Question 1

Which one of the following is a research method used to study the effects news has on stock prices?

Accepted Answer

A) polarization 
B) market analysis 
C) event study 
D) news theory 
E) reaction hypothesis 
A) polarization 
B) market analysis 
C) event study 
D) news theory 
E) reaction hypothesis

Question 2

Which of the following are offered as possible causes of the January effect?
I. new professional money managers who assume the role at the beginning of the year
II. tax loss selling in December
III. bonus lock-in effect
IV. window dressing

Accepted Answer

A) I and II only 
B) III and IV only 
C) I, III, and IV only 
D) II, III, and IV only 
E) I, II, III, and IV 
A) I and II only 
B) III and IV only 
C) I, III, and IV only 
D) II, III, and IV only 
E) I, II, III, and IV

Question 3

In an efficient market, daily abnormal returns:

Accepted Answer

A) are very volatile. 
B) reflect news within the past week. 
C) reflect news since the prior trading day. 
D) remain constant. 
E) do not exist. 
A) are very volatile. 
B) reflect news within the past week. 
C) reflect news since the prior trading day. 
D) remain constant. 
E) do not exist.

Question 4

Which of the following factors contributed to the Crash of 1987?
I. irrational investors
II. program trading
III. panic selling
IV. price uncertainty

Accepted Answer

A) II and IV only 
B) I, II, and III only 
C) I, II, and IV only 
D) II, III, and IV only 
E) I, II, III, and IV 
A) II and IV only 
B) I, II, and III only 
C) I, II, and IV only 
D) II, III, and IV only 
E) I, II, III, and IV

Question 5

If the S&P 500 falls by 20 percent, the NYSE will:

Accepted Answer

A) do nothing if the drop occurs after 2:30 P.M. 
B) halt trading for one hour. 
C) halt trading for one hour if the decline occurs before 3 P.M. 
D) halt trading for one-half hour if the decline occurs after noon. 
E) cease trading for the day. 
A) do nothing if the drop occurs after 2:30 P.M. 
B) halt trading for one hour. 
C) halt trading for one hour if the decline occurs before 3 P.M. 
D) halt trading for one-half hour if the decline occurs after noon. 
E) cease trading for the day.

Question 6

Which type of trader is defined as one who decides to trade securities based on publicly available information and analysis?

Accepted Answer

A) public 
B) informed 
C) normal 
D) inside 
E) block 
A) public 
B) informed 
C) normal 
D) inside 
E) block

Question 7

Which one of the following relates to the risk adjustment problem encountered when testing market efficiency?

Accepted Answer

A) ascertaining how historical prices relate to current stock prices 
B) determining whether a market reaction was appropriate or overstated 
C) correctly determining the correct risk-adjustment procedure 
D) determining what undocumented information existed on any particular trading day 
E) identifying patterns that occur over time in the pricing of a particular security 
A) ascertaining how historical prices relate to current stock prices 
B) determining whether a market reaction was appropriate or overstated 
C) correctly determining the correct risk-adjustment procedure 
D) determining what undocumented information existed on any particular trading day 
E) identifying patterns that occur over time in the pricing of a particular security

Question 8

Which one of the following items is most apt to be considered material nonpublic information? Assume that none of this information is known publicly.

Accepted Answer

A) Barbara knows that Sue, an accounting clerk, is planning on resigning on Friday. 
B) Linda knows a new receptionist has just been hired. 
C) Wendy knows that her firm's net income is continuing to increase at a steady rate. 
D) Tracy knows her employer just received patent approval on a key new product. 
E) Maria is the chief financial officer and knows the firm intends to maintain its current dividend policy. 
A) Barbara knows that Sue, an accounting clerk, is planning on resigning on Friday. 
B) Linda knows a new receptionist has just been hired. 
C) Wendy knows that her firm's net income is continuing to increase at a steady rate. 
D) Tracy knows her employer just received patent approval on a key new product. 
E) Maria is the chief financial officer and knows the firm intends to maintain its current dividend policy.

