Question 1

If it takes 10 days for a stock price to correctly respond an event,it might be due to

Accepted Answer

A)  overreaction. 
B)  under reaction. 
C)  efficient markets. 
D)  overreaction and under reaction. 
E)  under reaction and efficient markets. 
A)  overreaction. 
B)  under reaction. 
C)  efficient markets. 
D)  overreaction and under reaction. 
E)  under reaction and efficient markets.

Question 2

Efficient capital markets are financial markets:

Accepted Answer

A)  in which current market prices reflect available information. 
B)  in which current market prices reflect the present value of securities. 
C)  in which there is no excess profit from using available information. 
D)  All of these. 
E)  None of these. 
A)  in which current market prices reflect available information. 
B)  in which current market prices reflect the present value of securities. 
C)  in which there is no excess profit from using available information. 
D)  All of these. 
E)  None of these.

Question 3

Individuals that continually monitor the financial markets seeking mispriced securities:

Accepted Answer

A)  tend to make substantial profits on a daily basis. 
B)  tend to make the markets more efficient. 
C)  are never able to find a security that is temporarily mispriced. 
D)  are always quite successful using only well-known public information as their basis of evaluation. 
E)  are always quite successful using only historical price information as their basis of evaluation. 
A)  tend to make substantial profits on a daily basis. 
B)  tend to make the markets more efficient. 
C)  are never able to find a security that is temporarily mispriced. 
D)  are always quite successful using only well-known public information as their basis of evaluation. 
E)  are always quite successful using only historical price information as their basis of evaluation.

Question 4

In an efficient market,the price of a security will:

Accepted Answer

A)  always rise immediately upon the release of new information with no further price adjustments related to that information. 
B)  react to new information over a two-day period after which time no further price adjustments related to that information will occur. 
C)  rise sharply when new information is first released and then decline to a new stable level by the following day. 
D)  react immediately to new information with no further price adjustments related to that information. 
E)  be slow to react for the first few hours after new information is released allowing time for that information to be reviewed and analyzed. 
A)  always rise immediately upon the release of new information with no further price adjustments related to that information. 
B)  react to new information over a two-day period after which time no further price adjustments related to that information will occur. 
C)  rise sharply when new information is first released and then decline to a new stable level by the following day. 
D)  react immediately to new information with no further price adjustments related to that information. 
E)  be slow to react for the first few hours after new information is released allowing time for that information to be reviewed and analyzed.

Question 5

According to the efficient market hypothesis,financial markets fluctuate daily because they:

Accepted Answer

A)  are inefficient. 
B)  slowly react to new information. 
C)  are continually reacting to new information. 
D)  offer tremendous arbitrage opportunities. 
E)  only reflect historical information. 
A)  are inefficient. 
B)  slowly react to new information. 
C)  are continually reacting to new information. 
D)  offer tremendous arbitrage opportunities. 
E)  only reflect historical information.

Question 6

Financial managers must be cognizant of market efficiency because:

Accepted Answer

A)  manipulating earnings by accounting changes does not fool the market. 
B)  timing security sales is futile because without private information the current price reflects all known information. 
C)  there is limited price pressure from any large sale of stock depressing prices only momentarily before recovering to prior levels. 
D)  All of these. 
E)  None of these. 
A)  manipulating earnings by accounting changes does not fool the market. 
B)  timing security sales is futile because without private information the current price reflects all known information. 
C)  there is limited price pressure from any large sale of stock depressing prices only momentarily before recovering to prior levels. 
D)  All of these. 
E)  None of these.

Question 7

An example of financially irrational behavior is:

Accepted Answer

A)  gambling in Las Vegas. 
B)  when a firm announces an increase in earnings and the stock price enjoys three days of large abnormal returns. 
C)  when a firm announces an increase in earnings and the stock price enjoys an immediate surge in value which is captured in one day. 
D)  Both gambling in Las Vegas; and when a firm announces an increase in earnings and the stock price enjoys three days of large abnormal returns. 
E)  Both gambling in Las Vegas; and when a firm announces an increase in earnings and the stock price enjoys an immediate surge in value which is captured in one day. 
A)  gambling in Las Vegas. 
B)  when a firm announces an increase in earnings and the stock price enjoys three days of large abnormal returns. 
C)  when a firm announces an increase in earnings and the stock price enjoys an immediate surge in value which is captured in one day. 
D)  Both gambling in Las Vegas; and when a firm announces an increase in earnings and the stock price enjoys three days of large abnormal returns. 
E)  Both gambling in Las Vegas; and when a firm announces an increase in earnings and the stock price enjoys an immediate surge in value which is captured in one day.

Question 8

Which of the following is true?

Accepted Answer

A)  A random walk for stock price changes is inconsistent with observed patterns in price changes. 
B)  If the stock market follows a random walk, price changes should be highly correlated. 
C)  If the stock market is weak form efficient, then stock prices follow a random walk. 
D)  All of these. 
E)  Both If the stock market follows a random walk, price changes should be highly correlated; and If the stock market is weak form efficient, then stock prices follow a random walk. 
A)  A random walk for stock price changes is inconsistent with observed patterns in price changes. 
B)  If the stock market follows a random walk, price changes should be highly correlated. 
C)  If the stock market is weak form efficient, then stock prices follow a random walk. 
D)  All of these. 
E)  Both If the stock market follows a random walk, price changes should be highly correlated; and If the stock market is weak form efficient, then stock prices follow a random walk.

