Question 1

Independent deviations from rationality:

Accepted Answer

A) only exist when the overall market is overvalued. 
B) prevent the markets from ever being efficient. 
C) can create an efficient market. 
D) are the actions taken by rational arbitrage traders. 
E) do not exist in an efficient market. 
A) only exist when the overall market is overvalued. 
B) prevent the markets from ever being efficient. 
C) can create an efficient market. 
D) are the actions taken by rational arbitrage traders. 
E) do not exist in an efficient market.

Question 2

Which one of the following statements is correct?

Accepted Answer

A) Company insiders are not permitted to trade their employer's securities. 
B) Only tippers can be accused of illegal insider trading. 
C) Tippees are permitted to trade securities based on information they know is private. 
D) Trading on private information that you just happen to overhear is legal. 
E) Any trading based on information known to be private is illegal. 
A) Company insiders are not permitted to trade their employer's securities. 
B) Only tippers can be accused of illegal insider trading. 
C) Tippees are permitted to trade securities based on information they know is private. 
D) Trading on private information that you just happen to overhear is legal. 
E) Any trading based on information known to be private is illegal.

Question 3

Which one of the following best describes the type(s)of information included in a strong form efficient market?

Accepted Answer

A) historical 
B) historical and public 
C) private and public 
D) current and public 
E) historical and private 
A) historical 
B) historical and public 
C) private and public 
D) current and public 
E) historical and private

Question 4

Last week, Newtown Plastics announced that it had developed a new plastic container that is stronger and more durable, yet easier to recycle. In response to this announcement, the firm's stock price rose from $21 a share to a high of $27 a share and has remained at that level. This is an example of a(n):

Accepted Answer

A) overreaction and correction. 
B) post-activity reaction. 
C) delayed reaction. 
D) pre-activity action. 
E) efficient market reaction. 
A) overreaction and correction. 
B) post-activity reaction. 
C) delayed reaction. 
D) pre-activity action. 
E) efficient market reaction.

Question 5

Which one of the following statements describes an investment strategy that may lead to profitable results based on current research findings?

Accepted Answer

A) selling stocks as soon as positive earnings surprises are announced 
B) selling stocks on Mondays only 
C) selling small-company stocks in December and repurchasing them in February 
D) selling stocks on the 25th of the month and repurchasing them on the 5th of the following month 
E) buying stocks with relatively low P/E ratios 
A) selling stocks as soon as positive earnings surprises are announced 
B) selling stocks on Mondays only 
C) selling small-company stocks in December and repurchasing them in February 
D) selling stocks on the 25th of the month and repurchasing them on the 5th of the following month 
E) buying stocks with relatively low P/E ratios

Question 6

Helen is the chief executive officer of Baker Holdings (BEH). She owns 1.2 million shares of BEH stock and wishes to sell 10 percent of those shares to diversify her holdings. She follows the SEC requirements, along with those of her firm, and proceeds with the sale on Monday, June 9. On Tuesday, June 10, BEH stock declines by 25 percent. Helena's stock trade is:

Accepted Answer

A) legal but any future trading in BEH will be prohibited as long as she remains employed by the firm. 
B) illegal and could subject her to both fines and jail time. 
C) legal. 
D) subject to reversal by the SEC. 
E) subject to a forfeiture of her profits to the SEC. 
A) legal but any future trading in BEH will be prohibited as long as she remains employed by the firm. 
B) illegal and could subject her to both fines and jail time. 
C) legal. 
D) subject to reversal by the SEC. 
E) subject to a forfeiture of her profits to the SEC.

Question 7

Efficient markets tend to exist:

Accepted Answer

A) only when all investors are rational. 
B) anytime market volume exceeds the average trading volume. 
C) only when market volatility is low. 
D) when rational arbitrage traders dominate irrational traders. 
E) when arbitrage trading is prohibited. 
A) only when all investors are rational. 
B) anytime market volume exceeds the average trading volume. 
C) only when market volatility is low. 
D) when rational arbitrage traders dominate irrational traders. 
E) when arbitrage trading is prohibited.

Question 8

Which one of the following correctly identifies the phenomenon that states that one month has the greatest tendency for small stocks to earn large returns?

