement, research papers, including those of Fama and French, argue that stocks with high book-value-to-stock-price ratios outperform stocks with low ratios. Therefore, option C is the best choice. Other options mentioned in the statement have varying degrees of contradicting information or require more context to determine the best choice.

Question 7

Which one of these statements is correct?
A)Irrationality may be related across investors.
B)Arbitrage is risk-free.
C)Irrationality always cancels out among a group of investors.
D)Investors are always rational.
E)Arbitrage eliminates all market inefficiencies.

Accepted Answer

Irrationality may be related across investors, meaning that if one investor is making irrational decisions, it may influence the decisions of other investors. This can lead to market inefficiencies and potential opportunities for arbitrage. B is incorrect because arbitrage involves taking advantage of market inefficiencies, and there is always some level of risk involved. C and D are incorrect because not all investors are rational and irrationality may not always cancel out among a group of investors. E is incorrect because while arbitrage can reduce market inefficiencies, it may not eliminate all inefficiencies.

Question 8

Which one of these terms is used to describe a principle where investors draw conclusions from insufficient data?
A)Representativeness
B)Synergy
C)Conservatism
D)Arbitrage
E)Independent deviations from rationality

Accepted Answer

Representativeness is a cognitive bias where individuals draw broad conclusions from specific observations, often leading to errors in judgment or decision-making, such as in investing based on insufficient data.

Question 9

The cause of the October 19,1987 stock market crash
A)is related to actions taken on that date by the Federal Reserve Bank.
B)has been identified as the result of major internet company announcements on the prior day.
C)resulted from losses in international markets.
D)has yet to be determined.
E)was the result of regulatory changes that were implemented that morning.

Accepted Answer

The cause of the October 19, 1987 stock market crash has yet to be determined.

Question 10

If behavioral finance holds,this implies
A)all investors are irrational some of the time.
B)all investors are irrational all the time.
C)some investors are irrational some of the time.
D)some investors are irrational all of the time.
E)all investors are rational all of the time.

Accepted Answer

Behavioral finance suggests that investors are prone to cognitive biases and emotional influences that can lead to irrational decision-making. However, this does not mean that all investors are irrational all the time, but rather that some investors may exhibit irrational behavior occasionally.

Question 11

Researchers have found that over long periods of time
A)the difference between the returns on large company and small company stocks is due solely to the difference in their risks.
B)strong form market efficiency exists,without argument.
C)large company stocks tend to outperform small company stocks.
D)arbitrage has no effect on market efficiency.
E)value stocks may outperform growth stocks on a risk-adjusted basis but no firm conclusion can be drawn.

Accepted Answer

The statement suggests that value stocks may outperform growth stocks on a risk-adjusted basis, but no firm conclusion can be drawn. This implies that the difference between the returns on different types of stocks may not be solely due to their risks and that the market may not be perfectly efficient. Option A is incorrect because it suggests that the difference in returns is solely due to risk, which is not supported by the statement. Option B is incorrect because it suggests that strong form efficiency exists without any argument or evidence, which is not mentioned in the statement. Option C is incorrect because it suggests that large company stocks tend to outperform small company stocks, which is not supported by the statement. Option D is incorrect because it suggests that arbitrage has no effect on market efficiency, which is not mentioned in the statement.

Question 12

Sam,an avid day trader,has noticed that a particular stock has increased in value in each of the last three trading days.Given this trend,he believes the stock price will increase over the next two trading days.This is an example of
A)a timing decision.
B)irrational exuberance.
C)representativeness.
D)conservatism.
E)arbitrage.

Accepted Answer

Sam's belief is an example of representativeness, where he assumes that a short-term trend will continue into the future based on a small sample size, without considering other factors that might affect the stock's price.

Question 13

Market prices can be efficiently priced if
A)brokerage commissions are zero.
B)a number of interested traders use the publicly available information.
C)securities always offer a positive rate of return to investors.
D)the prices are guaranteed by the U.S.Securities and Exchange Commission.
E)taxes are irrelevant.

Accepted Answer

Efficient pricing of market prices depends on the availability and use of publicly available information by interested traders. Commissions, taxes, and SEC guarantees may affect prices indirectly but are not directly related to efficient pricing. The positive rate of return of securities is also not directly related to efficient pricing.

Question 14

Donald Keim's research presents evidence that the difference in performance between small capitalization stocks and large capitalization stocks is largest in the month of
A)January.
B)April.
C)May.
D)August.
E)October.

Accepted Answer

According to Donald Keim's research, the difference in performance between small cap stocks and large cap stocks is largest in the month of January. This is known as the "January effect," which suggests that small cap stocks tend to outperform large cap stocks in January. This could be due to investors selling their losing positions at the end of the year (tax-loss harvesting), leading to a decrease in prices of large cap stocks and an increase in prices of small cap stocks.

Question 15

Serial correlation
A)tends to prove that markets are totally inefficient.
B)supports weak form efficiency.
C)coefficients tend to range between 0.75 and 1.
D)is best used to identify insider trading.
E)best indicates that markets are semi-strong form efficient.

