Question 1

If a public company reports earnings substantially lower than expected, the stock should subsequently earn a positive abnormal return.

Accepted Answer

A) True 
 B)False

Question 2

The behavioral bias of mental accounting indicates that individuals tend to:

Accepted Answer

A)  follow what other individuals are doing. 
B)  avoid investments that have worked out poorly in the past. 
C)  separate assets into noninterchangeable accounts. 
D)  spread investments evenly across investment options. 
A)  follow what other individuals are doing. 
B)  avoid investments that have worked out poorly in the past. 
C)  separate assets into noninterchangeable accounts. 
D)  spread investments evenly across investment options.

Question 3

Carl holds a large position in Stock X that was recently downgraded. Carl's advisor recommends he sell X and take his gain, which was accumulated over the past several years. However, Carl decides not to sell X. Carl's behavior best represents:

Accepted Answer

A)  the house-money effect. 
B)  representativeness bias. 
C)  loss aversion. 
D)  the endowment effect. 
A)  the house-money effect. 
B)  representativeness bias. 
C)  loss aversion. 
D)  the endowment effect.

Question 4

A characteristic of an efficient market is that:

Accepted Answer

A)  prices adjust perfectly to new information. 
B)  announced information events tend to be dependent on one another. 
C)  investors are price takers. 
D)  individual investors have the ability to affect security prices. 
A)  prices adjust perfectly to new information. 
B)  announced information events tend to be dependent on one another. 
C)  investors are price takers. 
D)  individual investors have the ability to affect security prices.

Question 5

What is meant by the "disposition effect?"

Accepted Answer

A)  Investors are more likely to sell winners than losers. 
B)  Investors are more likely to sell losers than winners. 
C)  Investors sell both winners and losers too soon. 
D)  Investors hold both winners and losers too long. 
A)  Investors are more likely to sell winners than losers. 
B)  Investors are more likely to sell losers than winners. 
C)  Investors sell both winners and losers too soon. 
D)  Investors hold both winners and losers too long.

Question 6

Efficient markets imply investors can not earn abnormal returns.

Accepted Answer

A) True 
 B)False

Question 7

The snake-bit effect causes investors to avoid stocks where they had previous losses.

Accepted Answer

A) True 
 B)False

Question 8

The overconfidence bias tends to encourage investors to:

Accepted Answer

A)  trade too much. 
B)  trade too infrequently. 
C)  sell winners to early. 
D)  hold losers to long. 
A)  trade too much. 
B)  trade too infrequently. 
C)  sell winners to early. 
D)  hold losers to long.

Question 9

Event studies analyze return patterns around specific events such as stock splits or dividend announcements.

Accepted Answer

A) True 
 B)False

Question 10

One explanation for the January effect is that tax-induced sales in December temporarily depress prices, and these prices tend to recover in January.

Accepted Answer

A) True 
 B)False

Question 11

The endowment bias suggests that investors:

Accepted Answer

A)  with larger portfolios tend to be more aggressive. 
B)  with smaller portfolios tend to be more aggressive. 
C)  develop an attachment to securities in their portfolio. 
D)  tend to value future cash flows higher than current cash flows. 
A)  with larger portfolios tend to be more aggressive. 
B)  with smaller portfolios tend to be more aggressive. 
C)  develop an attachment to securities in their portfolio. 
D)  tend to value future cash flows higher than current cash flows.

Question 12

When Enron failed, many Enron employees lost their retirements because they had invested their retirement funds in Enron stock. Which behavioral bias is most consistent with this observation?

Accepted Answer

A)  House-money effect 
B)  Over-confidence 
C)  Loss aversion 
D)  Familiarity 
A)  House-money effect 
B)  Over-confidence 
C)  Loss aversion 
D)  Familiarity

Question 13

Which of the following statements is true for an efficient market?

Accepted Answer

A)  The expected return in the market is 0. 
B)  Information arrives randomly and independently. 
C)  Mutual fund managers outperform the aggregate market. 
D)  Stock prices respond gradually to information as it spreads across the country. 
A)  The expected return in the market is 0. 
B)  Information arrives randomly and independently. 
C)  Mutual fund managers outperform the aggregate market. 
D)  Stock prices respond gradually to information as it spreads across the country.

Question 14

Financial economists have tested various technical trading rules and found they fail to earn consistent abnormal returns.

Accepted Answer

A) True 
 B)False

Question 15

Data mining refers to the search for security return patterns by:

Accepted Answer

A)  regressing firm stock returns against firm price multiples. 
B)  calculating CARs relative to firm earnings announcements. 
C)  applying various investment techniques to a set of return data. 
D)  applying filter tests to very large samples of return data. 
A)  regressing firm stock returns against firm price multiples. 
B)  calculating CARs relative to firm earnings announcements. 
C)  applying various investment techniques to a set of return data. 
D)  applying filter tests to very large samples of return data.

