1. If you believe in the ________ form of the EMH, you believe that stock prices reflect all relevant information including historical stock prices and current public information about the firm, but not information that is available only to insiders.
A. semistrong
B. strong
C. weak
D. semistrong, strong, and weak
E. hard
A. semistrong
B. strong
C. weak
D. semistrong, strong, and weak
E. hard
The semistrong form of the EMH maintains that stock prices immediately reflect all historical and current public information, but not inside information.
AACSB: Analytic
Bloom's: Remember
Difficulty: Basic
Topic: Efficient Market Hypothesis
2. When Maurice Kendall examined the patterns of stock returns in 1953 he concluded that the stock market was __________. Now, these random price movements are believed to be _________.
A. inefficient; the effect of a well-functioning market
B. efficient; the effect of an inefficient market
C. inefficient; the effect of an inefficient market
D. efficient; the effect of a well-functioning market
E. irrational; even more irrational than before
A. inefficient; the effect of a well-functioning market
B. efficient; the effect of an inefficient market
C. inefficient; the effect of an inefficient market
D. efficient; the effect of a well-functioning market
E. irrational; even more irrational than before
Random price changes were originally thought to be driven by irrationality. Now, financial economists believe random price changes occur because markets are informationally efficient.
AACSB: Analytic
Bloom's: Understand
Difficulty: Basic
Topic: Efficient Market Hypothesis
3. The stock market follows a __________.
A. random walk
B. submartingale
C. predictable pattern that can be exploited
D. random walk and a predictable pattern that can be exploited
E. submartingale and a predictable pattern that can be exploited
A. random walk
B. submartingale
C. predictable pattern that can be exploited
D. random walk and a predictable pattern that can be exploited
E. submartingale and a predictable pattern that can be exploited
The stock market follows a submartingale.
AACSB: Analytic
Bloom's: Remember
Difficulty: Basic
Topic: Efficient Market Hypothesis
4. A hybrid strategy is one where the investor
A. uses both fundamental and technical analysis to select stocks.
B. selects the stocks of companies that specialize in alternative fuels.
C. selects some actively-managed mutual funds on their own and uses an investment advisor to select other actively-managed funds.
D. maintains a passive core and augments the position with an actively managed portfolio.
E. None of these are correct.
A. uses both fundamental and technical analysis to select stocks.
B. selects the stocks of companies that specialize in alternative fuels.
C. selects some actively-managed mutual funds on their own and uses an investment advisor to select other actively-managed funds.
D. maintains a passive core and augments the position with an actively managed portfolio.
E. None of these are correct.
A hybrid strategy is one where the investor maintains a passive core and augments the position with an actively managed portfolio.
AACSB: Analytic
Bloom's: Understand
Difficulty: Basic
Topic: Implications of the EMH
5. The difference between a random walk and a submartingale is the expected price change in a random walk is ______ and the expected price change for a submartingale is ______.
A. positive; zero
B. positive; positive
C. positive; negative
D. zero; positive
E. zero; zero
A. positive; zero
B. positive; positive
C. positive; negative
D. zero; positive
E. zero; zero
A random walk has an expected price change of zero and a submartingale has a positive expected price change.
AACSB: Analytic
Bloom's: Understand
Difficulty: Basic
Topic: Efficient Market Hypothesis
6. Proponents of the EMH typically advocate
A. an active trading strategy.
B. investing in an index fund.
C. a passive investment strategy.
D. an active trading strategy and investing in an index fund
E. investing in an index fund and a passive investment strategy
A. an active trading strategy.
B. investing in an index fund.
C. a passive investment strategy.
D. an active trading strategy and investing in an index fund
E. investing in an index fund and a passive investment strategy
Believers of market efficiency advocate passive investment strategies, and an investment in an index fund is one of the most practical passive investment strategies, especially for small investors.
AACSB: Analytic
Bloom's: Remember
Difficulty: Basic
Topic: Efficient Market Hypothesis
7. Proponents of the EMH typically advocate
A. buying individual stocks on margin and trading frequently.
B. investing in hedge funds.
C. a passive investment strategy.
D. buying individual stocks on margin and trading frequently and investing in hedge funds
E. investing in hedge funds and a passive investment strategy
A. buying individual stocks on margin and trading frequently.
B. investing in hedge funds.
C. a passive investment strategy.
D. buying individual stocks on margin and trading frequently and investing in hedge funds
E. investing in hedge funds and a passive investment strategy
Believers of market efficiency advocate passive investment strategies, and an investment in an index fund is one of the most practical passive investment strategies, especially for small investors.
