21. Jaffe (1974) found that stock prices _________ after insiders intensively bought shares.
A. decreased
B. did not change
C. increased
D. became extremely volatile
E. became much less volatile
A. decreased
B. did not change
C. increased
D. became extremely volatile
E. became much less volatile
Insider trading may signal private information.
AACSB: Analytic
Bloom's: Remember
Difficulty: Intermediate
Topic: Efficient Markets
22. Jaffe (1974) found that stock prices _________ after insiders intensively sold shares.
A. decreased
B. did not change
C. increased
D. became extremely volatile
E. became much less volatile
A. decreased
B. did not change
C. increased
D. became extremely volatile
E. became much less volatile
Insider trading may signal private information.
AACSB: Analytic
Bloom's: Remember
Difficulty: Intermediate
Topic: Efficient Markets
23. Banz (1981) found that, on average, the risk-adjusted returns of small firms
A. were higher than the risk-adjusted returns of large firms.
B. were the same as the risk-adjusted returns of large firms.
C. were lower than the risk-adjusted returns of large firms.
D. were unrelated to the risk-adjusted returns of large firms.
E. were negative.
A. were higher than the risk-adjusted returns of large firms.
B. were the same as the risk-adjusted returns of large firms.
C. were lower than the risk-adjusted returns of large firms.
D. were unrelated to the risk-adjusted returns of large firms.
E. were negative.
Banz found A to be true, although subsequent studies have attempted to explain the small firm effect as the January effect, the neglected firm effect, etc.
AACSB: Analytic
Bloom's: Remember
Difficulty: Intermediate
Topic: Efficient Markets
24. Banz (1981) found that, on average, the risk-adjusted returns of large firms
A. were higher than the risk-adjusted returns of small firms.
B. were the same as the risk-adjusted returns of small firms.
C. were lower than the risk-adjusted returns of small firms.
D. were unrelated to the risk-adjusted returns of small firms.
E. were negative.
A. were higher than the risk-adjusted returns of small firms.
B. were the same as the risk-adjusted returns of small firms.
C. were lower than the risk-adjusted returns of small firms.
D. were unrelated to the risk-adjusted returns of small firms.
E. were negative.
Banz found A to be true, although subsequent studies have attempted to explain the small firm effect as the January effect, the neglected firm effect, etc.
AACSB: Analytic
Bloom's: Remember
Difficulty: Intermediate
Topic: Efficient Markets
25. Proponents of the EMH think technical analysts
A. should focus on relative strength.
B. should focus on resistance levels.
C. should focus on support levels.
D. should focus on financial statements.
E. are wasting their time.
A. should focus on relative strength.
B. should focus on resistance levels.
C. should focus on support levels.
D. should focus on financial statements.
E. are wasting their time.
Technical analysts attempt to predict future stock prices from historic stock prices; proponents of EMH believe that stock price changes are random variables.
AACSB: Analytic
Bloom's: Remember
Difficulty: Intermediate
Topic: Implications of the EMH
26. Studies of positive earnings surprises have shown that there is
A. a positive abnormal return on the day positive earnings surprises are announced.
B. a positive drift in the stock price on the days following the earnings surprise announcement.
C. a negative drift in the stock price on the days following the earnings surprise announcement.
D. both a positive abnormal return on the day positive earnings surprises are announced and a positive drift in the stock price on the days following the earnings surprise announcement.
E. both a positive abnormal return on the day positive earnings surprises are announced and a negative drift in the stock price on the days following the earnings surprise announcement.
A. a positive abnormal return on the day positive earnings surprises are announced.
B. a positive drift in the stock price on the days following the earnings surprise announcement.
C. a negative drift in the stock price on the days following the earnings surprise announcement.
D. both a positive abnormal return on the day positive earnings surprises are announced and a positive drift in the stock price on the days following the earnings surprise announcement.
E. both a positive abnormal return on the day positive earnings surprises are announced and a negative drift in the stock price on the days following the earnings surprise announcement.
The market appears to adjust to earnings information gradually, resulting in a sustained period of abnormal returns.
