Question 1

The semi-strong form of the EMH:

Accepted Answer

A)  suggests that technical trading rules can be used advantageously. 
B)  encompasses the strong form of the EMH. 
C)  states that publicly available information can be used to earn abnormal returns. 
D)  encompasses the weak form of the EMH. 
A)  suggests that technical trading rules can be used advantageously. 
B)  encompasses the strong form of the EMH. 
C)  states that publicly available information can be used to earn abnormal returns. 
D)  encompasses the weak form of the EMH. D

Question 2

Evidence indicates that the majority of actively-managed, large cap equity funds outperform the S&P 500 Index.

Accepted Answer

A) True 
 B)False  False

Question 3

Gordon has conducted a test to determine whether he could have earned abnormal returns by purchasing stocks after their price increased by 2% and selling stocks after their price fell by 2%. This is an example of:

Accepted Answer

A)  a runs test. 
B)  a filter rule test. 
C)  an event study. 
D)  a test of strong form efficiency. 
A)  a runs test. 
B)  a filter rule test. 
C)  an event study. 
D)  a test of strong form efficiency. B

Question 4

For statistical tests of stock returns over time to support the efficient markets hypothesis (EMH), the resulting correlations should be:

Accepted Answer

A)  positive. 
B)  approximately 1. 
C)  approximately -1. 
D)  approximately 0. 
A)  positive. 
B)  approximately 1. 
C)  approximately -1. 
D)  approximately 0.

Question 5

What is the most important determinant of stock price in an efficient market?

Accepted Answer

A)  Information about past events and beliefs about future events 
B)  The trading system that connects buyers and sellers within the market 
C)  The number of traders participating in the market 
D)  The ability of investors to perfectly adjust prices based on new information 
A)  Information about past events and beliefs about future events 
B)  The trading system that connects buyers and sellers within the market 
C)  The number of traders participating in the market 
D)  The ability of investors to perfectly adjust prices based on new information

Question 6

The SEC has laws to punish insider trading, which implies that the SEC believes in the strong form of the Efficient Market Hypothesis.

Accepted Answer

A) True 
 B)False

Question 7

What is meant by the expression stock prices follow a "random walk?"

Accepted Answer

A)  The best prediction of next period's price change is last period's price change. 
B)  Stock price changes do not depend statistically on prior price changes. 
C)  Stock price changes tend to be positive. 
D)  Stock price changes do not reflect market information. 
A)  The best prediction of next period's price change is last period's price change. 
B)  Stock price changes do not depend statistically on prior price changes. 
C)  Stock price changes tend to be positive. 
D)  Stock price changes do not reflect market information.

Question 8

Using technical analysis to consistently earn abnormal returns is consistent with which form of the Efficient Market Hypothesis?

Accepted Answer

A)  None 
B)  Weak form 
C)  Semi-strong form 
D)  Strong form 
A)  None 
B)  Weak form 
C)  Semi-strong form 
D)  Strong form

Question 9

Research suggests company insiders earn abnormal returns on their stock transactions. What does this research mean for the efficient market hypothesis (EMH)?

Accepted Answer

A)  Insider trading has nothing to do with the EMH. 
B)  Profitable insider trading contradicts all forms of the EMH. 
C)  Profitable insider trading contradicts only the weak form of the EMH. 
D)  Profitable insider trading contradicts only the strong form of the EMH 
A)  Insider trading has nothing to do with the EMH. 
B)  Profitable insider trading contradicts all forms of the EMH. 
C)  Profitable insider trading contradicts only the weak form of the EMH. 
D)  Profitable insider trading contradicts only the strong form of the EMH

Question 10

An investor trying to take advantage of the firm quality anomaly would most likely target firms with high:

Accepted Answer

A)  profitability. 
B)  price multiples. 
C)  recent stock performance. 
D)  long-term stock performance. 
A)  profitability. 
B)  price multiples. 
C)  recent stock performance. 
D)  long-term stock performance.

Question 11

The asset growth anomaly finds that abnormal performance is particularly poor for:

Accepted Answer

A)  large firms with high asset growth. 
B)  large firms with low asset growth. 
C)  small firms with high asset growth. 
D)  small firms with low asset growth. 
A)  large firms with high asset growth. 
B)  large firms with low asset growth. 
C)  small firms with high asset growth. 
D)  small firms with low asset growth.

Question 12

Which of the following is the best definition of "behavioral finance?"

Accepted Answer

A)  Behavioral finance studies how financial market participants behave. 
B)  Behavioral finance studies the ethical behavior of investors. 
C)  Behavioral finance studies what investors should do to optimize performance. 
D)  Behavioral finance studies how investor biases and emotions affect stock prices. 
A)  Behavioral finance studies how financial market participants behave. 
B)  Behavioral finance studies the ethical behavior of investors. 
C)  Behavioral finance studies what investors should do to optimize performance. 
D)  Behavioral finance studies how investor biases and emotions affect stock prices.

Question 13

In tests of market efficiency, CAR refers to:

Accepted Answer

A)  cumulative average return. 
B)  compound average return. 
C)  compound annual return. 
D)  cumulative abnormal return. 
A)  cumulative average return. 
B)  compound average return. 
C)  compound annual return. 
D)  cumulative abnormal return.