Question 9

In the three years prior to a forced departure of management,stock prices,adjusted for market performance,on average will:

Accepted Answer

A)  decline about 20%. 
B)  decline about 40%. 
C)  decline about 60%. 
D)  remain stable. 
E)  increase about 20%. 
A)  decline about 20%. 
B)  decline about 40%. 
C)  decline about 60%. 
D)  remain stable. 
E)  increase about 20%.

Question 10

In examining the issue of whether the choice of accounting methods affects stock prices,studies have found that:

Accepted Answer

A)  accounting depreciation methods can significantly affect stock prices. 
B)  switching depreciation methods can significantly affect stock prices. 
C)  accounting changes that increase accounting earnings also increases stock prices. 
D)  accounting changes can affect stock prices if the company were either to withhold information or provide incorrect information. 
E)  All of 
A)  accounting depreciation methods can significantly affect stock prices. 
B)  switching depreciation methods can significantly affect stock prices. 
C)  accounting changes that increase accounting earnings also increases stock prices. 
D)  accounting changes can affect stock prices if the company were either to withhold information or provide incorrect information. 
E)  All of

Question 11

If the market is weak form efficient:

Accepted Answer

A)  semistrong form efficiency holds. 
B)  strong form efficiency must hold. 
C)  semistrong form efficiency may hold. 
D)  markets are not weak form efficient. 
E)  None of these. 
A)  semistrong form efficiency holds. 
B)  strong form efficiency must hold. 
C)  semistrong form efficiency may hold. 
D)  markets are not weak form efficient. 
E)  None of these.

Question 12

A semistrong form efficient market is distinct from a weak form efficient market by:

Accepted Answer

A)  incorporating only random movements in the price. 
B)  incorporating all publicly available information in the price. 
C)  incorporating inside information in the price. 
D)  All of these. 
E)  None of these. 
A)  incorporating only random movements in the price. 
B)  incorporating all publicly available information in the price. 
C)  incorporating inside information in the price. 
D)  All of these. 
E)  None of these.

Question 13

If the securities market is efficient,an investor need only throw darts at the stock pages to pick securities and be just as well off.

Accepted Answer

A)  This is true because there are no differences in risk and return. 
B)  This is true because in an efficient stock market prices do not fluctuate. 
C)  This is false because professional portfolio managers prefer to generate commissions by active trading. 
D)  This is false because investors may not hold a desirable risk-return combination in their portfolio. 
E)  This is false because the markets are controlled by the institutional investors. 
A)  This is true because there are no differences in risk and return. 
B)  This is true because in an efficient stock market prices do not fluctuate. 
C)  This is false because professional portfolio managers prefer to generate commissions by active trading. 
D)  This is false because investors may not hold a desirable risk-return combination in their portfolio. 
E)  This is false because the markets are controlled by the institutional investors.

Question 14

Which of the following is not true about serial correlation?

Accepted Answer

A)  It measures the correlation between the current return on a security and the current return on another security. 
B)  It involves only one security. 
C)  Positive serial correlation indicates a tendency for continuation. 
D)  Negative serial correlation indicates a tendency toward reversal. 
E)  Significant positive or negative serial correlation coefficients are indicative of market inefficiency in the weak form. 
A)  It measures the correlation between the current return on a security and the current return on another security. 
B)  It involves only one security. 
C)  Positive serial correlation indicates a tendency for continuation. 
D)  Negative serial correlation indicates a tendency toward reversal. 
E)  Significant positive or negative serial correlation coefficients are indicative of market inefficiency in the weak form.

Question 15

Which of the following would be indicative of inefficient markets?

Accepted Answer

A)  Overreaction and reversion 
B)  Delayed response 
C)  Immediate and accurate response 
D)  Both Overreaction and reversion; and Delayed response 
E)  Both Overreaction and reversion; and Immediate and accurate response 
A)  Overreaction and reversion 
B)  Delayed response 
C)  Immediate and accurate response 
D)  Both Overreaction and reversion; and Delayed response 
E)  Both Overreaction and reversion; and Immediate and accurate response

Question 16

The abnormal returns for initial public offerings over longer time periods seem to call market efficiency into question because:

Accepted Answer

A)  the average returns at announcement are large and positive while the long-term results are much lower than the returns for seasoned equity offerings. 
B)  the average returns at announcement are small and negative while the long-term results are much lower than the returns for seasoned equity offerings. 
C)  the average returns at announcement are zero while the long-term results are much higher than the returns for seasoned equity offerings. 
D)  the average returns at announcement are large and positive while the long-term results are much higher than the returns for seasoned equity offerings. 
E)  the average returns at announcement are insignificant while the long-term results are much lower than the returns for seasoned equity offerings. 
A)  the average returns at announcement are large and positive while the long-term results are much lower than the returns for seasoned equity offerings. 
B)  the average returns at announcement are small and negative while the long-term results are much lower than the returns for seasoned equity offerings. 
C)  the average returns at announcement are zero while the long-term results are much higher than the returns for seasoned equity offerings. 
D)  the average returns at announcement are large and positive while the long-term results are much higher than the returns for seasoned equity offerings. 
E)  the average returns at announcement are insignificant while the long-term results are much lower than the returns for seasoned equity offerings.