Question 9

The following are the daily returns for both the overall market and for Omega, Inc. What is the cumulative abnormal return on Omega, Inc., stock for these five days?
$\begin{array}{lrr}
\text { Date } & \text { R(m) }& \text { Omega }\
24-\mathrm{Nov} & 1.208 & 1.20\% \
25-\mathrm{Nov} & -.408 & .10\% \
26-\mathrm{Nov} & -.108 & 1.00\% \
27-\mathrm{Nov}  & .408 & -.50\% \
28-\mathrm{Nov}  & .508 & -.70\%
\end{array}$

Accepted Answer

A) -.8% 
B) -.5% 
C) -.1% 
D) .2% 
E) .5% 
A) -.8% 
B) -.5% 
C) -.1% 
D) .2% 
E) .5%

Question 10

Ann uses two approaches to trading stocks. First, she trades on what she believes is a repetitive pattern as seen in Dotson Co.'s historical prices. Secondly, she analyzes the financial statements of The Allen Co. to compute changes in the return on equity as a predictor of future stock prices for that firm. She trades based on both strategies. Ann earns abnormal profits on her return on equity strategy but not on her historical prices strategy. This suggests that the market is at least ________ efficient but less than ________ efficient.

Accepted Answer

A) weak form; mild form 
B) mild form; semistrong form 
C) weak form; semistrong form 
D) semistrong form; full form 
E) semistrong form; strong form 
A) weak form; mild form 
B) mild form; semistrong form 
C) weak form; semistrong form 
D) semistrong form; full form 
E) semistrong form; strong form

Question 11

Which one of the following is most apt to be considered insider trading?

Accepted Answer

A) Amy overhears Mary say she is being promoted to accounts payables manager and then she purchases shares in Mary's employer. 
B) Jennifer compiles the financial statements and knows that net income for the latest quarter is significantly below analyst's forecasts but continues to hold shares of her employer's stock. 
C) Kathy is an outside auditor and has found what she believes are significant accounting irregularities in a company's financial reports but owns no shares in the firm. 
D) Lee buys stock in Winter's Wear after he overhears a conversation between the firm's president and vice-president concerning a proposed acquisition. 
E) Jeff buys shares of stock in his employer's firm through the company retirement plan on a regular monthly basis. 
A) Amy overhears Mary say she is being promoted to accounts payables manager and then she purchases shares in Mary's employer. 
B) Jennifer compiles the financial statements and knows that net income for the latest quarter is significantly below analyst's forecasts but continues to hold shares of her employer's stock. 
C) Kathy is an outside auditor and has found what she believes are significant accounting irregularities in a company's financial reports but owns no shares in the firm. 
D) Lee buys stock in Winter's Wear after he overhears a conversation between the firm's president and vice-president concerning a proposed acquisition. 
E) Jeff buys shares of stock in his employer's firm through the company retirement plan on a regular monthly basis.

Question 12

Approximately how many years did it take for the stock market to recover from the bear market of 1929 to 1932?

Accepted Answer

A) 5 
B) 10 
C) 15 
D) 20 
E) 25 
A) 5 
B) 10 
C) 15 
D) 20 
E) 25

Question 13

Which one of the following terms is used to describe a sudden and significant collapse in market prices?

Accepted Answer

A) dive 
B) recession 
C) crash 
D) adjustment 
E) rebound 
A) dive 
B) recession 
C) crash 
D) adjustment 
E) rebound

Question 14

Which of the following occurred during the Crash of 1987?
I. market prices were kept up-to-date which increased investors' anxiety
II. the market declined another 5 percent within the 2 days following the crash
III. trading volume exceeded the exchanges' capacities
IV. NASDAQ went off-line

Accepted Answer

A) I and II only 
B) III and IV only 
C) I, II and IV only 
D) II, III, and IV only 
E) I, II, III, and IV 
A) I and II only 
B) III and IV only 
C) I, II and IV only 
D) II, III, and IV only 
E) I, II, III, and IV

Question 15

The value of the Amex Internet Index increased by about ________ percent from October 1998 to March 2000 and subsequently declined by about ________ percent by October 2002.

Accepted Answer

A) 100; 50 
B) 200; 75 
C) 400; 80 
D) 500; 90 
E) 600; 80 
A) 100; 50 
B) 200; 75 
C) 400; 80 
D) 500; 90 
E) 600; 80

Question 16

Research on semistrong form efficient markets indicates which one of the following is correct?