AACSB: Analytic
Bloom's: Understand
Difficulty: Intermediate
Topic: Efficient Markets
27. Studies of negative earnings surprises have shown that there is
A. a negative abnormal return on the day negative earnings surprises are announced.
B. a positive drift in the stock price on the days following the earnings surprise announcement.
C. a negative drift in the stock price on the days following the earnings surprise announcement.
D. both a negative abnormal return on the day negative earnings surprises are announced and a positive drift in the stock price on the days following the earnings surprise announcement.
E. both a negative abnormal return on the day negative earnings surprises are announced and a negative drift in the stock price on the days following the earnings surprise announcement.
A. a negative abnormal return on the day negative earnings surprises are announced.
B. a positive drift in the stock price on the days following the earnings surprise announcement.
C. a negative drift in the stock price on the days following the earnings surprise announcement.
D. both a negative abnormal return on the day negative earnings surprises are announced and a positive drift in the stock price on the days following the earnings surprise announcement.
E. both a negative abnormal return on the day negative earnings surprises are announced and a negative drift in the stock price on the days following the earnings surprise announcement.
The market appears to adjust to earnings information gradually, resulting in a sustained period of abnormal returns.
AACSB: Analytic
Bloom's: Understand
Difficulty: Intermediate
Topic: Efficient Markets
28. Studies of stock price reactions to news are called
A. reaction studies.
B. event studies.
C. drift studies.
D. both reaction studies and drift studies.
E. both event studies and drift studies.
A. reaction studies.
B. event studies.
C. drift studies.
D. both reaction studies and drift studies.
E. both event studies and drift studies.
Studies of stock price reactions to news are called event studies.
AACSB: Analytic
Bloom's: Understand
Difficulty: Intermediate
Topic: Event Studies
29. On November 22, 2009 the stock price of WalMart was $39.50 and the retailer stock index was 600.30. On November 25, 2009 the stock price of WalMart was $40.25 and the retailer stock index was 605.20. Consider the ratio of WalMart to the retailer index on November 22 and November 25. WalMart is _______ the retail industry and technical analysts who follow relative strength would advise _______ the stock.
A. outperforming, buying
B. outperforming, selling
C. underperforming, buying
D. underperforming, selling
E. equally performing, neither buying nor selling
A. outperforming, buying
B. outperforming, selling
C. underperforming, buying
D. underperforming, selling
E. equally performing, neither buying nor selling
11/22: $39.50/600.30 = 0.0658; 11/25: $40.25/605.20 = 0.0665; Thus, WalMart's relative strength is improving and technicians using this technique would recommend buying.
AACSB: Analytic
Bloom's: Understand
Difficulty: Intermediate
Topic: Implications of the EMH
30. Work by Amihud and Mendelson (1986, 1991)
A. argues that investors will demand a rate of return premium to invest in less liquid stocks.
B. may help explain the small firm effect.
C. may be related to the neglected firm effect.
D. may help explain the small firm effect and may be related to the neglected firm effect.
E. argues that investors will demand a rate of return premium to invest in less liquid stocks, may help explain the small firm effect, and may be related to the neglected firm effect.
A. argues that investors will demand a rate of return premium to invest in less liquid stocks.
B. may help explain the small firm effect.
C. may be related to the neglected firm effect.
D. may help explain the small firm effect and may be related to the neglected firm effect.
E. argues that investors will demand a rate of return premium to invest in less liquid stocks, may help explain the small firm effect, and may be related to the neglected firm effect.
Lack of liquidity may affect the returns of small and neglected firms; however the theory does not explain why the abnormal returns are concentrated in January.
AACSB: Analytic
Bloom's: Understand
Difficulty: Intermediate
Topic: Efficient Markets
31. Fama and French (1992) found that the stocks of firms within the highest decile of book-to-market ratios had average monthly returns of _______ while the stocks of firms within the lowest decile of book-to-market ratios had average monthly returns of________.
A. greater than 1%, greater than 1%
B. greater than 1%, less than 1%
C. less than 1%, greater than 1%
D. less than 1%, less than 1%
E. less than 0.5%, greater than 0.5%
A. greater than 1%, greater than 1%
B. greater than 1%, less than 1%
C. less than 1%, greater than 1%
D. less than 1%, less than 1%
E. less than 0.5%, greater than 0.5%
This finding suggests either that low book-to-market ratio firms are relatively overpriced, or that the book-to-market ratio is serving as a proxy for a risk factor that affects expected equilibrium returns.
