Question 1

Escalation bias refers to the situation where

Accepted Answer

A)  Investors have a propensity to sell winners too soon and hang on to losers too long. 
B)  Investors ignore bad news and overemphasize good news. 
C)  Investors tend to follow the herd. 
D)  Investors put more money into a failure rather than into a success. 
E)  Investors are all noise traders. 
A)  Investors have a propensity to sell winners too soon and hang on to losers too long. 
B)  Investors ignore bad news and overemphasize good news. 
C)  Investors tend to follow the herd. 
D)  Investors put more money into a failure rather than into a success. 
E)  Investors are all noise traders. D

Question 2

Studies concerning quarterly earnings reports indicate that information in quarterly statements is of value and can provide an above-average risk-adjusted return.

Accepted Answer

A) True 
 B)False  True

Question 3

Exhibit 6.5
Use the Information Below for the Following Problem(S)
 $\begin{array}{ccccc}
\text { Stock } & \mathbf{R}_{\mathbf{i t}} & \mathbf{R}_{\text {mt }} & \mathbf{a}_{\mathbf{i}} & \mathbf{B e t a} \
\hline \mathrm{A} & 10.6 & 15 & 0 & 0.8 \
7 & 9.8 & 8 .0 & n & 1.1
\end{array}$ 
R?t = return for stock i during period t
Rmt = return for the aggregate market during period t
-Refer to Exhibit 6.5.What is the abnormal rate of return for Stock A when you consider its systematic risk measure (beta)?

Accepted Answer

A)  1.40% 
B)  -1.40% 
C)  2.80% 
D)  -2.80% 
E)  None of the above 
A)  1.40% 
B)  -1.40% 
C)  2.80% 
D)  -2.80% 
E)  None of the above B

Question 4

Which of the following would be inconsistent with an efficient market?

Accepted Answer

A)  Information arrives randomly and independently. 
B)  Stock prices adjust rapidly to new information. 
C)  Price changes are independent. 
D)  Price changes are random. 
E)  Price adjustments are biased. 
A)  Information arrives randomly and independently. 
B)  Stock prices adjust rapidly to new information. 
C)  Price changes are independent. 
D)  Price changes are random. 
E)  Price adjustments are biased.

Question 5

Exhibit 6.2
Use the Information Below for the Following Problem(S)
 $$\begin{array} { c c c c c } 
\text { Stack } & \mathrm { R } _ { \mathbf { i t } } & \mathbf { R } _ { \text {mt } } & \mathbf { a } _ { \mathbf { i } } & \text { Beta } \
\hline \text { ABC } & 11.5 & 13.0 & 0 & 0.7 \
\text { XYZ } & 90 & 70 & 0 & 1 .1
\end{array}$$ 
RS1U1B1itS1U1B0= return for stock i during period t
RS1U1B1mtS1U1B0 = return for the aggregate market during period t
-Refer to Exhibit 6.2.What is the abnormal rate of return for Stock XYZ during period t using only the aggregate market return (ignore differential systematic risk)?

Accepted Answer

A)  -3.2% 
B)  2.4% 
C)  2.0% 
D)  1.3% 
E)  -1.5% 
A)  -3.2% 
B)  2.4% 
C)  2.0% 
D)  1.3% 
E)  -1.5%

Question 6

Exhibit 6.5
Use the Information Below for the Following Problem(S)
 $\begin{array}{ccccc}
\text { Stock } & \mathbf{R}_{\mathbf{i t}} & \mathbf{R}_{\text {mt }} & \mathbf{a}_{\mathbf{i}} & \mathbf{B e t a} \
\hline \mathrm{A} & 10.6 & 15 & 0 & 0.8 \
7 & 9.8 & 8 .0 & n & 1.1
\end{array}$ 
R?t = return for stock i during period t
Rmt = return for the aggregate market during period t
-Refer to Exhibit 6.5.What is the abnormal rate of return for Stock Z when you consider its systematic risk measure (beta)?

Accepted Answer

A)  0.1% 
B)  1.0% 
C)  0.5% 
D)  -1.0% 
E)  -2.0% 
A)  0.1% 
B)  1.0% 
C)  0.5% 
D)  -1.0% 
E)  -2.0%

Question 7

Exhibit 6.4
Use the Information Below for the Following Problem(S)
 $$\begin{array} { c c c c c } 
\text { stack } & \text { Fit } & R \text { mit } & \text { a } _ { \text {i } } & \text { Eeta } \
\hline \text { A } & 10.3 & 12 & 0 & 0.6 \
3 & 94 & 90 & 0 & 1 .2
\end{array}$$ 
R?t = return for stock i during period t
Rmt = return for the aggregate market during period t
-Refer to Exhibit 6.4.What is the abnormal rate of return for Stock B during period t using only the aggregate market return (ignore differential systematic risk)?

