Question 1

Dover Lumber announced last week that its unpopular CEO had resigned.In response to this announcement,the firm's stock price increased from $17 a share to $23 a share.The following day the price declined to $21 a share and has remained constant at that level.This is an example of a(n):
A) over-reaction and correction.
B) underpricing.
C) delayed reaction.
D) pre-activity action.
E) efficient market reaction.

Accepted Answer

The sharp increase in stock price followed by a decline suggests an over-reaction to the news of the CEO's resignation, followed by a correction to a more realistic level. This is an example of an efficient market reaction where the market quickly adjusts to new information, and in this case, the initial reaction was too extreme. Hence, option A is the best choice.

Question 2

Last week,Newtown Plastics announced that it had developed a new plastic container that is stronger and more durable,yet easier to recycle.In response to this announcement,the firm's stock price rose from $21 a share to a high of $27 a share and has remained at that level.This is an example of a(n):
A) over-reaction and correction.
B) post-activity reaction.
C) delayed reaction.
D) pre-activity action.
E) efficient market reaction.

Accepted Answer

The efficient market reaction is the best choice as it indicates that the market quickly and accurately incorporated the new information about the firm's product into the stock price, resulting in a sharp increase that has remained at a higher level. This suggests that the market is efficient and that investors quickly respond to new information. None of the other options accurately describe the situation.

Question 3

Which one of the following best describes the type(s)of information included in a strong-form efficient market?
A) historical
B) historical and public
C) private and public
D) current and public
E) historical and private

Accepted Answer

In a strong form efficient market, all information, including both public and private (or insider) information, is already reflected in stock prices. This means that no one can consistently achieve higher returns by trading on any information, whether it is publicly available or privately held.

Question 4

You are the chief financial officer of Davidson Industries.On multiple occasions,you have engaged in insider trading but have never been able to earn any abnormal returns.Which form of market efficiency most likely exists given your situation?
A) mild-form
B) weak-form
C) historical-form
D) semi-strong form
E) strong-form

Accepted Answer

The answer of You are the chief financial officer of...

Question 5

In an efficient market,daily abnormal returns:
A) are very volatile.
B) reflect news within the past week.
C) reflect news since the prior trading day.
D) remain constant.
E) do not exist.

Accepted Answer

In an efficient market, prices adjust to new information quickly, meaning that abnormal returns will reflect news since the prior trading day. This is because any news before that would have already been incorporated into the stock price. Therefore, Choice C is the best answer.

Question 6

Which one of the following statements is correct?
A) Company insiders are not permitted to trade their employer's securities.
B) Only tippers can be accused of illegal insider trading.
C) Tippees are permitted to trade securities based on information they know is private.
D) Trading on private information which you just happen to overhear is legal.
E) Any trading based on information known to be private is illegal.

Accepted Answer

Trading on private information is illegal for both company insiders and outsiders. It is considered insider trading if the information is obtained from a company insider and the person trading on it is aware that it is non-public information. Different levels of liability may apply to the tipper and tippee, but both can be accused of illegal insider trading. Overhearing private information is also considered illegal if the person knew or should have known that the information was obtained in violation of a duty of trust or confidence.

Question 7

If the financial markets were regulated such that the markets maintained strong-form efficiency,then:
A) insider trading laws would be unnecessary.
B) all investors would earn equivalent rates of return.
C) risk premiums would vanish.
D) all investors would become arbitrage traders.
E) securities would tend to be continually underpriced.

Accepted Answer

Strong-form efficiency means all information, including insider information, is already reflected in the market prices. Therefore, there would be no advantage to insider trading, making insider trading laws unnecessary.

Question 8

You analyze a firm's financial statements and invest based upon the results of this analysis.Which form of market efficiency must exist if you are able to earn excess profits on these investments?
A) weak-form
B) historical-form
C) semi-strong form
D) full-form
E) mild-form

Accepted Answer

The answer of You analyze a firm's financial statements and...