Accepted Answer

Serial correlation, also known as autocorrelation, refers to the correlation between a variable and its lagged values. In financial markets, it is most commonly used to test for weak-form efficiency, which suggests that past prices are already reflected in current prices and cannot be used to predict future prices. Therefore, if serial correlation is identified in a market, it supports the idea that it is weak-form efficient. It does not necessarily mean that the market is totally inefficient or semi-strong form efficient, as those hypotheses require different types of tests.

Question 16

If semistrong,or strong,form efficiency exists,then,on average,investors are probably best served by
A)investing based solely on a stock's past performance.
B)avoiding all mutual funds.
C)avoiding the stock market altogether.
D)investing in index funds rather than in actively managed mutual funds.
E)randomly purchasing stocks by just throwing darts.

Accepted Answer

If semistrong or strong form efficiency exists, it means that all publicly available information is already reflected in the stock price. This makes it difficult for investors to consistently outperform the market through stock selection. Therefore, investing in index funds, which track the performance of a market index, is likely the best choice for investors. Avoiding mutual funds or the stock market altogether is not necessarily a recommended strategy, and randomly purchasing stocks is not a sound investment approach.

Question 17

Which one of these serial coefficient values is most consistent with weak form market efficiency?
A)-1
B)-0.5
C)0
D)+0.5
E)+1

Accepted Answer

A serial coefficient of 0 indicates that there is no correlation between past and future returns, which is consistent with weak form market efficiency. The other coefficients indicate varying levels of positive or negative correlation, which would suggest that past returns can be used to predict future returns, contradicting weak form efficiency.

Question 18

Given the vast resources available to mutual fund managers,these managers on average have generally
A)outperformed the overall market on a risk-adjusted basis.
B)eliminated excess profits for arbitrageurs.
C)beat broad-based indexes.
D)proved the market to be strong form efficient.
E)underperformed the market on a risk-adjusted basis.

Accepted Answer

Despite the vast resources available to mutual fund managers, on average they have underperformed the market on a risk-adjusted basis. Studies have shown that a majority of mutual fund managers fail to beat broad-based indexes over the long-term, highlighting the difficulty of consistently outperforming the market through stock-picking and active management.

Question 19

The abnormal return in an event study is described as the
A)actual return on a security minus the market rate of return on the same date.
B)total return earned by a security on the date of an announcement affecting that security.
C)total return earned on a security for the 7-day period commencing 3 days prior to an announcement affecting that security.
D)change in market value of a security on the day of an announcement affecting that security.
E)any change in the market price of a security that exceeds 5 percent over a 7-day period.

Accepted Answer

The abnormal return in an event study is the difference between the actual return on a security and the expected return based on the market rate of return on the same date. It is used to measure the impact of a specific event or announcement on the value of a security, after controlling for the overall movement of the market. Therefore, choice A is the correct answer. The other options are not accurate descriptions of abnormal return.

Question 20

Individuals that continually monitor the financial markets seeking mispriced securities
A)tend to make substantial profits on a daily basis.
B)tend to make the markets more efficient.
C)are never able to find a security that is temporarily mispriced.
D)are always quite successful using only well-known public information as their basis of evaluation.
E)are always quite successful using only historical price information as their basis of evaluation.

Accepted Answer

Individuals that continually monitor the financial markets seeking mispriced securities tend to make the markets more efficient because their actions lead to the correction of mispricing and more accurate pricing of securities. They may make profits on a daily basis, but this is not guaranteed and depends on the level of market efficiency and the individual's ability to identify mispricings. They may also use a combination of public and private information to evaluate securities.

Quiz 13: Efficient Capital Markets Amcq Behavioral Challenges

The principle that investors slowly adjust their beliefs to new information is referred to as

Which one of these would generally be considered the most rational action for a tax-paying investor?

Serial correlation

If markets are strong-form efficient,then event studies should show that new information affects a related stock's price

Which one of these serial correlation values is the strongest indicator of price continuation?

Even though no final conclusion is currently warranted,a number of research papers,including those of Fama and French,have argued that

Which one of these statements is correct?

Which one of these terms is used to describe a principle where investors draw conclusions from insufficient data?

The cause of the October 19,1987 stock market crash

If behavioral finance holds,this implies

Researchers have found that over long periods of time

Sam,an avid day trader,has noticed that a particular stock has increased in value in each of the last three trading days.Given this trend,he believes the stock price will increase over the next two trading days.This is an example of

Market prices can be efficiently priced if

Donald Keim's research presents evidence that the difference in performance between small capitalization stocks and large capitalization stocks is largest in the month of

Serial correlation

If semistrong,or strong,form efficiency exists,then,on average,investors are probably best served by

Which one of these serial coefficient values is most consistent with weak form market efficiency?

Given the vast resources available to mutual fund managers,these managers on average have generally

The abnormal return in an event study is described as the

Individuals that continually monitor the financial markets seeking mispriced securities