Accepted Answer

A) Identifying a stock with repetitive price movements is generally the best method of active investing. 
B) Future returns on large company stocks tend to closely follow past pricing patterns. 
C) Buying and holding a broad market index is one of the best investment strategies. 
D) Predicting future stock prices is relatively easy for academic researchers. 
E) Trading costs have little, if any, impact on investment returns. 
A) Identifying a stock with repetitive price movements is generally the best method of active investing. 
B) Future returns on large company stocks tend to closely follow past pricing patterns. 
C) Buying and holding a broad market index is one of the best investment strategies. 
D) Predicting future stock prices is relatively easy for academic researchers. 
E) Trading costs have little, if any, impact on investment returns.

Question 17

Moving money in and out of the market based on your market expectations is called ________ and tends to lead to returns that are ________ than the overall market return, assuming that the market is relatively efficient.

Accepted Answer

A) asset allocation; higher 
B) asset allocation; lower 
C) market timing; higher 
D) market timing; lower 
E) security selection; higher 
A) asset allocation; higher 
B) asset allocation; lower 
C) market timing; higher 
D) market timing; lower 
E) security selection; higher

Question 18

The term "independent deviations from rationality" implies that:

Accepted Answer

A) irrational investors are absent from an efficient market. 
B) arbitrage traders act independent of each other. 
C) markets must be inefficient. 
D) irrational investors behave differently from one another. 
E) arbitrage traders act together to offset the actions of rational investors. 
A) irrational investors are absent from an efficient market. 
B) arbitrage traders act independent of each other. 
C) markets must be inefficient. 
D) irrational investors behave differently from one another. 
E) arbitrage traders act together to offset the actions of rational investors.

Question 19

If the markets are efficient, then why is asset allocation still considered important?

Accepted Answer

A) because the risk-return relationship must still be considered 
B) because market timing is critical in efficient markets 
C) because individual security selection is the key to the markets being efficient 
D) because asset allocation combines market timing with individual security selection 
E) because the majority of market gains tend to occur only over long periods of time 
A) because the risk-return relationship must still be considered 
B) because market timing is critical in efficient markets 
C) because individual security selection is the key to the markets being efficient 
D) because asset allocation combines market timing with individual security selection 
E) because the majority of market gains tend to occur only over long periods of time

Question 20

The day-of-the-week effect is defined as the tendency for which day of the week to have a negative average rate of return?

Accepted Answer

A) Monday 
B) Tuesday 
C) Wednesday 
D) Thursday 
E) Friday 
A) Monday 
B) Tuesday 
C) Wednesday 
D) Thursday 
E) Friday

Which one of the following is a research method used to study the effects news has on stock prices?

Which of the following are offered as possible causes of the January effect? I. new professional money managers who assume the role at the beginning of the year II. tax loss selling in December III. bonus lock-in effect IV. window dressing

In an efficient market, daily abnormal returns:

Which of the following factors contributed to the Crash of 1987? I. irrational investors II. program trading III. panic selling IV. price uncertainty

If the S&P 500 falls by 20 percent, the NYSE will:

Which type of trader is defined as one who decides to trade securities based on publicly available information and analysis?

Which one of the following relates to the risk adjustment problem encountered when testing market efficiency?

Which one of the following items is most apt to be considered material nonpublic information? Assume that none of this information is known publicly.

The following are the daily returns for both the overall market and for Omega, Inc. What is the cumulative abnormal return on Omega, Inc., stock for these five days? Date R(m) Omega 24- 1.208 1.20\% 25- -.408 .10\% 26- -.108 1.00\% 27- .408 -.50\% 28- .508 -.70\%

Which one of the following is most apt to be considered insider trading?

Approximately how many years did it take for the stock market to recover from the bear market of 1929 to 1932?

Which one of the following terms is used to describe a sudden and significant collapse in market prices?