Question 9

How should cumulative abnormal returns react in an efficient market?
A) relatively constant, sharp break, relatively constant
B) relatively constant with no breaks
C) steadily increasing
D) steadily decreasing
E) remain constant at zero

Accepted Answer

In an efficient market, cumulative abnormal returns should remain relatively constant, experience a sharp break when new information is released, and then return to a relatively constant level, reflecting the immediate incorporation of new information into stock prices.

Question 10

Which of the following are ineffective strategies for producing excess returns if the market is semistrong-form efficient?
I.graphing past prices searching for patterns
II.watching the daily market movements
III.studying the latest analyst's reports
IV.analyzing a firm's financial statements
A) I and III only
B) I and IV only
C) I, II, and III only
D) II, III, and IV only
E) I, II, III, and IV

Accepted Answer

In a semistrong-form efficient market, all publicly available information, including past prices, market movements, analyst reports, and financial statements, is already reflected in stock prices, making these strategies ineffective for producing excess returns.

Question 11

Which of the following sources of information are used by informed traders?
I.financial statements
II.inside information
III.internet reports
IV.analysts reports
A) I and IV only
B) II and III only
C) III and IV only
D) I, III, and IV only
E) I, II, III, and IV

Accepted Answer

The answer of Which of the following sources of information...

Question 12

Which of the following will lead to excess profits in a semistrong-form efficient market?
I.private financial information
II.historical price trends
III.financial analysts reports
IV.unreleased merger plans
A) I only
B) I and IV only
C) II and III only
D) I, II, and III only
E) I, III, and IV only

Accepted Answer

In a semistrong-form efficient market, all publicly available information is already reflected in stock prices. Therefore, only private information, such as unreleased merger plans, can lead to excess profits.

Question 13

Which form of market efficiency exists if the market is efficient only in regard to historical information?
A) mild-form
B) weak-form
C) historical-form
D) semistrong-form
E) strong-form

Accepted Answer

The weak-form of market efficiency exists when the market is efficient only in regard to historical information. This means that past prices and volume information is already reflected in current prices, but other information such as insider knowledge may not be fully reflected.

Question 14

Ann uses two approaches to trading stocks.First,she trades on what she believes is a repetitive pattern as seen in Dotson Co's historical prices.Secondly,she analyzes the financial statements of The Allen Co.to compute changes in the return on equity as a predictor of future stock prices for that firm.She trades based on both strategies.Ann earns excess profits on her return on equity strategy but not on her historical prices strategy.This suggests that the market is at least ________ efficient but less than ________ efficient.
A) weak-form; mild-form
B) mild-form; semistrong-form
C) weak-form; semistrong-form
D) semistrong-form; full-form
E) semistrong-form; strong-form

Accepted Answer

Ann's failure to earn excess profits based on her historical prices strategy suggests that the market is at least weak-form efficient (meaning historical prices and patterns cannot be used to consistently beat the market). However, her success in earning excess profits based on her return on equity strategy suggests that the market is less than semistrong-form efficient (meaning publicly available information such as financial statements can be used to earn excess profits). Therefore, the market is at least weak-form efficient but less than semistrong-form efficient.

Question 15

Which one of the following involves the study of a firm's stock price for the few days surrounding a news announcement?
A) web survey
B) market analysis
C) event study
D) auditing review
E) trend study

Accepted Answer

The study of a firm's stock price for the few days surrounding a news announcement is known as an event study. It involves analyzing how the market reacts to a specific event, such as the announcement of a new product or a change in management. This type of analysis is often used in finance and investment research to determine the impact of news and events on a company's stock.

Question 16

Two weeks ago Acme Electronics announced that it had developed a new chip design which was being considered by major companies for use in future smart phone development.At the close of trading the day before the announcement,Acme common stock closed at $20.On the day following the announcement,Acme closed at $21.Two days after the announcement the stock closed at $22.50.Four days after the announcement the stock traded at $23.Last week,Acme stock traded at $26,a level it has maintained since then.This is an example of a(n):
A) over-reaction and correction.
B) underpricing.
C) delayed reaction.
D) pre-activity action.
E) efficient market reaction.

Accepted Answer

The answer of Two weeks ago Acme Electronics announced that...