AACSB: Analytic
Bloom's: Remember
Difficulty: Basic
Topic: Efficient Market Hypothesis
8. If you believe in the _______ form of the EMH, you believe that stock prices only reflect all information that can be derived by examining market trading data such as the history of past stock prices, trading volume or short interest.
A. semistrong
B. strong
C. weak
D. semistrong, strong, and weak
E. None of these are correct.
A. semistrong
B. strong
C. weak
D. semistrong, strong, and weak
E. None of these are correct.
The information described above is market data, which is the data set for the weak form of market efficiency. The semistrong form includes the above plus all other public information. The strong form includes all public and private information.
AACSB: Analytic
Bloom's: Remember
Difficulty: Basic
Topic: Efficient Market Hypothesis
9. If you believe in the _________ form of the EMH, you believe that stock prices reflect all available information, including information that is available only to insiders.
A. semistrong
B. strong
C. weak
D. semistrong, strong, and weak
E. None of these are correct.
A. semistrong
B. strong
C. weak
D. semistrong, strong, and weak
E. None of these are correct.
The strong form includes all public and private information.
AACSB: Analytic
Bloom's: Remember
Difficulty: Basic
Topic: Efficient Market Hypothesis
10. If you believe in the reversal effect, you should
A. buy bonds in this period if you held stocks in the last period.
B. buy stocks in this period if you held bonds in the last period.
C. buy stocks this period that performed poorly last period.
D. go short.
E. both buy stocks this period that performed poorly last period and go short
A. buy bonds in this period if you held stocks in the last period.
B. buy stocks in this period if you held bonds in the last period.
C. buy stocks this period that performed poorly last period.
D. go short.
E. both buy stocks this period that performed poorly last period and go short
The reversal effect states that stocks that do well in one period tend to perform poorly in the subsequent period, and vice versa.
AACSB: Analytic
Bloom's: Remember
Difficulty: Basic
Topic: Efficient Market Hypothesis
11. __________ focus more on past price movements of a firm's stock than on the underlying determinants of future profitability.
A. Credit analysts
B. Fundamental analysts
C. Systems analysts
D. Technical analysts
E. Credit analysts, Fundamental analysts, Systems analysts, and Technical analysts
A. Credit analysts
B. Fundamental analysts
C. Systems analysts
D. Technical analysts
E. Credit analysts, Fundamental analysts, Systems analysts, and Technical analysts
Technicians attempt to predict future stock prices based on historical stock prices.
AACSB: Analytic
Bloom's: Remember
Difficulty: Basic
Topic: Implications of the EMH
12. _________ above which it is difficult for the market to rise.
A. A book value is a value
B. A resistance level is a value
C. A support level is a value
D. A book value and a resistance level are values
E. A book value and a support level are values
A. A book value is a value
B. A resistance level is a value
C. A support level is a value
D. A book value and a resistance level are values
E. A book value and a support level are values
When stock prices have remained stable for a long period, these prices are termed resistance levels; technicians believe it is difficult for the stock prices to penetrate these resistance levels.
AACSB: Analytic
Bloom's: Remember
Difficulty: Basic
Topic: Implications of the EMH
13. _________ below which it is difficult for the market to fall.
A. An intrinsic value is a value
B. A resistance level is a value
C. A support level is a value
D. An intrinsic value and a resistance level are values
E. A resistance level and a support level are values
A. An intrinsic value is a value
B. A resistance level is a value
C. A support level is a value
D. An intrinsic value and a resistance level are values
E. A resistance level and a support level are values
When stock prices have remained stable for a long period, these prices are termed support levels; technicians believe it is difficult for the stock prices to penetrate these support levels.
AACSB: Analytic
Bloom's: Remember
Difficulty: Basic
Topic: Implications of the EMH
14. ___________ the return on a stock beyond what would be predicted from market movements alone.
A. An irrational return is
B. An economic return is
C. An abnormal return is
D. An irrational return and an economic return are
E. An irrational return and an abnormal return are
A. An irrational return is
B. An economic return is
C. An abnormal return is
D. An irrational return and an economic return are
E. An irrational return and an abnormal return are
An economic return is the expected return, based on the perceived level of risk and market factors. When returns exceed these levels, the returns are called abnormal returns.