Accepted Answer

A)  0.40 
B)  1.40 
C)  -1.10 
D)  -4.40 
E)  -6.40 
A)  0.40 
B)  1.40 
C)  -1.10 
D)  -4.40 
E)  -6.40

Question 8

According to the weak-form efficient market hypothesis,which of the following types of information are fully reflected in stock prices?

Accepted Answer

A)  Rates of return, trading volume, and news about the economy. 
B)  Dividend and earnings announcements. 
C)  Rates of return, trading volume, and block trades. 
D)  Earnings announcements and rates of return. 
E)  All of the above. 
A)  Rates of return, trading volume, and news about the economy. 
B)  Dividend and earnings announcements. 
C)  Rates of return, trading volume, and block trades. 
D)  Earnings announcements and rates of return. 
E)  All of the above.

Question 9

A trading rule which signals purchase of a stock if it rises X percent and sale of a stock if it falls X percent is known as a

Accepted Answer

A)  Breakout. 
B)  Short sale. 
C)  Sieve. 
D)  Filter. 
E)  Relative strength. 
A)  Breakout. 
B)  Short sale. 
C)  Sieve. 
D)  Filter. 
E)  Relative strength.

Question 10

Evidence supporting the strong-form efficient market hypothesis (EMH)resulted from examining

Accepted Answer

A)  Value Line rankings. 
B)  Corporate insiders. 
C)  Stock exchange specialists. 
D)  Both b and c only. 
E)  All of the above. 
A)  Value Line rankings. 
B)  Corporate insiders. 
C)  Stock exchange specialists. 
D)  Both b and c only. 
E)  All of the above.

Question 11

Exhibit 6.2
Use the Information Below for the Following Problem(S)
 $$\begin{array} { c c c c c } 
\text { Stack } & \mathrm { R } _ { \mathbf { i t } } & \mathbf { R } _ { \text {mt } } & \mathbf { a } _ { \mathbf { i } } & \text { Beta } \
\hline \text { ABC } & 11.5 & 13.0 & 0 & 0.7 \
\text { XYZ } & 90 & 70 & 0 & 1 .1
\end{array}$$ 
RS1U1B1itS1U1B0= return for stock i during period t
RS1U1B1mtS1U1B0 = return for the aggregate market during period t
-Refer to Exhibit 6.2.What is the abnormal rate of return for Stock ABC when you consider its systematic risk measure (beta)?

Accepted Answer

A)  2.4% 
B)  1.5% 
C)  -1.5% 
D)  2.0% 
E)  -3.2% 
A)  2.4% 
B)  1.5% 
C)  -1.5% 
D)  2.0% 
E)  -3.2%

Question 12

Recent studies indicate that due to lower transaction costs intraday patterns of returns and volume persisted and result in profitable momentum trading strategies.

Accepted Answer

A) True 
 B)False

Question 13

Exhibit 6.4
Use the Information Below for the Following Problem(S)
 $$\begin{array} { c c c c c } 
\text { stack } & \text { Fit } & R \text { mit } & \text { a } _ { \text {i } } & \text { Eeta } \
\hline \text { A } & 10.3 & 12 & 0 & 0.6 \
3 & 94 & 90 & 0 & 1 .2
\end{array}$$ 
R?t = return for stock i during period t
Rmt = return for the aggregate market during period t
-Refer to Exhibit 6.4.What is the abnormal rate of return for Stock A when you consider its systematic risk measure (beta)?

Accepted Answer

A)  2.30% 
B)  2.10% 
C)  3.10% 
D)  12.40% 
E)  None of the above 
A)  2.30% 
B)  2.10% 
C)  3.10% 
D)  12.40% 
E)  None of the above

Question 14

Which of the following assumptions imply capital markets will be efficient?

Accepted Answer

A)  A large number of independent profit-maximizing participants analyze securities. 
B)  New information regarding securities comes to the market in a random fashion. 
C)  Investors adjust security prices rapidly to reflect the effect of new information. 
D)  Both b and c only. 
E)  All of the above are assumptions that imply a market will be efficient. 
A)  A large number of independent profit-maximizing participants analyze securities. 
B)  New information regarding securities comes to the market in a random fashion. 
C)  Investors adjust security prices rapidly to reflect the effect of new information. 
D)  Both b and c only. 
E)  All of the above are assumptions that imply a market will be efficient.

Question 15

Event studies are used to test the

Accepted Answer

A)  Weak-form efficient market hypothesis (EMH). 
B)  Semistrong-form efficient market hypothesis (EMH). 
C)  Strong-form efficient market hypothesis (EMH). 
D)  Both b and c 
E)  All of the above. 
A)  Weak-form efficient market hypothesis (EMH). 
B)  Semistrong-form efficient market hypothesis (EMH). 
C)  Strong-form efficient market hypothesis (EMH). 
D)  Both b and c 
E)  All of the above.

Question 16

Prices in efficient capital markets fully reflect all available information and rapidly adjust to new information.

