Question 1

You are reading the most recent issue of the Wall Street Reporter and Review and learn of a mutual fund manager who has outperformed the market over the past five years by at least 6 percent per year. Which of the following would make it difficult to argue this shows the stock market is not efficient?
I. The dumb luck problem.
II. The data snooping problem.
III. The risk-adjustment problem.
IV. The relevant information problem.

Accepted Answer

The answer of You are reading the most recent issue...

Question 2

Which one of the following statements describes an investment strategy that may lead to profitable results based on current research findings?

Accepted Answer

Buying stocks with relatively low P/E ratios is a well-known investment strategy that has been shown to generate above-average returns over time. This approach involves identifying companies whose stock prices are lower compared to their earnings, indicating that the stock is potentially undervalued. By investing in these stocks, investors can benefit from both capital appreciation as the stock price rises and potential dividend payments. Selling stocks based on timing or earnings surprises, as suggested in the other options, is not a proven investment strategy and may lead to losses.

Question 3

If the DJIA falls by 20 percent, the NYSE will:

Accepted Answer

The NYSE has specific circuit breaker rules that are designed to temporarily halt trading in order to provide a cooling-off period during large, intraday market declines. If the DJIA falls by 20 percent, the NYSE will stop trading for two hours if the decline occurs before 1 P.M., according to these rules.

Question 4

If the DJIA falls by 10 percent, the NYSE will:

Accepted Answer

The answer of If the DJIA falls by 10 percent,...

Question 5

Which of the following preceded the Asian stock market crash?
I. substantial stock price increases
II. substantial increases in real estate values
III. U.S. Crash of 1987
IV. growing Japanese market pessimism

Accepted Answer

The Asian stock market crash was preceded by substantial stock price increases and increases in real estate values, as well as the U.S. Crash of 1987, which had a global impact. However, growing Japanese market pessimism occurred after the crash.

Question 6

Approximately how long did it take the stock market to return to its highs from August 1987 once it crashed in October?

Accepted Answer

The stock market crash in October 1987, known as Black Monday, saw the Dow Jones Industrial Average take about two years to recover to its pre-crash highs.

Question 7

Assume the market is semistrong-form efficient. The best investment strategy is to:

Accepted Answer

If the market is semistrong-form efficient, all publicly available information such as financial reports, news, and past prices are already reflected in the stock prices. Therefore, it is unlikely that an individual investor can consistently beat the market by analyzing the public information. In this case, investing in an index fund that follows the market is the most efficient way to gain market returns without incurring additional costs associated with actively managed mutual funds.

Question 8

During the period of August 25, 1987 to October 20, 1987, the stock market declined in value by approximately __________ percent.

Accepted Answer

This period is known as Black Monday, and it saw the largest single-day percentage decline in stock market history with a drop of 22.6%. Overall, during this two-month period, the market lost around 40% of its value.

Question 9

If the DJIA falls by 30 percent, the NYSE will:

Accepted Answer

According to Rule 80B of the New York Stock Exchange, if the DJIA falls by 30 percent, trading will be halted for the remainder of the day.

Question 10

Which of the following are possible factors contributing to the Crash of 1987?
I. irrational investors
II. program trading
III. takeover activity
IV. negative economic forecasts

Accepted Answer

All listed factors (irrational investors, program trading, takeover activity, and negative economic forecasts) are considered possible contributors to the Crash of 1987. Each played a role in creating the conditions that led to the sudden market downturn.

Question 11

Which one of the following statements is correct concerning market bubbles and crashes?

Accepted Answer

Market bubbles can last for a long time and lead to unsustainable increases in market prices, while market crashes often happen quickly and can result in a significant downturn in market prices over a short period of time. However, it is important to note that the length and severity of both bubbles and crashes can vary and are not always predictable.

Question 12

Approximately how many years did it take for the stock market to recover from the bear market of 1929 to 1932?

Accepted Answer

The answer of Approximately how many years did it take...

Question 13

In reality, market prices tend to __________ earnings "surprises".

Accepted Answer

The answer of In reality, market prices tend to __________...

Question 14

Over the time period of 1929 to 1932, the stock market lost approximately __________ percent of its value.

Accepted Answer

The stock market lost approximately 90% of its value during the period from 1929 to 1932, a time that marked the beginning of the Great Depression.

Question 15

From the end of 1989 to the spring of 2003, the Nikkei Index declined in value approximately __________ percent.

Accepted Answer

The correct answer is D (80%). The Nikkei Index decreased from a high of almost 39,000 in December 1989 to a low of around 7,900 in April 2003, a decline of approximately 80%. Therefore, the best option is D.

Question 16

Immediately following the Crash of 1987, the stock market:

Accepted Answer

The stock market had one of the biggest short-term gains ever following the Crash of 1987. This was due to coordinated efforts by central banks around the world to inject liquidity into the markets and prevent a complete collapse.

Question 17

The primary purpose of the NYSE circuit breakers is to:

Accepted Answer

The primary purpose of the NYSE circuit breakers is to slow a market decline by temporarily halting trading in the event of significant price movements. This provides investors with time to reevaluate their positions and prevent panic selling.

Question 18

The first time the DJIA fell by more than 100 points on a single day was:

Accepted Answer

The answer of The first time the DJIA fell by...

Question 19

The dot.com bubble affected __________ stocks.

Accepted Answer

The dot.com bubble affected both large and small-company stocks, particularly those related to the internet and technology sectors.

Question 20

The value of the Amex Internet Index increased by about __________ percent from October 1998 to March 2000 and subsequently declined by about __________ by October 2002.

Accepted Answer

The Amex Internet Index experienced a significant increase of approximately 500% from October 1998 to March 2000, reflecting the dot-com bubble's peak. After the bubble burst, the index declined by about 90% by October 2002, indicating a dramatic loss in value.

Quiz 8: Stock Price Behaviour and Market Efficiency