Accepted Answer

A) January effect 
B) March effect 
C) September effect 
D) October effect 
E) December effect 
A) January effect 
B) March effect 
C) September effect 
D) October effect 
E) December effect

Question 9

Two weeks ago Acme Electronics announced that it had developed a new chip design, which was being considered by major companies for use in future smart phone development. At the close of trading the day before the announcement, Acme common stock closed at $20. On the day following the announcement, Acme closed at $21. Two days after the announcement the stock closed at $22.50. Four days after the announcement, the stock traded at $23. Last week, Acme stock traded at $26, a level it has maintained since then. This is an example of a(n):

Accepted Answer

A) overreaction and correction. 
B) underpricing. 
C) delayed reaction. 
D) pre-activity action. 
E) efficient market reaction. 
A) overreaction and correction. 
B) underpricing. 
C) delayed reaction. 
D) pre-activity action. 
E) efficient market reaction.

Question 10

Which of the following are forms of market efficiency?
I. Strong form
Ii. Semistrong form
Iii. Semiweak form
Iv. Weak form

Accepted Answer

A) i and iii only 
B) i and iv only 
C) i, ii, and iv only 
D) ii, iii, and iv only 
E) i, ii, iii, and iv 
A) i and iii only 
B) i and iv only 
C) i, ii, and iv only 
D) ii, iii, and iv only 
E) i, ii, iii, and iv

Question 11

The Asian stock market crash of 1990 was followed by a:

Accepted Answer

A) long bull market. 
B) rapid recovery. 
C) prolonged flat market. 
D) short-term decline. 
E) long bear market. 
A) long bull market. 
B) rapid recovery. 
C) prolonged flat market. 
D) short-term decline. 
E) long bear market.

Question 12

If the S&P 500 falls by 7 percent, the NYSE will:

Accepted Answer

A) halt trading for thirty minutes. 
B) halt trading for two hours if the decline occurs before 3:25 P.M. 
C) halt trading for one hour. 
D) halt trading for one hour if the decline occurs after noon. 
E) halt trading for 15 minutes if the decline occurs before 3:25 P.M. 
A) halt trading for thirty minutes. 
B) halt trading for two hours if the decline occurs before 3:25 P.M. 
C) halt trading for one hour. 
D) halt trading for one hour if the decline occurs after noon. 
E) halt trading for 15 minutes if the decline occurs before 3:25 P.M.

Question 13

The primary purpose of the NYSE circuit breakers is to:

Accepted Answer

A) halt short selling. 
B) encourage program trading. 
C) limit trading by specialists. 
D) minimize institutional trading. 
E) slow a market decline. 
A) halt short selling. 
B) encourage program trading. 
C) limit trading by specialists. 
D) minimize institutional trading. 
E) slow a market decline.

Question 14

Market prices tend to ________ earnings "surprises".

Accepted Answer

A) adjust quickly and efficiently to 
B) overreact and then correct in response to 
C) overreact and never correct in response to 
D) ignore 
E) adjust slowly to 
A) adjust quickly and efficiently to 
B) overreact and then correct in response to 
C) overreact and never correct in response to 
D) ignore 
E) adjust slowly to

Question 15

Which of the following are ineffective strategies for producing abnormal returns if the market is semistrong form efficient?
I. graphing past prices searching for patterns
II. watching the daily market movements
III. studying the latest analyst's reports
IV. analyzing a firm's financial statements

Accepted Answer

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

Question 16

You are the chief financial officer of Davidson Industries. On multiple occasions, you have engaged in insider trading but have never been able to earn any abnormal returns. Which form of market efficiency most likely exists given your situation?

Accepted Answer

A) mild form 
B) weak form 
C) historical form 
D) semistrong form 
E) strong form 
A) mild form 
B) weak form 
C) historical form 
D) semistrong form 
E) strong form

Question 17

A.C. Pharmaceutical announced FDA approval for a new drug on October 12. XY Drug Co. announced approval for its new drug on October 14. No other information was released that would affect returns over the period. What is the combined cumulative abnormal return for the five-day period commencing two days prior to the approval announcement date? Use the following data to answer this question. No trading occurred on October 15 and 16.
$\begin{array}{cccc}

\text { Date } & \text { Market } & \text { AC Return } & \text { XY Return }\
 10-\text {oct} & .20 \% & .108 & .00\% \
11-\text { oct } & .108 & .208 & -.10 \%\
12-\text { oct } & .008 & .608 &.30\% \
 13-\text { oct } & -.108 & .408 &.20\% \
 14-\text { oct } & -.208 & -.50 \% &.30\% \
17- \text {oct } & .10 \% & -.308 & -.10\% \
 18-\text {oct } &- .10 \% & -.10\%& -.40\%\
\end{array}$

Accepted Answer

A) .6% 
B) 1.0% 
C) 1.2% 
D) 1.4% 
E) 1.6% 
A) .6% 
B) 1.0% 
C) 1.2% 
D) 1.4% 
E) 1.6%

Question 18

Which one of the following is required for a trader to earn abnormal profits?

