Which of the following are used by technical analysts to determine proper stock prices?

51. 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. I and II

Fundamental analysts look at factors such as earnings, dividend prospects, expectation of future interest rates, and risk of the firm. The information is used to determine the present value of future cash flows to stockholders. Technical analysts use trendlines and resistance levels.

AACSB: Analytic
Bloom's: Understand
Difficulty: Intermediate
Topic: Implications of the EMH
 

52. 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.

Individual investors tend to have relatively small portfolios and are usually unable to realize economies of size. The best strategy is to pool funds with other small investors and allow professional managers to invest the funds.

AACSB: Analytic
Bloom's: Apply
Difficulty: Intermediate
Topic: Mutual Fund/Analyst Performance
 

53. 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

Warren Buffet manages Berkshire Hathaway and Peter Lynch managed Fidelity's Magellan Fund. Phoebe Buffet is a character on NBC's "Friends" and Jimmy Buffet is "Wasting Away in Margaritaville." Merrill Lynch isn't a person.

AACSB: Analytic
Bloom's: Remember
Difficulty: Intermediate
Topic: Mutual Fund/Analyst Performance
 

54. 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.

AR = 14% − (5% + 1.0 (6%)) = +3.0%. A positive abnormal return suggests that there was firm-specific good news.

AACSB: Analytic
Bloom's: Apply
Difficulty: Intermediate
Topic: Efficient Markets
 

55. 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.

AR = 15% − (4% + 2.25 (8%)) = −7.0%. A negative abnormal return suggests that there was firm-specific bad news.

AACSB: Analytic
Bloom's: Apply
Difficulty: Intermediate
Topic: Efficient Markets
 

56. 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.

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.

AACSB: Analytic
Bloom's: Apply
Difficulty: Intermediate
Topic: Efficient Markets
 

57. 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.

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.

AACSB: Analytic
Bloom's: Apply
Difficulty: Intermediate
Topic: Efficient Markets
 

58. 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.

The positive abnormal return suggests that investors view the international joint venture as good news.

AACSB: Analytic
Bloom's: Apply
Difficulty: Intermediate
Topic: Efficient Markets
 

59. 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.

The negative abnormal return suggests that investors expected the sales increase to be larger than what was actually announced.

AACSB: Analytic
Bloom's: Apply
Difficulty: Intermediate
Topic: Efficient Markets
 

60. 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 these is correct.

The approval was already anticipated by the market.

AACSB: Analytic
Bloom's: Apply
Difficulty: Intermediate
Topic: Event Studies