Question 14

On average, small, less well-known companies have lower long-run returns than larger, more well-known companies.

Accepted Answer

A) True 
 B)False

Question 15

An efficient market requires that:

Accepted Answer

A)  all investors are rational and react quickly to new information. 
B)  information can be obtained at a considerable cost by investors. 
C)  new information does not have a significant effect on market prices. 
D)  investors react quickly and fully to new information. 
A)  all investors are rational and react quickly to new information. 
B)  information can be obtained at a considerable cost by investors. 
C)  new information does not have a significant effect on market prices. 
D)  investors react quickly and fully to new information.

Question 16

The January effect can be largely attributed to the exceptional performance of:

Accepted Answer

A)  low P/E stocks in January. 
B)  winner stocks in January. 
C)  loser stocks in January. 
D)  small stocks in January. 
A)  low P/E stocks in January. 
B)  winner stocks in January. 
C)  loser stocks in January. 
D)  small stocks in January.

Question 17

Real estate prices have dropped substantially in Stan's home town. Stan recently got transferred and needs to sell his house, but he informs his real estate agent that he won't sell for less than the original purchase price of the house. Which bias is most consistent with Stan's statement?

Accepted Answer

A)  House-money effect 
B)  Mental accounting 
C)  Anchoring and reference points 
D)  Hindsight bias 
A)  House-money effect 
B)  Mental accounting 
C)  Anchoring and reference points 
D)  Hindsight bias

Question 18

Research suggests that low P/E stocks outperform high P/E stocks. Why is this finding an anomaly?

Accepted Answer

A)  Low P/E stocks tend to have higher risk than high P/E stocks. 
B)  Low P/E stocks are temporarily out of favor but may have strong prospects. 
C)  The low P/E effect contradicts the Efficient Market Hypothesis. 
D)  Low P/E stocks are often weak companies. 
A)  Low P/E stocks tend to have higher risk than high P/E stocks. 
B)  Low P/E stocks are temporarily out of favor but may have strong prospects. 
C)  The low P/E effect contradicts the Efficient Market Hypothesis. 
D)  Low P/E stocks are often weak companies.

Question 19

Carl owns stock in XYZ, which has dropped by 20% over the last month. Carl decides to purchase additional shares of XYZ. Which bias is most consistent with Carl's decision?

Accepted Answer

A)  Representativeness 
B)  Overconfidence 
C)  Naïve diversification 
D)  Status quo bias 
A)  Representativeness 
B)  Overconfidence 
C)  Naïve diversification 
D)  Status quo bias

Question 20

The value effect suggests that investors can earn abnormal returns by holding stocks with:

Accepted Answer

A)  low price multiples. 
B)  high price multiples. 
C)  small size and strong recent performance. 
D)  large size and strong recent performance. 
A)  low price multiples. 
B)  high price multiples. 
C)  small size and strong recent performance. 
D)  large size and strong recent performance.

Exam 12: Market Efficiency

The semi-strong form of the EMH:

Evidence indicates that the majority of actively-managed, large cap equity funds outperform the S&P 500 Index.

Gordon has conducted a test to determine whether he could have earned abnormal returns by purchasing stocks after their price increased by 2% and selling stocks after their price fell by 2%. This is an example of:

For statistical tests of stock returns over time to support the efficient markets hypothesis (EMH), the resulting correlations should be:

What is the most important determinant of stock price in an efficient market?

The SEC has laws to punish insider trading, which implies that the SEC believes in the strong form of the Efficient Market Hypothesis.

What is meant by the expression stock prices follow a "random walk?"

Using technical analysis to consistently earn abnormal returns is consistent with which form of the Efficient Market Hypothesis?

Research suggests company insiders earn abnormal returns on their stock transactions. What does this research mean for the efficient market hypothesis (EMH)?

An investor trying to take advantage of the firm quality anomaly would most likely target firms with high:

The asset growth anomaly finds that abnormal performance is particularly poor for:

Which of the following is the best definition of "behavioral finance?"

In tests of market efficiency, CAR refers to:

On average, small, less well-known companies have lower long-run returns than larger, more well-known companies.

An efficient market requires that:

The January effect can be largely attributed to the exceptional performance of:

Real estate prices have dropped substantially in Stan's home town. Stan recently got transferred and needs to sell his house, but he informs his real estate agent that he won't sell for less than the original purchase price of the house. Which bias is most consistent with Stan's statement?

Research suggests that low P/E stocks outperform high P/E stocks. Why is this finding an anomaly?

Carl owns stock in XYZ, which has dropped by 20% over the last month. Carl decides to purchase additional shares of XYZ. Which bias is most consistent with Carl's decision?

The value effect suggests that investors can earn abnormal returns by holding stocks with:

Understanding Investments

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Securities Markets and Market Indexes

How Securities Are Traded

The Risk and Return From Investing

Portfolio Theory

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Capital Market Theory and Asset Pricing Models

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Common Stocks: Analysis and Strategy

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