Question 1

Fama and French examined the relationship between the Book Value to Market Value ratio and average stock returns and found

Accepted Answer

A)  No evidence of a relationship for U.S. stocks. 
B)  Evidence of a negative relationship in U.S. stocks only. 
C)  Evidence of a positive relationship for Japanese stocks only. 
D)  Evidence of a negative relationship for U.S. and Japanese stocks. 
E)  Evidence of a positive relationship for U.S. and Japanese stocks. 
A)  No evidence of a relationship for U.S. stocks. 
B)  Evidence of a negative relationship in U.S. stocks only. 
C)  Evidence of a positive relationship for Japanese stocks only. 
D)  Evidence of a negative relationship for U.S. and Japanese stocks. 
E)  Evidence of a positive relationship for U.S. and Japanese stocks.

Question 2

When considering markets in Europe,it is inappropriate to assume a level of efficiency similar to that for U.S.markets.

Accepted Answer

A) True 
 B)False

Question 3

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 when you consider its systematic risk measure (beta)?

Accepted Answer

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

Question 4

In order to confirm the weak-form efficient market hypothesis,an examination of stock price runs over time would reveal that stock price changes over time were

Accepted Answer

A)  Highly positively correlated. 
B)  Moderately positively correlated. 
C)  Highly negatively correlated. 
D)  Moderately negatively correlated. 
E)  None of the above. 
A)  Highly positively correlated. 
B)  Moderately positively correlated. 
C)  Highly negatively correlated. 
D)  Moderately negatively correlated. 
E)  None of the above.

Question 5

If the efficient market hypothesis is true price changes are independent and biased.

Accepted Answer

A) True 
 B)False

Question 6

Even when fees and costs are considered most mutual fund managers outperform the aggregate market.

Accepted Answer

A) True 
 B)False

Question 7

Results of studies concerning corporate insider trading indicate that corporate insiders generally enjoy above-average returns.

Accepted Answer

A) True 
 B)False

Question 8

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.What is the abnormal rate of return for Stock B when you consider its systematic risk measure (beta)?

Accepted Answer

A)  -0.8% 
B)  -1.2% 
C)  1.3% 
D)  2.4% 
E)  6.6% 
A)  -0.8% 
B)  -1.2% 
C)  1.3% 
D)  2.4% 
E)  6.6%

Question 9

In his original article,Fama divided the efficient market hypothesis into two subhypotheses.

Accepted Answer

A) True 
 B)False

Question 10

Tests of the efficient market hypothesis (EMH)are sometimes based on examining its abnormal rate of return.The abnormal rate of return is calculated by:

Accepted Answer

A)  Subtracting the expected rate of return from the actual return, where the expected return is based on the stock's beta and the CAPM. 
B)  Subtracting the actual rate of return from the expected return, where the expected return is based on the stock's beta and the CAPM . 
C)  Subtracting the expected rate of return from the actual return, where the expected return is based on the stock's projected dividend yields . 
D)  Subtracting the expected rate of return from the actual return, where the expected return is based on the stock's projected dividend yields. 
E)  None of the above 
A)  Subtracting the expected rate of return from the actual return, where the expected return is based on the stock's beta and the CAPM. 
B)  Subtracting the actual rate of return from the expected return, where the expected return is based on the stock's beta and the CAPM . 
C)  Subtracting the expected rate of return from the actual return, where the expected return is based on the stock's projected dividend yields . 
D)  Subtracting the expected rate of return from the actual return, where the expected return is based on the stock's projected dividend yields. 
E)  None of the above

Question 11

Exhibit 6.1
Use the Information Below for the Following Problem(S)
 $\begin{array}{ccccc}
\text { Stock } & \mathbf{R}_{\text {it }} & \mathbf{R}_{\text {mt }} & \mathbf{a}_{\mathbf{i}} & \text { Beta } \
\hline \mathrm{C} & 12 & 10 & 0 & 0.8 \
\mathrm{~F} & 10 & 80 & 0 & 1.1
\end{array}$ 
RS1U1B1itS1U1B0 = return for stock i during period t
RS1U1B1mtS1U1B0 = return for the aggregate market during period t
-Refer to Exhibit 6.1.What is the abnormal rate of return for Stock E during period t using only the aggregate market return (ignore differential systematic risk)?

Accepted Answer

A)  4.0% 
B)  2.0% 
C)  1.2% 
D)  -1.05% 
E)  -8.5% 
A)  4.0% 
B)  2.0% 
C)  1.2% 
D)  -1.05% 
E)  -8.5%

Question 12

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.What is the abnormal rate of return for Stock A when you consider its systematic risk measure (beta)?

