Question 1

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
A)drop immediately.
B)remain unchanged.
C)increase immediately.
D)gradually decline for the next several weeks.
E)gradually increase for the next several weeks.

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 2

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
A)I and V
B)I, II, and III
C)II, III, and IV
D)II, IV, and V
E)All of the items are used by fundamental analysts.

Accepted Answer

Technical analysts rely mainly on charts and patterns to identify trends and support/resistance levels. Trendlines are used to identify the direction of the trend, while resistance levels indicate the point at which selling pressure is likely to increase, leading to a reversal in price trends. Earnings, dividend prospects, and expectations of future interest rates are factors considered by fundamental analysts, who focus on the financial health and performance of the companies they analyze.

Question 3

Nicholas Manufacturing just announced yesterday that its fourth quarter earnings will be 10% higher than last year's fourth quarter.You observe that Nicholas had an abnormal return of -1.2% yesterday.This suggests that
A)the market is not efficient.
B)Nicholas' stock will probably rise in value tomorrow.
C)investors expected the earnings increase to be larger than what was actually announced.
D)investors expected the earnings increase to be smaller than what was actually announced.
E)earnings are expected to decrease next quarter.

Accepted Answer

The abnormal return of -1.2% suggests that investors expected the earnings increase to be larger than what was actually announced. This could indicate disappointment or a misinterpretation of the information, leading to a decrease in the stock price.

Question 4

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
A)bad news about Matthews was announced yesterday.
B)good news about Matthews was announced yesterday.
C)no news about Matthews was announced yesterday.
D)interest rates rose yesterday.
E)interest rates fell yesterday.

Accepted Answer

Since Matthews Corporation had an annualized return yesterday of 17%, which is higher than the expected return of 13% (annualized market return), this suggests that some good news about Matthews was announced yesterday. This increase in return could be due to positive earnings announcements or other positive news about the company.

Question 5

The likelihood of an investment newsletter's successfully predicting the direction of the market for three consecutive years by chance should be
A)between 50% and 70%.
B)between 25% and 50%.
C)between 10% and 25%.
D)less than 10%.
E)greater than 70%.

Accepted Answer

The answer of The likelihood of an investment newsletter's successfully...

Question 6

If stock prices follow a random walk
A)it implies that investors are irrational.
B)it means that the market cannot be efficient.
C)price levels are not random.
D)price changes are random.
E)price movements are predictable.

Accepted Answer

If stock prices follow a random walk, it means that price changes are random and cannot be predicted or explained by past events or trends. This does not imply that investors are irrational or that the market is not efficient, but rather that there is no way to consistently make profitable predictions about future price movements.

Question 7

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
A)I, III, and IV
B)II, III, and IV
C)I and III
D)III and IV
E)I,III,IV,and V

Accepted Answer

Warren Buffet and Peter Lynch are both investment superstars who have consistently shown superior performance, while Phoebe Buffet is a fictional character from the TV show Friends. Merrill Lynch is a financial services company, but not an individual investor, and Jimmy Buffet is a musician and businessman, not an investor. Therefore, the best choice is C, which includes only Warren Buffet and Peter Lynch as the investment superstars.

Question 8

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
A)bad news about QQAG was announced yesterday.
B)good news about QQAG was announced yesterday.
C)no significant news about QQAG was announced yesterday.
D)interest rates rose yesterday.
E)interest rates fell yesterday.

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 9

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
A)the market is not efficient.
B)Music Doctors stock will probably rise in value tomorrow.
C)investors expected the sales increase to be larger than what was actually announced.
D)investors expected the sales increase to be smaller than what was actually announced.
E)earnings are expected to decrease next quarter.

Accepted Answer

An abnormal return of -2% suggests that investors had higher expectations for Music Doctors' sales increase than what was actually reported. This indicates that the market had already priced in the positive sales news and expected an even larger increase.

Question 10

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
A)bad news about Google was announced yesterday.
B)good news about Google was announced yesterday.
C)no news about Google was announced yesterday.
D)interest rates rose yesterday.
E)interest rates fell yesterday.

Accepted Answer

Since Google had an annualized return yesterday of 14%, which is higher than the annualized market return of 11%, it suggests that good news about Google was announced yesterday. If there was bad news, the return would have been lower than the market return and if there was no news, the return would have been around the market return. Interest rates do not directly impact the return of a stock, unless there is a connection to the news about the company.

Question 11

Chartists practice
A)technical analysis.
B)fundamental analysis.
C)regression analysis.
D)insider analysis.
E)psychoanalysis.