Question 17

Your best friend works in the finance office of the Delta Corporation. You are aware that this friend trades Delta stock based on information he overhears in the office. You know that this information is not known to the general public. Your friend continually brags to you about the profits he earns trading Delta stock. Based on this information,you would tend to argue that the financial markets are at best _____ form efficient.

Accepted Answer

A)  weak 
B)  semiweak 
C)  semistrong 
D)  strong 
E)  perfect 
A)  weak 
B)  semiweak 
C)  semistrong 
D)  strong 
E)  perfect

Question 18

Which one of the following statements is correct concerning market efficiency?

Accepted Answer

A)  Real asset markets are more efficient than financial markets. 
B)  If a market is efficient, arbitrage opportunities should be common. 
C)  In an efficient market, some market participants will have an advantage over others. 
D)  A firm will generally receive a fair price when it sells shares of stock. 
E)  New information will gradually be reflected in a stock's price to avoid any sudden change in the price of the stock. 
A)  Real asset markets are more efficient than financial markets. 
B)  If a market is efficient, arbitrage opportunities should be common. 
C)  In an efficient market, some market participants will have an advantage over others. 
D)  A firm will generally receive a fair price when it sells shares of stock. 
E)  New information will gradually be reflected in a stock's price to avoid any sudden change in the price of the stock.

Question 19

The following time period(s) is/are consistent with the bubble theory:

Accepted Answer

A)  the stock market crash of 1929. 
B)  the stock market crash of 1972. 
C)  the stock market crash of 1987. 
D)  the stock market crash of 1929 and the stock market crash of 1987. 
E)  the stock market crash of 1929; the stock market crash of 1972; and the stock market crash of 1987. 
A)  the stock market crash of 1929. 
B)  the stock market crash of 1972. 
C)  the stock market crash of 1987. 
D)  the stock market crash of 1929 and the stock market crash of 1987. 
E)  the stock market crash of 1929; the stock market crash of 1972; and the stock market crash of 1987.

Question 20

The hypothesis that market prices reflect all historical information is called _____ form efficiency.

Accepted Answer

A)  open 
B)  strong 
C)  semistrong 
D)  weak 
E)  stable 
A)  open 
B)  strong 
C)  semistrong 
D)  weak 
E)  stable

Exam 14: Efficient Capital Markets and Behavioral Challenges

If it takes 10 days for a stock price to correctly respond an event,it might be due to

Efficient capital markets are financial markets:

Individuals that continually monitor the financial markets seeking mispriced securities:

In an efficient market,the price of a security will:

According to the efficient market hypothesis,financial markets fluctuate daily because they:

Financial managers must be cognizant of market efficiency because:

An example of financially irrational behavior is:

Which of the following is true?

In the three years prior to a forced departure of management,stock prices,adjusted for market performance,on average will:

In examining the issue of whether the choice of accounting methods affects stock prices,studies have found that:

If the market is weak form efficient:

A semistrong form efficient market is distinct from a weak form efficient market by:

If the securities market is efficient,an investor need only throw darts at the stock pages to pick securities and be just as well off.

Which of the following is not true about serial correlation?

Which of the following would be indicative of inefficient markets?

The abnormal returns for initial public offerings over longer time periods seem to call market efficiency into question because:

Which one of the following statements is correct concerning market efficiency?

The following time period(s) is/are consistent with the bubble theory:

The hypothesis that market prices reflect all historical information is called _____ form efficiency.

Introduction to Corporate Finance

Financial Statements and Cash Flow

Financial Statements Analysis and Financial Models

Discounted Cash Flow Valuation

Net Present Value and Other Investment Rules

Making Capital Investment Decisions

Risk Analysis, Real Options, and Capital Budgeting

Interest Rates and Bond Valuation

Stock Valuation

Risk and Return: Lessons From Market History

Return and Risk: the Capital Asset Pricing Model Capm

An Alternative View of Risk and Return: The Arbitrage Pricing Theory

Risk, Cost of Capital, and Valuation

Long-Term Financing

Capital Structure: Basic Concepts

Capital Structure: Limits to the Use of Debt

Valuation and Capital Budgeting for the Levered Firm

Dividends and Other Payouts

Raising Capital

Leasing

Options and Corporate Finance

Options and Corporate Finance: Extensions and Applications

Warrants and Convertibles

Derivatives and Hedging Risk

Short-Term Finance and Planning

Cash Management

Credit and Inventory Management

Mergers, Acquisitions, and Divestitures

Financial Distress

International Corporate Finance

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