Which of the following occurred during the Crash of 1987? I. market prices were kept up-to-date which increased investors' anxiety II. the market declined another 5 percent within the 2 days following the crash III. trading volume exceeded the exchanges' capacities IV. NASDAQ went off-line

The value of the Amex Internet Index increased by about percent from October 1998 to March 2000 and subsequently declined by about percent by October 2002.

Research on semistrong form efficient markets indicates which one of the following is correct?

Moving money in and out of the market based on your market expectations is called and tends to lead to returns that are than the overall market return, assuming that the market is relatively efficient.

The term "independent deviations from rationality" implies that:

If the markets are efficient, then why is asset allocation still considered important?

The day-of-the-week effect is defined as the tendency for which day of the week to have a negative average rate of return?

A Brief History of Risk and Return

The Investment Process

Overview of Security Tips

Mutual Funds and Other Investment Companies

The Stock Market

Common Stock Valuation

Behavioral Finance and the Psychology of Investing

Interest Rates

Bond Prices and Yields

Diversification and Risky Asset Allocation

Return, Risk, and the Security Market Line

Performance Evaluation and Risk Management

Futures Contracts

Stock Options

Option Valuation

Alternative Investments

Corporate and Government Bonds

Projecting Cash Flow and Earnings

Global Economic Activity and Industry Analysis

Mortgage-Backed Securities

Filters

Exam 7: Stock Price Behavior and Market Efficiency

Which one of the following is a research method used to study the effects news has on stock prices?

Which of the following are offered as possible causes of the January effect? I. new professional money managers who assume the role at the beginning of the year II. tax loss selling in December III. bonus lock-in effect IV. window dressing

In an efficient market, daily abnormal returns:

Which of the following factors contributed to the Crash of 1987? I. irrational investors II. program trading III. panic selling IV. price uncertainty

If the S&P 500 falls by 20 percent, the NYSE will:

Which type of trader is defined as one who decides to trade securities based on publicly available information and analysis?

Which one of the following relates to the risk adjustment problem encountered when testing market efficiency?

Which one of the following items is most apt to be considered material nonpublic information? Assume that none of this information is known publicly.

The following are the daily returns for both the overall market and for Omega, Inc. What is the cumulative abnormal return on Omega, Inc., stock for these five days? Date R(m) Omega 24- 1.208 1.20\% 25- -.408 .10\% 26- -.108 1.00\% 27- .408 -.50\% 28- .508 -.70\%

Which one of the following is most apt to be considered insider trading?

Approximately how many years did it take for the stock market to recover from the bear market of 1929 to 1932?

Which one of the following terms is used to describe a sudden and significant collapse in market prices?

Which of the following occurred during the Crash of 1987? I. market prices were kept up-to-date which increased investors' anxiety II. the market declined another 5 percent within the 2 days following the crash III. trading volume exceeded the exchanges' capacities IV. NASDAQ went off-line

The value of the Amex Internet Index increased by about ________ percent from October 1998 to March 2000 and subsequently declined by about ________ percent by October 2002.

Research on semistrong form efficient markets indicates which one of the following is correct?

Moving money in and out of the market based on your market expectations is called ________ and tends to lead to returns that are ________ than the overall market return, assuming that the market is relatively efficient.

The term "independent deviations from rationality" implies that:

If the markets are efficient, then why is asset allocation still considered important?

The day-of-the-week effect is defined as the tendency for which day of the week to have a negative average rate of return?

A Brief History of Risk and Return

The Investment Process

Overview of Security Tips

Mutual Funds and Other Investment Companies

The Stock Market

Common Stock Valuation

Behavioral Finance and the Psychology of Investing

Interest Rates

Bond Prices and Yields

Diversification and Risky Asset Allocation

Return, Risk, and the Security Market Line

Performance Evaluation and Risk Management

Futures Contracts

Stock Options

Option Valuation

Alternative Investments

Corporate and Government Bonds

Projecting Cash Flow and Earnings

Global Economic Activity and Industry Analysis

Mortgage-Backed Securities

Filters

The value of the Amex Internet Index increased by about percent from October 1998 to March 2000 and subsequently declined by about percent by October 2002.

Moving money in and out of the market based on your market expectations is called and tends to lead to returns that are than the overall market return, assuming that the market is relatively efficient.