Question 1

Which of the following are investment superstars who have consistently shown superior performance
I. Warren Buffet
II. Phoebe Buffet
III. Peter Lynch
IV. Merrill Lynch
V. Jimmy Buffet

Accepted Answer

Warren Buffet manages Berkshire Hathaway and Peter Lynch managed Fidelity's Magellan Fund.Phoebe Buffet is a character on NBC's "Friends" and Jimmy Buffet is "Wasting Away in Margaritaville." Merrill Lynch isn't a person.

Question 2

Music Doctors has a beta of 2.25.The annualized market return yesterday was 12%, and the risk-free rate is currently 4%.You observe that Music Doctors had an annualized return yesterday of 15%.Assuming that markets are efficient, this suggests that

Accepted Answer

AR = 15% - (4% + 2.25 (8%)) = -7.0%.A negative abnormal return suggests that there was firm-specific bad news.

Question 3

LJP Corporation just announced yesterday that it would undertake an international joint venture.You observe that LJP had an abnormal return of 3% yesterday.This suggests that

Accepted Answer

The positive abnormal return suggests that investors view the international joint venture as good news.

Question 4

The weather report says that a devastating and unexpected freeze is expected to hit Florida tonight, during the peak of the citrus harvest.In an efficient market one would expect the price of Florida Orange's stock to

Accepted Answer

In an efficient market the price of the stock should drop immediately when the bad news is announced.If later news changes the perceived impact to Florida Orange, the price may once again adjust quickly to the new information.A gradual change is a violation of the EMH.

Question 5

Google has a beta of 1.0.The annualized market return yesterday was 11%, and the risk-free rate is currently 5%.You observe that Google had an annualized return yesterday of 14%.Assuming that markets are efficient, this suggests that

Accepted Answer

AR = 14% - (5% + 1.0 (6%)) = +3.0%.A positive abnormal return suggests that there was firm-specific good news.

Question 6

Which of the following are used by technical analysts to determine proper stock prices
I. Trendlines
II. Earnings
III. Dividend prospects
IV. Expectations of future interest rates
V. Resistance levels

Accepted Answer

Fundamental analysts look at factors such as earnings, dividend prospects, expectation of future interest rates, and risk of the firm.The information is used to determine the present value of future cash flows to stockholders.Technical analysts use trendlines and resistance levels.

Question 7

The main difference between the three forms of market efficiency is that

Accepted Answer

The main difference is that weak form encompasses only historical data, semistrong form encompasses historical data and current public information, and strong form encompasses historical data, current public information, and inside information.All of the other definitions remain the same.

Question 8

Nicholas Manufacturing just announced yesterday that its fourth quarter earnings will be 10% higher than last year's fourth quarter.Nicholas had an abnormal return of -1.2% yesterday.This suggests that

Accepted Answer

Anticipated earnings changes are impounded into a security's price as soon as expectations are formed.Therefore a negative market response indicates that the earnings surprise was negative, that is, the increase was less than anticipated.

Question 9

Chartists practice

Accepted Answer

Chartist is another name for a technical analyst.

Question 10

Matthews Corporation has a beta of 1.2.The annualized market return yesterday was 13%, and the risk-free rate is currently 5%.You observe that Matthews had an annualized return yesterday of 17%.Assuming that markets are efficient, this suggests that

Accepted Answer

AR = 17% - (5% + 1.2 (8%)) = +2.4%.A positive abnormal return suggests that there was firm-specific good news.

Question 11

In an efficient market the correlation coefficient between stock returns for two nonoverlapping time periods should be

Accepted Answer

In an efficient market there should be no serial correlation between returns from nonoverlapping periods.

Question 12

Music Doctors just announced yesterday that its first quarter sales were 35% higher than last year's first quarter.You observe that Music Doctors had an abnormal return of -2% yesterday.This suggests that

Accepted Answer

The negative abnormal return suggests that investors expected the sales increase to be larger than what was actually announced.

Question 13

QQAG has a beta of 1.7.The annualized market return yesterday was 13%, and the risk-free rate is currently 3%.You observe that QQAG had an annualized return yesterday of 20%.Assuming that markets are efficient, this suggests that

Accepted Answer

AR = 20% - (3% + 1.7 (10%)) = 0.0%.A positive abnormal return suggests that there was firm-specific good news and a negative abnormal return suggests that there was firm-specific bad news.

Question 14

If stock prices follow a random walk

Accepted Answer

A random walk means that the changes in prices are random and independent.

Question 15

Which of the following are used by fundamental analysts to determine proper stock prices
I. Trendlines
II. Earnings
III. Dividend prospects
IV. Expectations of future interest rates
V. Resistance levels

Accepted Answer

Fundamental analysts look at factors such as earnings, dividend prospects, expectation of future interest rates, and risk of the firm.The information is used to determine the present value of future cash flows to stockholders.Technical analysts use trendlines and resistance levels.

Question 16

QQAG just announced yesterday that its fourth quarter earnings will be 35% higher than last year's fourth quarter.You observe that QQAG had an abnormal return of -1.7% yesterday.This suggests that

Accepted Answer

Anticipated earnings changes are impounded into a security's price as soon as expectations are formed.Therefore a negative market response indicates that the earnings surprise was negative; that is, the increase was less than anticipated.

Question 17

The Food and Drug Administration (FDA) just announced yesterday that they would approve a new cancer-fighting drug from King.You observe that King had an abnormal return of 0% yesterday.This suggests that

Accepted Answer

The approval was already anticipated by the market.

Question 18

According to proponents of the efficient market hypothesis, the best strategy for a small investor with a portfolio worth $40,000 is probably to

Accepted Answer

Individual investors tend to have relatively small portfolios and are usually unable to realize economies of size.The best strategy is to pool funds with other small investors and allow professional managers to invest the funds.

Question 19

When Maurice Kendall first examined stock price patterns in 1953, he found that

Accepted Answer

The first studies in this area were made possible by the development of computer technology.Kendall's study was the first to indicate that markets were efficient.

Question 20

The likelihood of an investment newsletter's successfully predicting the direction of the market for three consecutive years by chance should be

Accepted Answer

The probability of successful prediction for three consecutive years is 12.5%.

Quiz 11: The Efficient Market Hypothesis

Which of the following are investment superstars who have consistently shown superior performance I. Warren Buffet II. Phoebe Buffet III. Peter Lynch IV. Merrill Lynch V. Jimmy Buffet