Question 1

Behavioral finance integrates sociology with finance.It argues that investors often make systematic mistakes when processing social information about market participants.

Accepted Answer

A) True 
 B)False  False

Question 2

Using technical analysis to consistently earn abnormal returns is consistent with which form of the Efficient Market Hypothesis?

Accepted Answer

A) None 
B) Weak form 
C) Semi-strong form 
D) Strong form 
A) None 
B) Weak form 
C) Semi-strong form 
D) Strong form A

Question 3

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. B

Question 4

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

Accepted Answer

A) True 
 B)False

Question 5

What is meant by the expression stock prices follow a "random walk?"

Accepted Answer

A) The best prediction of next period's price change is last period's price change. 
B) Stock price changes do not depend statistically on prior price changes. 
C) Stock price changes tend to be positive. 
D) Stock price changes do not reflect market information. 
A) The best prediction of next period's price change is last period's price change. 
B) Stock price changes do not depend statistically on prior price changes. 
C) Stock price changes tend to be positive. 
D) Stock price changes do not reflect market information.

Question 6

Historically,stock returns for companies with low P/E ratios have been better than returns for stocks with high P/E ratios.

Accepted Answer

A) True 
 B)False

Question 7

In tests of market efficiency,CAR refers to:

Accepted Answer

A) cumulative average return. 
B) compound average return. 
C) compound annual return. 
D) cumulative abnormal return. 
A) cumulative average return. 
B) compound average return. 
C) compound annual return. 
D) cumulative abnormal return.

Question 8

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

Accepted Answer

A) True 
 B)False

Question 9

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 10

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

Accepted Answer

A) True 
 B)False

Question 11

Evidence indicates that the majority of actively-managed,large cap equity funds outperform the S&P 500 Index.

Accepted Answer

A) True 
 B)False

Question 12

Which of the following is not an investor trading bias?

Accepted Answer

A) Loss aversion 
B) Framing 
C) Overconfidence 
D) Mean reversion 
A) Loss aversion 
B) Framing 
C) Overconfidence 
D) Mean reversion

Question 13

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 14

What is the most important determinant of stock price in an efficient market?

Accepted Answer

A) Information about past events and beliefs about future events 
B) The trading system that connects buyers and sellers within the market 
C) The number of traders participating in the market 
D) The ability of investors to perfectly adjust prices based on new information 
A) Information about past events and beliefs about future events 
B) The trading system that connects buyers and sellers within the market 
C) The number of traders participating in the market 
D) The ability of investors to perfectly adjust prices based on new information

Question 15

The SUE effect suggests that superior performance is associated:

Accepted Answer

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

Question 16

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 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

Efficient markets imply investors can not earn abnormal returns.

Accepted Answer

A) True 
 B)False

Question 19

Research suggests company insiders earn abnormal returns on their stock transactions.What does this research mean for the efficient market hypothesis (EMH)?

Accepted Answer

A) Insider trading has nothing to do with the EMH. 
B) Profitable insider trading contradicts all forms of the EMH. 
C) Profitable insider trading contradicts only the weak form of the EMH. 
D) Profitable insider trading contradicts only the strong form of the EMH 
A) Insider trading has nothing to do with the EMH. 
B) Profitable insider trading contradicts all forms of the EMH. 
C) Profitable insider trading contradicts only the weak form of the EMH. 
D) Profitable insider trading contradicts only the strong form of the EMH

Question 20

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.

Exam 12: Market Efficiency

Behavioral finance integrates sociology with finance.It argues that investors often make systematic mistakes when processing social information about market participants.

Using technical analysis to consistently earn abnormal returns is consistent with which form of the Efficient Market Hypothesis?

The momentum effect indicates that stocks with the:

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

What is meant by the expression stock prices follow a "random walk?"

Historically,stock returns for companies with low P/E ratios have been better than returns for stocks with high P/E ratios.

In tests of market efficiency,CAR refers to:

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

What is meant by the "disposition effect?"

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

Evidence indicates that the majority of actively-managed,large cap equity funds outperform the S&P 500 Index.

Which of the following is not an investor trading bias?

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

What is the most important determinant of stock price in an efficient market?

The SUE effect suggests that superior performance is associated:

A characteristic of an efficient market is that:

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

Efficient markets imply investors can not earn abnormal returns.

Research suggests company insiders earn abnormal returns on their stock transactions.What does this research mean for the efficient market hypothesis (EMH)?

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

Understanding Investments

Investment Alternatives

Indirect Investing

Securities Markets and Market Indexes

How Securities Are Traded

The Risks and Returns From Investing

Portfolio Theory

Portfolio Selection

Asset Pricing Models

Common Stock Valuation

Common Stocks: Analysis and Strategy

Economy Market Analysis

Industry Analysis

Company Analysis

Technical Analysis

Bond Yields

Bonds: Analysis and Strategy

Options

Futures

Portfolio Management

Evaluation of Investment Performance

Filters