AACSB: Analytic
Bloom's: Remember
Difficulty: Intermediate
Topic: Efficient Markets
32. A market decline of 23% on a day when there is no significant macroeconomic event ______ consistent with the EMH because ________.
A. would be, it was a clear response to macroeconomic news
B. would be, it was not a clear response to macroeconomic news
C. would not be, it was a clear response to macroeconomic news
D. would not be, it was not a clear response to macroeconomic news
E. None of these are correct.
A. would be, it was a clear response to macroeconomic news
B. would be, it was not a clear response to macroeconomic news
C. would not be, it was a clear response to macroeconomic news
D. would not be, it was not a clear response to macroeconomic news
E. None of these are correct.
This happened on October 19, 1987. Although this specific event is not mentioned in this edition of the book, it is an example of something that would be considered a violation of the EMH.
AACSB: Analytic
Bloom's: Understand
Difficulty: Intermediate
Topic: Efficient Markets
33. In an efficient market, __________.
A. security prices react quickly to new information
B. security prices are seldom far above or below their justified levels
C. security analysis will not enable investors to realize superior returns consistently
D. one cannot make money
E. security prices react quickly to new information, are seldom far above or below their justified levels, and security analysis will not enable investors to realize superior returns consistently
A. security prices react quickly to new information
B. security prices are seldom far above or below their justified levels
C. security analysis will not enable investors to realize superior returns consistently
D. one cannot make money
E. security prices react quickly to new information, are seldom far above or below their justified levels, and security analysis will not enable investors to realize superior returns consistently
Security prices react quickly to new information, security prices are seldom far above or below their justified levels, and security analysis will not enable investors to realize superior returns consistently; however, even in an efficient market one should be able to earn the appropriate risk-adjusted rate of return.
AACSB: Analytic
Bloom's: Understand
Difficulty: Basic
Topic: Efficient Market Hypothesis
34. The weak form of the efficient market hypothesis asserts that
A. stock prices do not rapidly adjust to new information contained in past prices or past data.
B. future changes in stock prices cannot be predicted from past prices.
C. technicians cannot expect to outperform the market.
D. stock prices do not rapidly adjust to new information contained in past prices or past data and future changes in stock prices cannot be predicted from past prices
E. future changes in stock prices cannot be predicted from past prices and technicians cannot expect to outperform the market
A. stock prices do not rapidly adjust to new information contained in past prices or past data.
B. future changes in stock prices cannot be predicted from past prices.
C. technicians cannot expect to outperform the market.
D. stock prices do not rapidly adjust to new information contained in past prices or past data and future changes in stock prices cannot be predicted from past prices
E. future changes in stock prices cannot be predicted from past prices and technicians cannot expect to outperform the market
The weak form of the efficient market hypothesis asserts that future changes in stock prices cannot be predicted from past prices; therefore, technicians cannot expect to outperform the market.
AACSB: Analytic
Bloom's: Understand
Difficulty: Basic
Topic: Efficient Market Hypothesis
35. A support level is the price range at which a technical analyst would expect the
A. supply of a stock to increase dramatically.
B. supply of a stock to decrease substantially.
C. demand for a stock to increase substantially.
D. demand for a stock to decrease substantially.
E. price of a stock to fall.
A. supply of a stock to increase dramatically.
B. supply of a stock to decrease substantially.
C. demand for a stock to increase substantially.
D. demand for a stock to decrease substantially.
E. price of a stock to fall.
A support level is considered to be a level below that the price of the stock is unlikely to fall and is believed to be determined by market psychology.
AACSB: Analytic
Bloom's: Remember
Difficulty: Basic
Topic: Implications of the EMH
36. A finding that _________ would provide evidence against the semistrong form of the efficient market theory.
A. low P/E stocks tend to have positive abnormal returns
B. trend analysis is worthless in determining stock prices
C. one can consistently outperform the market by adopting the contrarian approach exemplified by the reversals phenomenon
D. low P/E stocks tend to have positive abnormal returns and trend analysis is worthless in determining stock prices
E. low P/E stocks tend to have positive abnormal returns and one can consistently outperform the market by adopting the contrarian approach exemplified by the reversals phenomenon
A. low P/E stocks tend to have positive abnormal returns
B. trend analysis is worthless in determining stock prices
C. one can consistently outperform the market by adopting the contrarian approach exemplified by the reversals phenomenon
D. low P/E stocks tend to have positive abnormal returns and trend analysis is worthless in determining stock prices
E. low P/E stocks tend to have positive abnormal returns and one can consistently outperform the market by adopting the contrarian approach exemplified by the reversals phenomenon
Both low P/E stocks tending to have positive abnormal returns and the ability to consistently outperform the market by adopting the contrarian approach exemplified by the reversals phenomenon are inconsistent with the semistrong form of the EMH.