Accepted Answer

Chartists rely on technical analysis, which involves studying price charts and using patterns, indicators, and other tools to make trading decisions. Fundamental analysis (B) involves analyzing a company's financial health and economic conditions, regression analysis (C) involves analyzing the relationship between variables, insider analysis (D) involves analyzing information from company insiders, and psychoanalysis (E) is a psychological therapy that has no relevance to financial analysis.

Question 12

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
A)bad news about Music Doctors was announced yesterday.
B)good news about Music Doctors was announced yesterday.
C)no news about Music Doctors was announced yesterday.
D)interest rates rose yesterday.
E)interest rates fell yesterday.

Accepted Answer

The answer of Music Doctors has a beta of 2.25.The...

Question 13

According to proponents of the efficient market hypothesis,the best strategy for a small investor with a portfolio worth $40,000 is probably to
A)perform fundamental analysis.
B)exploit market anomalies.
C)invest in Treasury securities.
D)invest in derivative securities.
E)invest in mutual funds.

Accepted Answer

Proponents of the efficient market hypothesis believe that markets are efficient and all relevant information about a security is already reflected in its price. Therefore, it is difficult to beat the market by analyzing individual securities or exploiting market anomalies. Instead, it is recommended to invest in broadly diversified mutual funds, which provide exposure to a range of securities and minimize unsystematic risk associated with individual stocks. Investing in Treasury securities or derivative securities may not provide enough diversification or returns, while performing fundamental analysis may not be an effective strategy given the efficiency of the markets.

Question 14

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
A)the market is not efficient.
B)QQAG stock will probably rise in value tomorrow.
C)investors expected the earnings increase to be larger than what was actually announced.
D)investors expected the earnings increase to be smaller than what was actually announced.
E)earnings are expected to decrease next quarter.

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 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
A)I, IV, and V
B)I, II, and III
C)II, III, and IV
D)II, IV, and V
E)All of the items are used by fundamental analysts.

Accepted Answer

Fundamental analysts focus on a company's financial health and economic factors, such as earnings, dividend prospects, and expectations of future interest rates, to determine stock prices. Trendlines and resistance levels are typically used in technical analysis.

Question 16

When Maurice Kendall first examined stock price patterns in 1953,he found that
A)certain patterns tended to repeat within the business cycle.
B)there were no predictable patterns in stock prices.
C)stocks whose prices had increased consistently for one week tended to have a net decrease the following week.
D)stocks whose prices had increased consistently for one week tended to have a net increase the following week.
E)the direction of change in stock prices was unpredictable,but the amount of change followed a distinct pattern.

Accepted Answer

Maurice Kendall, in his 1953 study, concluded that stock prices moved in a manner that was essentially random, indicating that there were no predictable patterns in stock prices. This finding laid the groundwork for the efficient market hypothesis.

Question 17

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
A)the market is not efficient.
B)LJP stock will probably rise in value again tomorrow.
C)investors view the international joint venture as bad news.
D)investors view the international joint venture as good news.
E)earnings are expected to decrease next quarter.

Accepted Answer

A positive abnormal return of 3% suggests that investors view the international joint venture as good news for LJP Corporation.

Question 18

In an efficient market the correlation coefficient between stock returns for two non-overlapping time periods should be
A)positive and large.
B)positive and small.
C)zero.
D)negative and small.
E)negative and large.

Accepted Answer

In an efficient market, prices fully reflect all available information, including past prices. Therefore, there should be no correlation between stock returns for non-overlapping time periods since there should be no predictable pattern in past prices that would impact future prices. Thus, the correlation coefficient should be close to zero.

Question 19

The main difference between the three forms of market efficiency is that
A)the definition of efficiency differs.
B)the definition of excess return differs.
C)the definition of prices differs.
D)the definition of information differs.
E)they were discovered by different people.

Accepted Answer

The main difference between the three forms of market efficiency (weak, semi-strong, and strong) lies in the definition of information and what is already reflected in stock prices. Weak form efficiency suggests that all past trading information is reflected in stock prices, semi-strong form efficiency suggests that all publicly available information is reflected, and strong form efficiency suggests that all information, including insider information, is reflected in stock prices.

Question 20

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
A)the market is not efficient.
B)King stock will probably rise in value tomorrow.
C)King stock will probably fall in value tomorrow.
D)the approval was already anticipated by the market.
E)none of the above.

Accepted Answer

The abnormal return of 0% suggests that the approval of the drug was already anticipated by the market, meaning that the news was already priced into the stock. Therefore, it is unlikely that the stock will experience a significant change in value in either direction as a result of the FDA's announcement.

Quiz 11: The Efficient Market Hypothesis

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

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

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

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

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

If stock prices follow a random walk

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

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

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

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

Chartists practice

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

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

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

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

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

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

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

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

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