AACSB: Analytic
Bloom's: Remember
Difficulty: Basic
Topic: Event Studies
15. The debate over whether markets are efficient will probably never be resolved because of ________.
A. the lucky event issue
B. the magnitude issue
C. the selection bias issue
D. the lucky event issue, magnitude issue, and selection bias issue
E. None of these answers are correct.
A. the lucky event issue
B. the magnitude issue
C. the selection bias issue
D. the lucky event issue, magnitude issue, and selection bias issue
E. None of these answers are correct.
The lucky event issue, magnitude issue, and selection bias issue all exist and make rigid testing of market efficiency difficult or impossible.
AACSB: Analytic
Bloom's: Remember
Difficulty: Basic
Topic: Efficient Markets
16. A common strategy for passive management is ____________.
A. creating an index fund
B. creating a small firm fund
C. creating an investment club
D. creating an index fund and creating an investment club
E. creating a small firm fund and creating an investment club
A. creating an index fund
B. creating a small firm fund
C. creating an investment club
D. creating an index fund and creating an investment club
E. creating a small firm fund and creating an investment club
The index fund is, by definition, passively managed. The other investment alternatives may or may not be managed passively.
AACSB: Analytic
Bloom's: Remember
Difficulty: Basic
Topic: Implications of the EMH
17. Arbel (1985) found that.
A. the January effect was highest for neglected firms.
B. the book-to-market value ratio effect was highest in January.
C. the liquidity effect was highest for small firms.
D. the neglected firm effect was independent of the small firm effect.
E. small firms had higher book-to-market value ratios.
A. the January effect was highest for neglected firms.
B. the book-to-market value ratio effect was highest in January.
C. the liquidity effect was highest for small firms.
D. the neglected firm effect was independent of the small firm effect.
E. small firms had higher book-to-market value ratios.
Arbel divided firms into highly researched, moderately researched, and neglected groups based on the number of institutions holding the stock.
AACSB: Analytic
Bloom's: Remember
Difficulty: Intermediate
Topic: Efficient Markets
18. Researchers have found that most of the small firm effect occurs
A. during the spring months.
B. during the summer months.
C. in December.
D. in January.
E. randomly.
A. during the spring months.
B. during the summer months.
C. in December.
D. in January.
E. randomly.
Much of the so-called small firm effect simply may be the tax-effect as investors sell stocks on which they have losses in December and reinvest the funds in January. As small firms are especially volatile, these actions affect small firms in a more dramatic fashion.
AACSB: Analytic
Bloom's: Understand
Difficulty: Intermediate
Topic: Efficient Markets
19. Basu (1977, 1983) found that firms with low P/E ratios
A. earned higher average returns than firms with high P/E ratios.
B. earned the same average returns as firms with high P/E ratios.
C. earned lower average returns than firms with high P/E ratios.
D. had higher dividend yields than firms with high P/E ratios.
E. None of these are correct.
A. earned higher average returns than firms with high P/E ratios.
B. earned the same average returns as firms with high P/E ratios.
C. earned lower average returns than firms with high P/E ratios.
D. had higher dividend yields than firms with high P/E ratios.
E. None of these are correct.
Firms with high P/E ratios already have an inflated price relative to earnings and thus tend to have lower returns than low P/E ratio stocks. However, the P/E ratio may capture risk not fully impounded in market betas so this may represent an appropriate risk adjustment rather than a market anomaly.
AACSB: Analytic
Bloom's: Understand
Difficulty: Intermediate
Topic: Efficient Markets
20. Basu (1977, 1983) found that firms with high P/E ratios
A. earned higher average returns than firms with low P/E ratios.
B. earned the same average returns as firms with low P/E ratios.
C. earned lower average returns than firms with low P/E ratios.
D. had higher dividend yields than firms with low P/E ratios.
E. None of these are correct.
A. earned higher average returns than firms with low P/E ratios.
B. earned the same average returns as firms with low P/E ratios.
C. earned lower average returns than firms with low P/E ratios.
D. had higher dividend yields than firms with low P/E ratios.
E. None of these are correct.
Firms with high P/E ratios already have an inflated price relative to earnings and thus tend to have lower returns than low P/E ratio stocks. However, the P/E ratio may capture risk not fully impounded in market betas so this may represent an appropriate risk adjustment rather than a market anomaly.
AACSB: Analytic
Bloom's: Understand
Difficulty: Intermediate
Topic: Efficient Markets
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