Question 1

A market in which past prices and volume are of no use in beating the market is __________ -form efficient
A) weak
B) semi-weak
C) semistrong
D) strong
E) technical

Accepted Answer

In a weak-form efficient market, all past trading information, such as prices and volume, is already reflected in current prices, making it impossible to gain an advantage using this historical data.

Question 2

Which of the following is NOT one of the economics foundations of market efficiency?
A) Investor rationality
B) Arbitrage
C) Independent deviations from rationality
D) Asymmetric information

Accepted Answer

Market efficiency is underpinned by the concepts of investor rationality, arbitrage, and independent deviations from rationality. Asymmetric information, however, refers to situations where one party has more or better information than the other, which can lead to market inefficiencies rather than supporting market efficiency.

Question 3

A market in which information of any kind, public or private, is of no use in beating the market is __________ -form efficient.
A) weak
B) semi-weak
C) semistrong
D) strong
E) technical

Accepted Answer

A market in which all information, public or private, is already reflected in the current price of the assets is called strong-form efficient. This means that it is impossible for any investor or trader to outperform the market by using any information, insider information or otherwise. This level of efficiency is the highest form of market efficiency.

Question 4

A(n) __________ is a method of research that studies the effect that news announcements have on stock prices.
A) Event study
B) Efficient hypothesis
C) Random walk
D) Market watch
E) Pure play

Accepted Answer

An event study is a research method that analyzes the impact of particular events, such as news announcements or corporate actions, on stock prices. It helps investors understand the reaction of the market to a particular event and make informed investment decisions. Efficient hypothesis, random walk, market watch, and pure play are other finance and investment-related concepts that are not directly related to studying the effect of news announcements on stock prices.

Question 5

The tendency for Monday to have a negative return is the __________ effect.
A) point-and-figure
B) January
C) harami
D) support
E) day-of-the-week

Accepted Answer

The tendency for Monday to have a negative return is commonly known as the day-of-the-week effect. This effect suggests that stock prices tend to be lower on Mondays compared to the rest of the week. The reasons behind this phenomenon are not entirely clear, but some theories suggest that it may be due to investors' sentiment and trading behavior at the start of the week.

Question 6

The observation that stocks price behaviour is that of a "random walk" is related to the __________ version of the efficient market hypothesis.
A) semi-weak form
B) semi-strong form
C) event-form
D) weak-form
E) Malkiel theorem

Accepted Answer

The weak-form efficient market hypothesis suggests that stock prices already reflect all past market trading information, including historical prices and trading volume, and that investors cannot consistently achieve returns greater than that of the overall market through technical analysis or other means of analyzing historical stock prices. The concept of a "random walk" in stock prices suggests that future price movements cannot be predicted based on past price movements, supporting the idea of a weak-form efficient market.

Question 7

The hypothesis that investors cannot consistently earn positive excess returns is known as the __________ hypothesis.
A) Technical analysis
B) Market efficiency
C) Risk-return
D) Fundamental analysis
E) Market breadth

Accepted Answer

The hypothesis that investors cannot consistently earn positive excess returns is known as the market efficiency hypothesis. This hypothesis states that all publicly available information is already reflected in stock prices, making it impossible to consistently outperform the market through the selection of undervalued stocks. Technical analysis and fundamental analysis are methods used by investors to analyze stocks, while risk-return and market breadth are not directly related to this hypothesis.

Question 8

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

In an efficient market, stocks with similar risks will have similar rates of return. This means that investors can expect to earn similar returns on their investments in stocks with similar levels of risk, and that prices will adjust accordingly to reflect these expected returns. However, this does not necessarily mean that prices must be identical or that dividends will be similar. It simply means that investors will demand a similar return on their investment, given the level of risk involved.

Question 9

The driving forces leading markets to be efficient is:
A) Arbitrage and asymmetric information
B) Competition and the profit motive
C) Abnormal returns and the central limit theorem
D) Volatility and the nature of risk averse investors
E) Irrationality and government anti-trust legislation

Accepted Answer

Competition and the profit motive drive investors to seek out and act on information that can provide an advantage in the markets, ultimately leading to efficiency. Arbitrage and asymmetric information also contribute to efficiency, but they are not the driving forces. Abnormal returns and the central limit theorem are concepts related to market efficiency but are not factors that drive it. Volatility and risk aversion can actually hinder market efficiency, as they can lead to irrational behavior. Irrationality and government anti-trust legislation are not factors that drive market efficiency.

Question 10

The return on a stock that remains after the overall market returns have been removed is called the __________ return
A) Excess
B) Distinct
C) Abnormal
D) Subjective
E) Efficient

Accepted Answer

Abnormal return refers to the portion of a stock's return that is not due to the market's overall movement but is unique to that specific stock. It represents the stock's performance beyond what would be predicted by market movements alone.

Question 11

When a stock price fluctuates, but follows no discernible pattern of movement over time, the stock price is said to be a(n)
A) Deviated pattern
B) Dispersed flow
C) Efficient movement
D) Overreaction and correction
E) Random walk

Accepted Answer

A random walk refers to a stock price movement that is unpredictable, and no pattern can be established to predict future movements. In other words, the stock price fluctuates randomly without any apparent direction or trend. The theory of a random walk suggests that the past price movements cannot be used to forecast future movements, and hence a stock's price is determined by the current information available in the market.

