Exam 13: Efficient Markets and Behavioral Finance

Analysis of past monthly movements in IBM's stock price produces the following estimates: α = 2.5 percent and β = 1.6. If the market index subsequently rises by 12 percent in one month and IBM's stock price increases by 20 percent, what is the abnormal change in IBM's stock price?

State the weak form of market efficiency and its implications.

The various lessons of market efficiency are I.markets have no memory; II.trust market prices; III.read the entrails; IV.the do-it yourself alternative; V.seen one stock, seen them all

Which of the following is a statement of semistrong form efficiency? I.Stock prices will adjust immediately to public information. II.Stock prices reflect all information. III.Stock prices will adjust to newly published information after a long time delay.

Predictable cycles in stock price movements I.tend to persist for a long time; II.tend to self-destruct as soon as investors recognize them; III.never appear, since stock returns change randomly

Briefly explain why, in a competitive securities market, successive price changes are random.

Which of the following statements is (are)true if the strong-form efficient market hypothesis holds? I.Analysts can easily forecast stock price changes. II.Financial markets are irrational. III.Stock returns follow a particular pattern. IV.Stock prices reflect all available information.

If the weak form of market efficiency holds, then I.technical analysis is useless; II.stock prices reflect all information contained in past prices; III.stock price returns follow a random walk

One important implication of the efficient markets hypothesis is that most investors

List the three forms of market efficiency and explain the bases for them.

The study of behavioral finance has best helped explain which of the following investor behaviors?

Informational efficiency in financial markets results in stock prices being

The weak form of efficient market theory implies that technical analysis is valuable.

In a completely competitive market, security prices follow a random walk.

Financing decisions differ from investment decisions because I.financing decisions are easier to reverse; II.markets for financial assets are generally more competitive than real asset markets; III.generally, financing decisions have NPVs very close to zero

State the strong form of market efficiency.

The semistrong form of efficiency focuses on the economic ineffectiveness of the following type of information:

Stock price cycles or patterns tend to self-destruct as soon as investors recognize them through

Weak-form efficiency implies that past stock returns

Behavioral finance and technical analysis are basically the same theory.