Accepted Answer

A)  -2.3% 
B)  -0.3% 
C)  0.3% 
D)  2.3% 
E)  3.0% 
A)  -2.3% 
B)  -0.3% 
C)  0.3% 
D)  2.3% 
E)  3.0%

Question 13

According to prospect theory

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.

Question 14

Results of initial public offering (IPOs)studies tend to support the semi-strong EMH,because it appears that prices adjusted rapidly after initial underpricing.

Accepted Answer

A) True 
 B)False

Question 15

Banz and Reinganum found that small firms consistently outperformed large firms.This anomaly is referred to as the

Accepted Answer

A)  Large firm effect. 
B)  Size effect. 
C)  Small firm effect. 
D)  PIE effect. 
E)  None of the above. 
A)  Large firm effect. 
B)  Size effect. 
C)  Small firm effect. 
D)  PIE effect. 
E)  None of the above.

Question 16

Abnormal returns associated with rankings by a major advisory service are associated with

Accepted Answer

A)  The PIE effect. 
B)  The Value-Line Enigma. 
C)  The Value-Line Effect. 
D)  The Standard and Poor's Anomaly. 
E)  The rankings anomaly. 
A)  The PIE effect. 
B)  The Value-Line Enigma. 
C)  The Value-Line Effect. 
D)  The Standard and Poor's Anomaly. 
E)  The rankings anomaly.

Question 17

In tests of the semistrong-form efficient market hypothesis,an adjustment for market effects is carried out by

Accepted Answer

A)  Calculating the historical return. 
B)  Calculating the market rate of return. 
C)  Calculating the abnormal rate of return. 
D)  Calculating the cross-sectional return. 
E)  None of the above. 
A)  Calculating the historical return. 
B)  Calculating the market rate of return. 
C)  Calculating the abnormal rate of return. 
D)  Calculating the cross-sectional return. 
E)  None of the above.

Question 18

In tests of the semistrong-form EMH,it is not necessary to use risk-adjusted rates of return.

Accepted Answer

A) True 
 B)False

Question 19

Some studies have attempted to determine whether it is possible to predict future returns for a stock based on publicly available quarterly earnings reports.The results of these studies indicate

Accepted Answer

A)  Stock prices adjust to reflect quarterly earnings reports. 
B)  Stock prices do not adjust to reflect quarterly earnings reports. 
C)  Support for the semistrong EMH. 
D)  Stock prices adjust if earnings reports are released in January. 
E)  Stock prices do not adjust if earnings reports are released in January. 
A)  Stock prices adjust to reflect quarterly earnings reports. 
B)  Stock prices do not adjust to reflect quarterly earnings reports. 
C)  Support for the semistrong EMH. 
D)  Stock prices adjust if earnings reports are released in January. 
E)  Stock prices do not adjust if earnings reports are released in January.

Question 20

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 when you consider its systematic risk measure (beta)?

Accepted Answer

A)  0.1% 
B)  -1.4% 
C)  0.5% 
D)  1.5% 
E)  2.0% 
A)  0.1% 
B)  -1.4% 
C)  0.5% 
D)  1.5% 
E)  2.0%

Exam 6: Efficient Capital Markets

Fama and French examined the relationship between the Book Value to Market Value ratio and average stock returns and found

When considering markets in Europe,it is inappropriate to assume a level of efficiency similar to that for U.S.markets.

In order to confirm the weak-form efficient market hypothesis,an examination of stock price runs over time would reveal that stock price changes over time were

If the efficient market hypothesis is true price changes are independent and biased.

Even when fees and costs are considered most mutual fund managers outperform the aggregate market.

Results of studies concerning corporate insider trading indicate that corporate insiders generally enjoy above-average returns.

In his original article,Fama divided the efficient market hypothesis into two subhypotheses.

Tests of the efficient market hypothesis (EMH)are sometimes based on examining its abnormal rate of return.The abnormal rate of return is calculated by:

According to prospect theory

Results of initial public offering (IPOs)studies tend to support the semi-strong EMH,because it appears that prices adjusted rapidly after initial underpricing.

Banz and Reinganum found that small firms consistently outperformed large firms.This anomaly is referred to as the

Abnormal returns associated with rankings by a major advisory service are associated with

In tests of the semistrong-form efficient market hypothesis,an adjustment for market effects is carried out by

In tests of the semistrong-form EMH,it is not necessary to use risk-adjusted rates of return.

Some studies have attempted to determine whether it is possible to predict future returns for a stock based on publicly available quarterly earnings reports.The results of these studies indicate

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