Exam 13: Efficient Markets and Behavioral Finance

A majority of research supports the theory that past stock movements can predict future asset prices.

State the semistrong form of market efficiency and its implications.

Behavioral finance deals with the idea that individual investors have built-in biases and misconceptions that can drive prices away from fair values.

The different forms of market efficiency are I.weak form; II.semistrong form; III.strong form

The statement that stock prices follow a random walk implies that I.the correlation coefficient between successive price changes (auto correlation)is not significantly different from zero; II.successive price changes are positively related; III.successive price changes are negatively related; IV.the autocorrelation coefficient is positive

The semistrong form of the efficient markets hypothesis has been tested by measuring how rapidly security prices react to various news items like I.earnings announcements; II.dividend announcements; III.news of takeovers; IV.macroeconomic information

Which of the following observations would provide evidence against the strong form of efficient market theory? I.Mutual fund managers do not on average make superior returns. II.In any year approximately 50% of all pension funds outperform the market. III.Managers who trade in their own firm's stocks make superior returns.

For a corporation, financing decisions are typically harder to reverse than investment decisions.

A random walk process for a single stock consists of the toss of a fair coin at the end of each day. If the outcome is heads, the stock price increases by 1.25 percent. If the outcome is tails, the stock price decreases by 0.75 percent. What is the drift of such a process?

If the abnormal return for a stock during the first week is +5 percent and +3 percent during the second week, what is the abnormal return for the two-week period?

Suppose that a lawyer works for a firm that advises corporate firms planning to sue other corporations for antitrust damages. He finds that he can "beat the market" by short selling the stock of firms that will be sued. This hypothetical finding would violate

Financing decisions differ from investment decisions for which of the following reasons? I.you cannot use NPV to evaluate financing decisions; II.markets for financial assets are more active than for real assets; III.it is easier to find financing decisions with positive NPV than to find investment decisions with positive NPV

State the important differences between investment decisions and financing decisions.

The collections of evidence against market efficiency are referred to as "puzzles" or anomalies.

Investors are particularly averse to the possibility of even a very small loss and need a high return to compensate for it. Such a concept is related to which theory?

If a stock's returns follow a random walk pattern, then one should expect to calculate a statistically insignificant autocorrelation coefficient, calculated between each successive day's stock returns.

Briefly discuss some of the important findings of behavioral finance studies.

For most stocks, a scatter plot chart of stock returns versus past stock returns will appear as