Accepted Answer

A) True 
 B)False

Question 17

Exhibit 6.5
Use the Information Below for the Following Problem(S)
 $\begin{array}{ccccc}
\text { Stock } & \mathbf{R}_{\mathbf{i t}} & \mathbf{R}_{\text {mt }} & \mathbf{a}_{\mathbf{i}} & \mathbf{B e t a} \
\hline \mathrm{A} & 10.6 & 15 & 0 & 0.8 \
7 & 9.8 & 8 .0 & n & 1.1
\end{array}$ 
R?t = return for stock i during period t
Rmt = return for the aggregate market during period t
-Refer to Exhibit 6.5.What is the abnormal rate of return for Stock Z during period t using only the aggregate market return (ignore differential systematic risk)?

Accepted Answer

A)  1.80 
B)  1.40 
C)  -1.80 
D)  -4.80 
E)  -8.80 
A)  1.80 
B)  1.40 
C)  -1.80 
D)  -4.80 
E)  -8.80

Question 18

Exhibit 6.6
Use the Information Below for the Following Problem(S)
 $$\begin{array} { c c c c c } 
\text { itack } & \text { Re } & \text { it } & \text { mit } & \text { Het. } \
\hline \text { A } & 9.7 & 10.0 & 0 & 0.7 \
8 & 10.4 & 8.0 & 0 & 1.4
\end{array}$$ 
R?S1U1B1tS1U1B0 = return for stock i during period t
RS1U1B1mtS1U1B0 = return for the aggregate market during period t
-Refer to Exhibit 6.6.Stock X had an actual return of 14% and Stock X's normal return based on the market's return for the same period was 13.6%.What is Stock X's abnormal rate of return?

Accepted Answer

A)  -0.4% 
B)  0.1% 
C)  0.4% 
D)  4.0% 
E)  6.4% 
A)  -0.4% 
B)  0.1% 
C)  0.4% 
D)  4.0% 
E)  6.4%

Question 19

The strongest explanations for the size anomaly are

Accepted Answer

A)  risk measurements 
B)  higher transaction costs 
C)  P/E ratio 
D)  a and b. 
E)  b and c. 
A)  risk measurements 
B)  higher transaction costs 
C)  P/E ratio 
D)  a and b. 
E)  b and c.

Question 20

Which statement is true concerning alternative efficient market hypothesis?

Accepted Answer

A)  The weak hypothesis encompasses the semi-strong hypothesis. 
B)  The weak hypothesis encompasses the strong hypothesis. 
C)  The semi-strong hypothesis encompasses the weak hypothesis. 
D)  The strong hypothesis relates only to public information. 
E)  None of the above (all statements are false) 
A)  The weak hypothesis encompasses the semi-strong hypothesis. 
B)  The weak hypothesis encompasses the strong hypothesis. 
C)  The semi-strong hypothesis encompasses the weak hypothesis. 
D)  The strong hypothesis relates only to public information. 
E)  None of the above (all statements are false)

Exam 6: Efficient Capital Markets

Escalation bias refers to the situation where

Studies concerning quarterly earnings reports indicate that information in quarterly statements is of value and can provide an above-average risk-adjusted return.

Which of the following would be inconsistent with an efficient market?

According to the weak-form efficient market hypothesis,which of the following types of information are fully reflected in stock prices?

A trading rule which signals purchase of a stock if it rises X percent and sale of a stock if it falls X percent is known as a

Evidence supporting the strong-form efficient market hypothesis (EMH)resulted from examining

Recent studies indicate that due to lower transaction costs intraday patterns of returns and volume persisted and result in profitable momentum trading strategies.

Which of the following assumptions imply capital markets will be efficient?

Event studies are used to test the

Prices in efficient capital markets fully reflect all available information and rapidly adjust to new information.

The strongest explanations for the size anomaly are

Which statement is true concerning alternative efficient market hypothesis?

An Overview of the Investment Process

The Asset Allocation Decision

The Global Market Investment Decision

Securities Markets: Organization and Operation

Security-Market Indexes

An Introduction to Portfolio Management

An Introduction to Asset Pricing Models

Multifactor Models of Risk and Return

Analysis of Financial Statements

Security Valuation Principles

Macroanalysis and Microvaluation of the Stock Market

Industry Analysis

Company Analysis and Stock Valuation

Equity Portfolio Management Stragtegies

Technical Analysis

Bond Fundamentals

The Analysis and Valuation of Bonds

Bond Portfolio Management Strategies

An Introduction to Derivative Markets and Securities

Forward and Futures Contracts

Option Contracts

Swap Contracts,convertible Securities,and Other Embedded Derivatives

Professional Money Management, alternative Assets, and Industry Ethics

Evaluation of Portfolio Performance

Investment Return and Risk Analysis Questions

Investment and Retirement Plans

Calculating Covariance and Correlation Coefficient of Assets

Portfolio Variance and Stock Weight Calculations

Portfolio Optimization with Negative Correlation: Finding Minimum Variance and Weight Allocation

Filters