Question 1

The weak form of the efficient-market hypothesis asserts that

Accepted Answer

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.

Question 2

Chartists practice

Accepted Answer

A)  technical analysis. 
B)  fundamental analysis. 
C)  regression analysis. 
D)  insider analysis. 
E)  psychoanalysis. 
A)  technical analysis. 
B)  fundamental analysis. 
C)  regression analysis. 
D)  insider analysis. 
E)  psychoanalysis.

Question 3

In an efficient market the correlation coefficient between stock returns for two nonoverlapping time periods should be

Accepted Answer

A)  positive and large. 
B)  positive and small. 
C)  zero. 
D)  negative and small. 
E)  negative and large. 
A)  positive and large. 
B)  positive and small. 
C)  zero. 
D)  negative and small. 
E)  negative and large.

Question 4

A hybrid strategy is one where the investor

Accepted Answer

A)  uses both fundamental and technical analysis to select stocks. 
B)  selects the stocks of companies that specialize in alternative fuels. 
C)  selects some actively-managed mutual funds on their own and uses an investment advisor to select other actively-managed funds. 
D)  maintains a passive core and augments the position with an actively-managed portfolio. 
A)  uses both fundamental and technical analysis to select stocks. 
B)  selects the stocks of companies that specialize in alternative fuels. 
C)  selects some actively-managed mutual funds on their own and uses an investment advisor to select other actively-managed funds. 
D)  maintains a passive core and augments the position with an actively-managed portfolio.

Question 5

If you believe in the reversal effect, you should

Accepted Answer

A)  buy bonds in this period if you held stocks in the last period. 
B)  buy stocks in this period if you held bonds in the last period. 
C)  buy stocks this period that performed poorly last period. 
D)  go short. 
E)  buy stocks this period that performed poorly last period and go short. 
A)  buy bonds in this period if you held stocks in the last period. 
B)  buy stocks in this period if you held bonds in the last period. 
C)  buy stocks this period that performed poorly last period. 
D)  go short. 
E)  buy stocks this period that performed poorly last period and go short.

Question 6

___________ the return on a stock beyond what would be predicted from market movements alone.

Accepted Answer

A)  An irrational return is 
B)  An economic return is 
C)  An abnormal return is 
D)  None of the options are correct. 
E)  All of the options are correct. 
A)  An irrational return is 
B)  An economic return is 
C)  An abnormal return is 
D)  None of the options are correct. 
E)  All of the options are correct.

Question 7

A common strategy for passive management is

Accepted Answer

A)  creating an index fund. 
B)  creating a small firm fund. 
C)  creating an investment club. 
D)  creating an index fund and creating an investment club. 
E)  creating a small firm fund and creating an investment club. 
A)  creating an index fund. 
B)  creating a small firm fund. 
C)  creating an investment club. 
D)  creating an index fund and creating an investment club. 
E)  creating a small firm fund and creating an investment club.

Question 8

XRCO just announced yesterday that its fourth quarter earnings will be 35% higher than last year's fourth quarter. You observe that XRCO had an abnormal return of −1.7% yesterday. This suggests that

Accepted Answer

A)  the market is not efficient. 
B)  XRCO 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. 
A)  the market is not efficient. 
B)  XRCO 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.

Question 9

Work by Amihud and Mendelson (1986, 1991)

Accepted Answer

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)  All of the options are correct. 
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)  All of the options are correct.

Question 10

Banz (1981) found that, on average, the risk-adjusted returns of small firms

Accepted Answer

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.

Question 11

At freshman orientation, 1,500 students are asked to flip a coin 20 times. One student is crowned the winner (tossed 20 heads). This is most closely associated with

Accepted Answer

A)  regret avoidance. 
B)  selection bias. 
C)  overconfidence. 
D)  the lucky event issue. 
A)  regret avoidance. 
B)  selection bias. 
C)  overconfidence. 
D)  the lucky event issue.

Question 12

Which of the following are used by technical analysts to determine proper stock prices?I) TrendlinesII) EarningsIII) Dividend prospectsIV) Expectations of future interest ratesV) Resistance levels

Accepted Answer

A)  I and V 
B)  I, II, and III 
C)  II, III, and IV 
D)  II, IV, and V 
E)  All of the items are used by fundamental analysts. 
A)  I and V 
B)  I, II, and III 
C)  II, III, and IV 
D)  II, IV, and V 
E)  All of the items are used by fundamental analysts.

Question 13

Jaffe (1974) found that stock prices _________ after insiders intensively sold shares.