Question 12

With a clear relationship as a tipper and a tipee, buying or selling securities in an attempt to make profit is a(n) __________.
A) Over-counter trading
B) Off-floor trading
C) Legal trading
D) Insider trading
E) Irrational trading

Accepted Answer

Insider trading involves trading securities based on material, non-public information. In this context, the "tipper" is the person who has insider information and shares it, and the "tipee" is the person who receives this information and may act on it to trade securities for profit.

Question 13

A sudden and significant decline in overall market prices is called a(n)
A) Crash
B) Dive
C) Recession
D) Rebound
E) Adjustment

Accepted Answer

A sudden and significant decline in overall market prices is commonly referred to as a crash. A crash typically involves a sharp drop in the value of stocks, bonds, commodities, or other assets, often resulting in panic selling by investors and widespread uncertainty in the markets.

Question 14

When market prices are much higher than fundamental or rational analysis would tend to support, the market is said to be in a(n):
A) Fantasy land
B) Cloud
C) Inverted state
D) Bubble
E) Winner's state

Accepted Answer

When market prices are significantly higher than what fundamental analysis would justify, it indicates a bubble in the market. This means that the prices of assets are driven by exuberance and speculation, rather than by fundamental valuation of assets. When the bubble bursts, prices can plummet quickly and significantly, sometimes causing significant financial losses for those invested in the market.

Question 15

A market in which publicly available information is of no use in beating the market is __________ -form efficient.
A) weak
B) semi-weak
C) semistrong
D) strong
E) technical

Accepted Answer

In a market that is semistrong-form efficient, all publicly available information is already reflected in stock prices, meaning that analyzing this information will not give an investor an advantage in beating the market.

Question 16

Small stocks tend to have the largest returns in __________.
A) March
B) January
C) September
D) August
E) October

Accepted Answer

January is known to be the month where small stocks tend to have the highest returns historically, based on data and analysis from stock market experts. This phenomenon is called the "January Effect."

Question 17

The rules established by the NYSE that control trading when the DJIA declines by more than a specified amount on any trading day are referred to as:
A) Stop-loss limits
B) Market timers
C) Crash helmets
D) Circuit breakers
E) Trade barriers

Accepted Answer

The rules established by the NYSE that control trading when the DJIA declines by more than a specified amount on any trading day are referred to as circuit breakers. These rules are designed to prevent a market crash and stabilize trading.

Question 18

The difference between what an investment earned and the return on other investments with the same level of risk is known as the _________ return.
A) Excess
B) Market
C) Superior
D) Top
E) Strong

Accepted Answer

Excess return refers to the difference between the return on a specific investment and the return on another investment with the same level of risk. This excess return can indicate how successful an investment was in generating returns above and beyond what would be expected given the level of risk involved.

Question 19

If you know information about a company that will have a significant effect on the company's stock price once the information is released, you have knowledge that is referred to as __________ information
A) Excess profit
B) Public
C) Abnormal
D) Market effect
E) Material no-public

Accepted Answer

The term for this type of information is "material non-public information" or MNPI. It refers to information that is not yet available to the public, but if released, could have a significant impact on the company's stock price. It is illegal to trade on MNPI, as it gives an unfair advantage to those who have access to it.

Question 20

A person who decides to buy or sell securities based on publicly available information and analysis is called a(n) __________ trader.
A) Public
B) Informed
C) Noisy
D) Inside
E) Block

Accepted Answer

An informed trader is someone who uses publicly available information and analysis to make trades. A public trader is someone who trades in the open market but may not necessarily be using publicly available information to make trades. A noisy trader is someone whose trades do not have any informational value and may be driven by factors such as liquidity needs. An inside trader is someone who trades on non-public information, which is illegal. A block trader is someone who trades in large volumes.

Quiz 8: Stock Price Behaviour and Market Efficiency

A market in which past prices and volume are of no use in beating the market is __________ -form efficient

Which of the following is NOT one of the economics foundations of market efficiency?

A market in which information of any kind, public or private, is of no use in beating the market is __________ -form efficient.

A(n) __________ is a method of research that studies the effect that news announcements have on stock prices.

The tendency for Monday to have a negative return is the __________ effect.

The observation that stocks price behaviour is that of a "random walk" is related to the __________ version of the efficient market hypothesis.

The hypothesis that investors cannot consistently earn positive excess returns is known as the __________ hypothesis.

In an efficient market, stocks with similar risks will:

The driving forces leading markets to be efficient is:

The return on a stock that remains after the overall market returns have been removed is called the __________ return

When a stock price fluctuates, but follows no discernible pattern of movement over time, the stock price is said to be a(n)

With a clear relationship as a tipper and a tipee, buying or selling securities in an attempt to make profit is a(n) __________.

A sudden and significant decline in overall market prices is called a(n)

When market prices are much higher than fundamental or rational analysis would tend to support, the market is said to be in a(n) :

A market in which publicly available information is of no use in beating the market is __________ -form efficient.

Small stocks tend to have the largest returns in __________.

The rules established by the NYSE that control trading when the DJIA declines by more than a specified amount on any trading day are referred to as:

The difference between what an investment earned and the return on other investments with the same level of risk is known as the _________ return.

If you know information about a company that will have a significant effect on the company's stock price once the information is released, you have knowledge that is referred to as __________ information

A person who decides to buy or sell securities based on publicly available information and analysis is called a(n) __________ trader.