Exam 13: Efficient Markets and Behavioral Finance

List the five lessons of market efficiency.

If capital markets are completely efficient, then the purchase or sale of any security at the prevailing market price is never a positive-NPV transaction.

Which of the following is a statement of weak-form efficiency? I.If markets are efficient in the weak form, then it is impossible to make consistently superior profits by using trading rules based on past returns. II.If markets are efficient in the weak form, then prices will adjust immediately to public information. III.If markets are efficient in the weak form, then prices reflect all information.

A small business received a five-year $1,000,000 loan at a subsidized rate of 3 percent per year. The firm will pay 3 percent annual interest payment each year and the principal at the end of five years. If market interest rates on similar loans are 6 percent per year, what is the NPV of the loan? (Ignore taxes.)

In order to test the weak form of the efficient-market hypothesis, researchers have used the following methods except

Analysis of past monthly movements in Wal-Mart's stock price has produced the following estimates: α = −0.45 percent and β = 0.5. If the market index subsequently rises by 5 percent while Wal-Mart's stock price rises by 3 percent, what is the abnormal change in Wal-Mart's stock price?

Strong-form efficiency implies that mutual fund managers should

A large firm received a loan guarantee from the government. Due to the guarantee, the firm can borrow $50 million for five years at 8 percent interest rate per year instead of 10 percent per year. Calculate the value of the guarantee to the firm. (Ignore taxes.)

The statement that stock prices follow a random walk implies that I.successive price changes are independent of each other; II.successive price changes are positively related; III.successive price changes are negatively related; IV.the autocorrelation coefficient is either +1.0 or −1.0

An abnormal stock return is calculated as the

When a firm announces a dividend change, or publishes its latest earnings, the major part of any price adjustment usually takes place within a few minutes of the announcement.

In an efficient market, investors will not pay others what they can do equally well themselves.

If the efficient market hypothesis holds, investors should expect I.to receive a fair price for their security II.to earn a normal rate of return on their investments III.to be able to pick stocks that will outperform the market

If markets are efficient, which of the following investors should achieve superior returns over time?

Generally, a firm is able to find positive-NPV opportunities among its I.financing decisions; II.capital investment decisions; III.short-term borrowing decisions

Strong-form market efficiency states that the market incorporates all information into stock prices. Strong-form efficiency implies that I.an investor can only earn risk-free rates of return; II.an investor can always rely on technical analysis; III.professional investors cannot consistently outperform the market;

In order to test the semistrong form of the efficient-market hypothesis, researchers have mostly relied on the

If stock returns follow a random walk pattern, then knowing the history of stock returns is not useful for predicting future stock returns.

In an efficient market, information is costless.

If capital markets are efficient, then the sale or purchase of any security at the prevailing market price is generally