Question 17

If the market is semistrong-form efficient,then which one of the following statements is true?
A) Neither technical nor fundamental analysis leads to abnormal profits.
B) Technical analysts have the ability to earn excess profits but fundamental analysts cannot.
C) Fundamental analysts can earn excess profits but technical analysts cannot.
D) Both technical and fundamental analysts earn excess profits based on their research.
E) No answer can be determined as the form of market efficiency is unrelated to abnormal, or excess returns.

Accepted Answer

Semi-strong form efficiency implies that all publicly available information is already reflected in the current stock prices. Therefore, neither technical nor fundamental analysis can provide abnormal profits as all relevant information is already incorporated into the price.

Question 18

Which one of the following would best reveal how stock prices react when competitive firms merge?
A) financial analysis
B) field testing
C) risk analysis
D) event study
E) market survey

Accepted Answer

An event study would be the best choice to reveal how stock prices react when competing firms merge. This involves analyzing stock prices surrounding the merger announcement to determine the effect it had on the merged and competing firms' stock prices.

Question 19

Research on semistrong-form efficient markets indicates which one of the following is correct?
A) Identifying a stock with repetitive price movements is generally the best method of active investing.
B) Future returns on large company stocks tend to closely follow past pricing patterns.
C) Buying and holding a broad market index is one of the best investment strategies.
D) Predicting future stock prices is relatively easy for academic researchers.
E) Trading costs have little, if any, impact on investment returns.

Accepted Answer

Semistrong-form efficient markets suggest that all publicly available information is reflected in a stock's current price. Therefore, it is difficult for an investor to consistently outperform the market. Buying and holding a broad market index is one of the best investment strategies as it provides exposure to the overall market return. Options A, B, D, and E are incorrect as they suggest that there may be opportunities for active investing or predictability in stock prices, which is not supported by semistrong-form efficient market theory.

Question 20

If you believe that stock market prices follow a random walk,then:
A) historical price information provides no benefit in predicting future prices.
B) there is no financial benefit from investing in the stock market.
C) having inside information will not lead to excess profits.
D) studying past price movements will lead to excess profits.
E) you also believe the market is strong-form efficient.

Accepted Answer

If stock market prices follow a random walk, then historical price information provides no benefit in predicting future prices. This is because future prices are simply the result of random fluctuations, and therefore cannot be predicted based on past patterns.

Quiz 7: Stock Price Behavior and Market Efficiency

Dover Lumber announced last week that its unpopular CEO had resigned.In response to this announcement,the firm's stock price increased from $17 a share to $23 a share.The following day the price declined to $21 a share and has remained constant at that level.This is an example of a(n) :

Which one of the following best describes the type(s) of information included in a strong-form efficient market?

You are the chief financial officer of Davidson Industries.On multiple occasions,you have engaged in insider trading but have never been able to earn any abnormal returns.Which form of market efficiency most likely exists given your situation?

In an efficient market,daily abnormal returns:

Which one of the following statements is correct?

If the financial markets were regulated such that the markets maintained strong-form efficiency,then:

You analyze a firm's financial statements and invest based upon the results of this analysis.Which form of market efficiency must exist if you are able to earn excess profits on these investments?

How should cumulative abnormal returns react in an efficient market?

Which of the following are ineffective strategies for producing excess returns if the market is semistrong-form efficient? I.graphing past prices searching for patterns II.watching the daily market movements III.studying the latest analyst's reports IV.analyzing a firm's financial statements

Which of the following sources of information are used by informed traders? I.financial statements II.inside information III.internet reports IV.analysts reports

Which of the following will lead to excess profits in a semistrong-form efficient market? I.private financial information II.historical price trends III.financial analysts reports IV.unreleased merger plans

Which form of market efficiency exists if the market is efficient only in regard to historical information?

Which one of the following involves the study of a firm's stock price for the few days surrounding a news announcement?

If the market is semistrong-form efficient,then which one of the following statements is true?

Which one of the following would best reveal how stock prices react when competitive firms merge?

Research on semistrong-form efficient markets indicates which one of the following is correct?

If you believe that stock market prices follow a random walk,then: