Question 1

The day-of-the-week effect is defined as the tendency for which day of the week to have a negative average rate of return?
A) Monday
B) Tuesday
C) Wednesday
D) Thursday
E) Friday

Accepted Answer

Researchers have found that Mondays have a negative average rate of return in stock markets around the world. This may be due to negative news over the weekend or investors selling off stocks to mitigate weekend risk.

Question 2

Which one of the following terms is used to describe a sudden and significant collapse in market prices?
A) dive
B) recession
C) crash
D) adjustment
E) rebound

Accepted Answer

A "crash" is a sudden and significant collapse in market prices. The other options do not accurately describe this type of event.

Question 3

Stocks A,B,and C have identical risks.Stock A earns an annual return of 9.9 percent as compared to 9.6 percent returns on stocks B and C.Given this,you can correctly assume that:
A) Stock A is overpriced.
B) the market return is 9.75 percent.
C) Stock A represents the smallest-sized firm.
D) Stock A has a positive excess return.
E) Stocks B and C represent firms that are in the process of merging.

Accepted Answer

The fact that Stock A earns a higher return compared to stocks B and C suggests that it has a positive excess return. This means that investors are willing to pay more for Stock A's expected future earnings, likely due to factors such as higher growth prospects or better management. Therefore, choice D is the best answer. Choices A, B, C, and E are incorrect because there is no information in the question to support them.

Question 4

Which one of the following returns is computed as the observed return minus the expected return?
A) visible
B) distinct
C) abnormal
D) subjective
E) efficient

Accepted Answer

Abnormal return is computed as the observed return minus the expected return.

Question 5

Which one of the following correctly identifies the phenomenon that states that one month has the greatest tendency for small stocks to earn large returns?
A) January effect
B) March effect
C) September effect
D) October effect
E) December effect

Accepted Answer

The January effect is a well-known phenomenon in finance where small stocks tend to outperform larger ones in the month of January. This effect is believed to be related to tax-loss harvesting by investors at the end of the year, which leads to selling of large-cap stocks and buying of small-cap stocks.

Question 6

Independent deviations from rationality:
A) only exist when the overall market is overvalued.
B) prevent the markets from ever being efficient.
C) can create an efficient market.
D) are the actions taken by rational arbitrage traders.
E) do not exist in an efficient market.

Accepted Answer

Independent deviations from rationality can create an efficient market through the process of arbitrage. Rational arbitrage traders will take advantage of these deviations, ultimately correcting the market and leading to efficiency. Therefore, independent deviations from rationality do not prevent the markets from ever being efficient and can actually lead to efficiency. Additionally, this is not limited to only when the market is overvalued, and these deviations can be present in an efficient market.

Question 7

Which one of the following terms best describes the information you know about a company that will have a significant effect on the price of the company's stock once that information is released?
A) material public information
B) public information
C) abnormal information
D) private, non-material information
E) material non-public information

Accepted Answer

Material non-public information (MNPI) is information that is not yet available to the public but would significantly impact a company's stock price if it were released. MNPI is often confidential and privileged, and trading on this information is illegal. It is important for individuals who have access to MNPI to safeguard this information to avoid any insider trading allegations.

Question 8

Efficient markets tend to exist:
A) only when all investors are rational.
B) anytime market volume exceeds the average trading volume.
C) only when market volatility is low.
D) when rational arbitrage traders dominate irrational traders.
E) when arbitrage trading is prohibited.

Accepted Answer

Efficient markets are those where prices reflect all available information, and all market participants have access to the same information. In such markets, rational arbitrage traders dominate irrational traders and quickly seize any profit opportunities that arise, thus ensuring that market prices remain consistent with underlying economic fundamentals. Therefore, Option D is the best option as it explains the role of rational arbitrage traders in efficient markets. Options A, B, C, and E are incorrect as they do not accurately capture the conditions necessary for efficient markets to exist.

Question 9

Security A and Security B have similar risks.However,Security A has a higher rate of return than Security B.The return on Security A minus the return on Security B is referred to as which one of the following?
A) market return
B) abnormal return
C) deviated return
D) excess return
E) real return

Accepted Answer

The difference between the return on two securities with similar risks is called the excess return. Therefore, option D is the correct answer. Option A is incorrect because market return refers to the return on the overall market or a specific market index. Option B is incorrect because the abnormal return is a return that is higher or lower than what would be expected based on the security's risk and market returns. Option C is not a commonly used term in finance. Option E refers to the return on an investment adjusted for inflation.

Question 10

Which one of the following states that investors cannot consistently earn positive excess returns?
A) market return hypothesis
B) current market hypothesis
C) efficient market hypothesis
D) risk-return theory
E) excess theory

Accepted Answer

The efficient market hypothesis states that all publicly available information is immediately reflected in the stock price, leaving no room for investors to consistently earn positive excess returns.

Question 11

Which one of the following is required for a trader to earn excess profits?
A) excessive trading
B) excessive research
C) market inefficiency
D) highly volatile market state
E) relatively stable market state

Accepted Answer

Excess profits can only be earned if there is a market inefficiency, which means that the market price does not reflect the true value of the asset. Traders who can identify and exploit market inefficiencies can earn excess profits. Excessive trading or research, and a highly volatile or stable market state, are not necessarily required for earning excess profits.

Question 12

Which type of trader is defined as one who decides to trade securities based on publicly available information and analysis?
A) public
B) informed
C) normal
D) inside
E) block

Accepted Answer

Informed traders make decisions based on publicly available information and analysis, distinguishing them from insiders who use private, non-public information.

Question 13

In an efficient market,stocks with similar risks will:
A) have the same market price.
B) pay similar dividends.
C) yield the market rate of return.
D) produce abnormal returns.
E) have similar rates of return.

Accepted Answer

The answer of In an efficient market,stocks with similar risks...

Question 14

The term "independent deviations from rationality" implies that:
A) irrational investors are absent from an efficient market.
B) arbitrage traders act independent of each other.
C) markets must be inefficient.
D) irrational investors behave differently from one another.
E) arbitrage traders act together to offset the actions of rational investors.

Accepted Answer

The term "independent deviations from rationality" refers to the idea that irrational investors may behave in different ways or have different biases, leading to deviations from rational market behavior. This does not necessarily imply that markets are inefficient, as rational investors may be able to identify and exploit these deviations through arbitrage. It also does not imply that arbitrage traders act independently or together to offset the actions of rational investors. Therefore, the best choice is D, which correctly captures the idea that irrational investors behave differently from one another.

Question 15

Arbitrage traders:
A) tend to be well-capitalized.
B) tend to be irrational investors.
C) are dominated by irrational investors in an efficient market.
D) lower the efficiency level of a market.
E) sell only relatively inexpensive stocks.

Accepted Answer

Arbitrage trading involves taking advantage of small price discrepancies between assets. In order to do so effectively, traders generally need to be well-capitalized in order to make large trades and cover any risks associated with the trade.

Question 16

Which one of the following terms is used to identify the NYSE rules which slow or stop trading when the DJIA declines by more than a specified amount during a trading session?
A) order flows
B) market timers
C) crash helmets
D) circuit breakers
E) trade barriers

Accepted Answer

Circuit breakers are the NYSE rules that slow or stop trading when the DJIA declines by more than a specified amount during a trading session.

Question 17

Which one of the following terms is used to describe a stock price that moves over time creating no discernible pattern?
A) deviated pattern
B) dispersed flow
C) efficient movement
D) overreaction and correction
E) random walk

Accepted Answer

Random walk is a term used to describe a stock price that moves in a seemingly random pattern with no discernible trend or pattern. This means that the price can move up or down with no clear direction or indication of future movements.

Question 18

Which one of the following will automatically occur if all investors are rational?
A) All stock prices will be equal.
B) Equivalent risk assets will have equal expected rates of return.
C) All investors will earn the market rate of return.
D) All investors will earn the same rate of return.
E) The riskier an asset, the higher its market price will be.

Accepted Answer

If all investors are rational, they will make investment decisions based on the expected return and risk of the asset. Therefore, equivalent risk assets will have equal expected rates of return as investors will only invest in assets with higher expected returns for the same level of risk. However, stock prices and individual rates of return will not necessarily be equal because investors have different preferences and investment strategies. The market price of an asset is not solely determined by its risk, but also by demand and supply factors.

Question 19

Which one of the following is a research method used to study the effects news has on stock prices?
A) polarization
B) market analysis
C) event study
D) news theory
E) reaction hypothesis

Accepted Answer

Event study is a research method used to analyze the impact of a specific event, such as news, on stock prices. It involves looking at stock market data before and after the event to assess the effect on prices. Polarization and news theory are not research methods, while market analysis and the reaction hypothesis are broader concepts that do not specifically focus on the effects of news on stock prices.

Question 20

Which one of the following terms is used to describe a market situation where prices are much higher than either fundamental or rational analysis would tend to support?
A) bear market
B) cloud
C) inversion
D) bubble
E) crash aversion

Accepted Answer

A bubble is a market situation where prices are significantly higher than their intrinsic value, often due to speculation and investor hype. This leads to overbuying and further price increases, creating a bubble that eventually bursts, causing a significant market correction.

Quiz 7: Stock Price Behavior and Market Efficiency

The day-of-the-week effect is defined as the tendency for which day of the week to have a negative average rate of return?

Which one of the following terms is used to describe a sudden and significant collapse in market prices?

Stocks A,B,and C have identical risks.Stock A earns an annual return of 9.9 percent as compared to 9.6 percent returns on stocks B and C.Given this,you can correctly assume that:

Which one of the following returns is computed as the observed return minus the expected return?

Which one of the following correctly identifies the phenomenon that states that one month has the greatest tendency for small stocks to earn large returns?

Independent deviations from rationality:

Which one of the following terms best describes the information you know about a company that will have a significant effect on the price of the company's stock once that information is released?

Efficient markets tend to exist:

Security A and Security B have similar risks.However,Security A has a higher rate of return than Security B.The return on Security A minus the return on Security B is referred to as which one of the following?

Which one of the following states that investors cannot consistently earn positive excess returns?

Which one of the following is required for a trader to earn excess profits?

Which type of trader is defined as one who decides to trade securities based on publicly available information and analysis?

In an efficient market,stocks with similar risks will:

The term "independent deviations from rationality" implies that:

Arbitrage traders:

Which one of the following terms is used to identify the NYSE rules which slow or stop trading when the DJIA declines by more than a specified amount during a trading session?

Which one of the following terms is used to describe a stock price that moves over time creating no discernible pattern?

Which one of the following will automatically occur if all investors are rational?

Which one of the following is a research method used to study the effects news has on stock prices?

Which one of the following terms is used to describe a market situation where prices are much higher than either fundamental or rational analysis would tend to support?