Accepted Answer

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

Question 14

What phrase actually measures the positive result of market inefficiency?

Accepted Answer

A)  CAMP 
B)  beta 
C)  volatility 
D)  alpha 
A)  CAMP 
B)  beta 
C)  volatility 
D)  alpha

Question 15

Using finance terminology, Billy Bean discovered a better estimate of ________________.

Accepted Answer

A)  intrinsic value. 
B)  inflation. 
C)  market efficiency. 
D)  discount rates. 
A)  intrinsic value. 
B)  inflation. 
C)  market efficiency. 
D)  discount rates.

Question 16

If you believe in the _________ form of the EMH, you believe that stock prices reflect all available information, including information that is available only to insiders.

Accepted Answer

A)  semistrong 
B)  strong 
C)  weak 
D)  All of the options are correct. 
E)  None of the options are correct. 
A)  semistrong 
B)  strong 
C)  weak 
D)  All of the options are correct. 
E)  None of the options are correct.

Question 17

The debate over whether markets are efficient will probably never be resolved because of

Accepted Answer

A)  the lucky event issue. 
B)  the magnitude issue. 
C)  the selection bias issue. 
D)  All of the options are correct. 
E)  None of the options are correct. 
A)  the lucky event issue. 
B)  the magnitude issue. 
C)  the selection bias issue. 
D)  All of the options are correct. 
E)  None of the options are correct.

Question 18

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

Accepted Answer

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. 
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.

Question 19

Banz (1981) found that, on average, the risk-adjusted returns of large firms

Accepted Answer

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.

Question 20

Sehun (1986) finds that the practice of monitoring insider trade disclosures, and trading on that information, would be

Accepted Answer

A)  extremely profitable for long-term traders. 
B)  extremely profitable for short-term traders. 
C)  marginally profitable for long-term traders. 
D)  marginally profitable for short-term traders. 
E)  not sufficiently profitable to cover trading costs. 
A)  extremely profitable for long-term traders. 
B)  extremely profitable for short-term traders. 
C)  marginally profitable for long-term traders. 
D)  marginally profitable for short-term traders. 
E)  not sufficiently profitable to cover trading costs.

Exam 11: The Efficient Market Hypothesis

The weak form of the efficient-market hypothesis asserts that

Chartists practice

In an efficient market the correlation coefficient between stock returns for two nonoverlapping time periods should be

A hybrid strategy is one where the investor

If you believe in the reversal effect, you should

___________ the return on a stock beyond what would be predicted from market movements alone.

A common strategy for passive management is

XRCO just announced yesterday that its fourth quarter earnings will be 35% higher than last year's fourth quarter. You observe that XRCO had an abnormal return of −1.7% yesterday. This suggests that

Work by Amihud and Mendelson (1986, 1991)

Banz (1981) found that, on average, the risk-adjusted returns of small firms

At freshman orientation, 1,500 students are asked to flip a coin 20 times. One student is crowned the winner (tossed 20 heads). This is most closely associated with

Which of the following are used by technical analysts to determine proper stock prices?I) TrendlinesII) EarningsIII) Dividend prospectsIV) Expectations of future interest ratesV) Resistance levels

Jaffe (1974) found that stock prices _________ after insiders intensively sold shares.

What phrase actually measures the positive result of market inefficiency?

Using finance terminology, Billy Bean discovered a better estimate of ________________.

If you believe in the _________ form of the EMH, you believe that stock prices reflect all available information, including information that is available only to insiders.

The debate over whether markets are efficient will probably never be resolved because of

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

Banz (1981) found that, on average, the risk-adjusted returns of large firms

Sehun (1986) finds that the practice of monitoring insider trade disclosures, and trading on that information, would be

The Investment Environment

Asset Classes and Financial Instruments

How Securities Are Traded

Mutual Funds and Other Investment Companies

Risk, Return, and the Historical Record

Capital Allocation to Risky Assets

Efficient Diversification

Index Models

The Capital Asset Pricing Model

Arbitrage Pricing Theory and Multifactor Models of Risk and Return

Behavioral Finance and Technical Analysis

Empirical Evidence on Security Returns

Bond Prices and Yields

The Term Structure of Interest Rates

Managing Bond Portfolios

Macroeconomic and Industry Analysis

Equity Valuation Models

Financial Statement Analysis

Options Markets: Introduction

Option Valuation

Futures Markets

Futures, Swaps, and Risk Management

Portfolio Performance Evaluation

International Diversification

Hedge Funds

The Theory of Active Portfolio Management

Investment Policy and the Framework of the Cfa Institute

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