Accepted Answer

A) abnormal trading 
B) excessive research 
C) market inefficiency 
D) highly volatile market state 
E) relatively stable market state 
A) abnormal trading 
B) excessive research 
C) market inefficiency 
D) highly volatile market state 
E) relatively stable market state

Question 19

Immediately following the Crash of 1987, the stock market:

Accepted Answer

A) remained in a slump for five years. 
B) remained flat for an extended period of time. 
C) had one of the biggest short-term gains ever. 
D) began a very slow and choppy recovery. 
E) began a very slow and smooth recovery. 
A) remained in a slump for five years. 
B) remained flat for an extended period of time. 
C) had one of the biggest short-term gains ever. 
D) began a very slow and choppy recovery. 
E) began a very slow and smooth recovery.

Question 20

If you believe that stock market prices follow a random walk, then:

Accepted Answer

A) historical price information provides no benefit in predicting future prices. 
B) there is no financial benefit from investing in the stock market. 
C) having inside information will not lead to abnormal profits. 
D) studying past price movements will lead to abnormal profits. 
E) you also believe the market is strong form efficient. 
A) historical price information provides no benefit in predicting future prices. 
B) there is no financial benefit from investing in the stock market. 
C) having inside information will not lead to abnormal profits. 
D) studying past price movements will lead to abnormal profits. 
E) you also believe the market is strong form efficient.

Independent deviations from rationality:

Which one of the following statements is correct?

Which one of the following best describes the type(s)of information included in a strong form efficient market?

Which one of the following statements describes an investment strategy that may lead to profitable results based on current research findings?

Efficient markets tend to exist:

Which one of the following correctly identifies the phenomenon that states that one month has the greatest tendency for small stocks to earn large returns?

Which of the following are forms of market efficiency? I. Strong form Ii. Semistrong form Iii. Semiweak form Iv. Weak form

The Asian stock market crash of 1990 was followed by a:

If the S&P 500 falls by 7 percent, the NYSE will:

The primary purpose of the NYSE circuit breakers is to:

Market prices tend to ________ earnings "surprises".

Which of the following are ineffective strategies for producing abnormal returns if the market is semistrong form efficient? I. graphing past prices searching for patterns II. watching the daily market movements III. studying the latest analyst's reports IV. analyzing a firm's financial statements

You are the chief financial officer of Davidson Industries. On multiple occasions, you have engaged in insider trading but have never been able to earn any abnormal returns. Which form of market efficiency most likely exists given your situation?

Which one of the following is required for a trader to earn abnormal profits?

Immediately following the Crash of 1987, the stock market:

If you believe that stock market prices follow a random walk, then:

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

Independent deviations from rationality:

Which one of the following statements is correct?

Which one of the following best describes the type(s)of information included in a strong form efficient market?

Which one of the following statements describes an investment strategy that may lead to profitable results based on current research findings?

Efficient markets tend to exist:

Which one of the following correctly identifies the phenomenon that states that one month has the greatest tendency for small stocks to earn large returns?

Which of the following are forms of market efficiency? I. Strong form Ii. Semistrong form Iii. Semiweak form Iv. Weak form

The Asian stock market crash of 1990 was followed by a:

If the S&P 500 falls by 7 percent, the NYSE will:

The primary purpose of the NYSE circuit breakers is to:

Market prices tend to ________ earnings "surprises".

Which of the following are ineffective strategies for producing abnormal returns if the market is semistrong form efficient? I. graphing past prices searching for patterns II. watching the daily market movements III. studying the latest analyst's reports IV. analyzing a firm's financial statements

You are the chief financial officer of Davidson Industries. On multiple occasions, you have engaged in insider trading but have never been able to earn any abnormal returns. Which form of market efficiency most likely exists given your situation?

Which one of the following is required for a trader to earn abnormal profits?

Immediately following the Crash of 1987, the stock market:

If you believe that stock market prices follow a random walk, then:

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