AACSB: Analytic
Bloom's: Understand
Difficulty: Intermediate
Topic: Efficient Market Hypothesis
37. The weak form of the efficient market hypothesis contradicts
A. technical analysis, but supports fundamental analysis as valid.
B. fundamental analysis, but supports technical analysis as valid.
C. both fundamental analysis and technical analysis.
D. technical analysis, but is silent on the possibility of successful fundamental analysis.
E. None of these is correct.
A. technical analysis, but supports fundamental analysis as valid.
B. fundamental analysis, but supports technical analysis as valid.
C. both fundamental analysis and technical analysis.
D. technical analysis, but is silent on the possibility of successful fundamental analysis.
E. None of these is correct.
The weak form of the efficient market hypothesis contradicts technical analysis, but is silent on the possibility of successful fundamental analysis.
AACSB: Analytic
Bloom's: Understand
Difficulty: Intermediate
Topic: Efficient Market Hypothesis
38. Two basic assumptions of technical analysis are that security prices adjust
A. rapidly to new information and market prices are determined by the interaction of supply and demand.
B. rapidly to new information and liquidity is provided by security dealers.
C. gradually to new information and market prices are determined by the interaction of supply and demand.
D. gradually to new information and liquidity is provided by security dealers.
E. rapidly to information and to the actions of insiders.
A. rapidly to new information and market prices are determined by the interaction of supply and demand.
B. rapidly to new information and liquidity is provided by security dealers.
C. gradually to new information and market prices are determined by the interaction of supply and demand.
D. gradually to new information and liquidity is provided by security dealers.
E. rapidly to information and to the actions of insiders.
Technicians follow market data such as price changes and volume of trading (as indicator of supply and demand) believing that they can identify price trends as security prices adjust gradually.
AACSB: Analytic
Bloom's: Understand
Difficulty: Intermediate
Topic: Implications of the EMH
39. Cumulative abnormal returns (CAR)
A. are used in event studies.
B. are better measures of security returns due to firm-specific events than are abnormal returns (AR).
C. are cumulated over the period prior to the firm-specific event.
D. are used in event studies and are better measures of security returns due to firm-specific events than are abnormal returns (AR).
E. are used in event studies and are cumulated over the period prior to the firm-specific event.
A. are used in event studies.
B. are better measures of security returns due to firm-specific events than are abnormal returns (AR).
C. are cumulated over the period prior to the firm-specific event.
D. are used in event studies and are better measures of security returns due to firm-specific events than are abnormal returns (AR).
E. are used in event studies and are cumulated over the period prior to the firm-specific event.
As leakage of information occurs, the accumulated abnormal returns that are abnormal returns summed over the period of interest (around the event date) are better measures of the effect of firm-specific events.
AACSB: Analytic
Bloom's: Remember
Difficulty: Intermediate
Topic: Event Studies
40. Studies of mutual fund performance
A. indicate that one should not randomly select a mutual fund.
B. indicate that historical performance is not necessarily indicative of future performance.
C. indicate that the professional management of the fund insures above market returns.
D. indicates both that one should not randomly select a mutual fund and that historical performance is not necessarily indicative of future performance.
E. indicate both that historical performance is not necessarily indicative of future performance and that the professional management of the fund insures above market returns.
A. indicate that one should not randomly select a mutual fund.
B. indicate that historical performance is not necessarily indicative of future performance.
C. indicate that the professional management of the fund insures above market returns.
D. indicates both that one should not randomly select a mutual fund and that historical performance is not necessarily indicative of future performance.
E. indicate both that historical performance is not necessarily indicative of future performance and that the professional management of the fund insures above market returns.
Studies show that, in general, funds do not outperform the market and that historical performance is not necessarily an indicator of future performance.
AACSB: Analytic
Bloom's: Remember
Difficulty: Basic
Topic: Mutual Fund/Analyst Performance
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