Question 16

Which statement regarding Warren Buffett's wager with Protege Funds is most accurate?

Accepted Answer

A)  The index fund outperformed the hedge funds, thus supporting market efficiency. 
B)  The index fund outperformed the hedge funds, thus countering market efficiency. 
C)  The index fund underperformed the hedge funds, thus supporting market efficiency. 
D)  The index fund underperformed the hedge funds, thus countering market efficiency. 
A)  The index fund outperformed the hedge funds, thus supporting market efficiency. 
B)  The index fund outperformed the hedge funds, thus countering market efficiency. 
C)  The index fund underperformed the hedge funds, thus supporting market efficiency. 
D)  The index fund underperformed the hedge funds, thus countering market efficiency.

Question 17

Which of the following best describes the so-called size effect?

Accepted Answer

A)  On average, small cap stocks return more than large cap stocks. 
B)  On average, large cap stocks return more than small cap stocks. 
C)  On average, small cap stocks earn abnormal returns. 
D)  Small cap stocks tend to perform exceptionally well during bull markets. 
A)  On average, small cap stocks return more than large cap stocks. 
B)  On average, large cap stocks return more than small cap stocks. 
C)  On average, small cap stocks earn abnormal returns. 
D)  Small cap stocks tend to perform exceptionally well during bull markets.

Question 18

The momentum effect indicates that stocks with the:

Accepted Answer

A)  best long-term past performance will continue to perform well. 
B)  best short-term past performance will continue to perform well. 
C)  worst long-term past performance will reverse course and perform well. 
D)  worst short-term past performance will reverse course and perform well. 
A)  best long-term past performance will continue to perform well. 
B)  best short-term past performance will continue to perform well. 
C)  worst long-term past performance will reverse course and perform well. 
D)  worst short-term past performance will reverse course and perform well.

Question 19

The SUE effect suggests that superior performance is associated with stocks:

Accepted Answer

A)  exhibiting strong recent price performance. 
B)  exhibiting weak long-term past price performance. 
C)  that have beat their earnings estimate. 
D)  that have low price multiples. 
A)  exhibiting strong recent price performance. 
B)  exhibiting weak long-term past price performance. 
C)  that have beat their earnings estimate. 
D)  that have low price multiples.

Question 20

The financial markets in the U.S. are less efficient than financial markets in less developed countries.

Accepted Answer

A) True 
 B)False

Exam 12: Market Efficiency

If a public company reports earnings substantially lower than expected, the stock should subsequently earn a positive abnormal return.

The behavioral bias of mental accounting indicates that individuals tend to:

Carl holds a large position in Stock X that was recently downgraded. Carl's advisor recommends he sell X and take his gain, which was accumulated over the past several years. However, Carl decides not to sell X. Carl's behavior best represents:

A characteristic of an efficient market is that:

What is meant by the "disposition effect?"

Efficient markets imply investors can not earn abnormal returns.

The snake-bit effect causes investors to avoid stocks where they had previous losses.

The overconfidence bias tends to encourage investors to:

Event studies analyze return patterns around specific events such as stock splits or dividend announcements.

One explanation for the January effect is that tax-induced sales in December temporarily depress prices, and these prices tend to recover in January.

The endowment bias suggests that investors:

When Enron failed, many Enron employees lost their retirements because they had invested their retirement funds in Enron stock. Which behavioral bias is most consistent with this observation?

Which of the following statements is true for an efficient market?

Financial economists have tested various technical trading rules and found they fail to earn consistent abnormal returns.

Data mining refers to the search for security return patterns by:

Which statement regarding Warren Buffett's wager with Protege Funds is most accurate?

Which of the following best describes the so-called size effect?

The momentum effect indicates that stocks with the:

The SUE effect suggests that superior performance is associated with stocks:

The financial markets in the U.S. are less efficient than financial markets in less developed countries.

Understanding Investments

Investment Alternatives

Indirect Investing

Securities Markets and Market Indexes

How Securities Are Traded

The Risk and Return From Investing

Portfolio Theory

Portfolio Selection and Asset Allocation

Capital Market Theory and Asset Pricing Models

Common Stock Valuation

Common Stocks: Analysis and Strategy

Economymarket Analysis

Sectorindustry Analysis

Company Analysis

Technical Analysis

Bond Yields and Prices

Bonds: Analysis and Strategy

Options

Futures Contracts

Managing Your Financial Assets

Evaluation of Investment Performance

Filters