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

How should cumulative abnormal returns react in an efficient market?

Accepted Answer

A) relatively constant, sharp break, relatively constant 
B) relatively constant with no breaks 
C) steadily increasing 
D) steadily decreasing 
E) remain constant at zero 
A) relatively constant, sharp break, relatively constant 
B) relatively constant with no breaks 
C) steadily increasing 
D) steadily decreasing 
E) remain constant at zero

Question 3

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

Accepted Answer

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

Question 4

Which one of the following is a research method used to study the effects news has on stock prices?

Accepted Answer

A) polarization 
B) market analysis 
C) event study 
D) news theory 
E) reaction hypothesis 
A) polarization 
B) market analysis 
C) event study 
D) news theory 
E) reaction hypothesis

Question 5

Which one of the following statements is correct?

Accepted Answer

A) Professional money managers outperformed the Vanguard 500 Index Fund on an annual basis more than half the time for the period 1977-2011. 
B) Purchasing and holding a broad-based index fund is a highly recommended means of investing. 
C) The number of general equity mutual funds has decreased over the past 20 years due to their underperformance as compared to index funds. 
D) The survivorship bias lowers the returns earned by professional money managers as a group. 
E) In an efficient market, there is no need for professional money managers. 
A) Professional money managers outperformed the Vanguard 500 Index Fund on an annual basis more than half the time for the period 1977-2011. 
B) Purchasing and holding a broad-based index fund is a highly recommended means of investing. 
C) The number of general equity mutual funds has decreased over the past 20 years due to their underperformance as compared to index funds. 
D) The survivorship bias lowers the returns earned by professional money managers as a group. 
E) In an efficient market, there is no need for professional money managers.

Question 6

Which one of the following terms is used to describe a stock price that moves over time creating no discernible pattern?

Accepted Answer

A) deviated pattern 
B) dispersed flow 
C) efficient movement 
D) overreaction and correction 
E) random walk 
A) deviated pattern 
B) dispersed flow 
C) efficient movement 
D) overreaction and correction 
E) random walk

Question 7

If the market is semistrong-form efficient,then which one of the following statements is true?

Accepted Answer

A) Neither technical nor fundamental analysis leads to abnormal profits. 
B) Technical analysts have the ability to earn excess profits but fundamental analysts cannot. 
C) Fundamental analysts can earn excess profits but technical analysts cannot. 
D) Both technical and fundamental analysts earn excess profits based on their research. 
E) No answer can be determined as the form of market efficiency is unrelated to abnormal, or excess returns. 
A) Neither technical nor fundamental analysis leads to abnormal profits. 
B) Technical analysts have the ability to earn excess profits but fundamental analysts cannot. 
C) Fundamental analysts can earn excess profits but technical analysts cannot. 
D) Both technical and fundamental analysts earn excess profits based on their research. 
E) No answer can be determined as the form of market efficiency is unrelated to abnormal, or excess returns.

Question 8

You are the chief financial officer of Donnelly 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) semi-strong form 
E) strong-form 
A) mild-form 
B) weak-form 
C) historical-form 
D) semi-strong form 
E) strong-form

Question 9

Which one of the following terms best describes the information you know about a company that will have a significant effect on the price of the company's stock once that information is released?

Accepted Answer

A) material public information 
B) public information 
C) abnormal information 
D) private, non-material information 
E) material non-public information 
A) material public information 
B) public information 
C) abnormal information 
D) private, non-material information 
E) material non-public information

Question 10

Which one of the following occurred following the Crash of 1987?

Accepted Answer

A) Program trading was barred. 
B) All market orders were changed to electronic orders. 
C) Trading is now halted for the day anytime the market declines by 10 percent or more. 
D) Trading now stops for one hour anytime the market declines by 10 percent. 
E) Congress decided not to pass any anti-takeover legislation. 
A) Program trading was barred. 
B) All market orders were changed to electronic orders. 
C) Trading is now halted for the day anytime the market declines by 10 percent or more. 
D) Trading now stops for one hour anytime the market declines by 10 percent. 
E) Congress decided not to pass any anti-takeover legislation.

Question 11

Helena is the chief executive officer of Beltway 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 12

If the financial markets were regulated such that the markets maintained strong-form efficiency,then:

Accepted Answer

A) insider trading laws would be unnecessary. 
B) all investors would earn equivalent rates of return. 
C) risk premiums would vanish. 
D) all investors would become arbitrage traders. 
E) securities would tend to be continually underpriced. 
A) insider trading laws would be unnecessary. 
B) all investors would earn equivalent rates of return. 
C) risk premiums would vanish. 
D) all investors would become arbitrage traders. 
E) securities would tend to be continually underpriced.

Question 13

You analyze a firm's financial statements and invest based upon the results of this analysis.Which form of market efficiency must exist if you are able to earn excess profits on these investments?

Accepted Answer

A) weak-form 
B) historical-form 
C) semi-strong form 
D) full-form 
E) mild-form 
A) weak-form 
B) historical-form 
C) semi-strong form 
D) full-form 
E) mild-form

Question 14

Over the past 5 days,the common stock of Tyler Mfg.had daily returns of 0.2,-0.1,-0.2,0.3,and 0.1 percent,respectively.For the same 5 days,the market had daily returns of 0.0,0.1,-0.3,0.4,and 0.2 percent,respectively.What is the cumulative abnormal return on Tyler Mfg.stock for this time period?

Accepted Answer

A) -0.2 percent 
B) -0.1 percent 
C) 0.0 percent 
D) 0.1 percent 
E) 0.2 percent 
A) -0.2 percent 
B) -0.1 percent 
C) 0.0 percent 
D) 0.1 percent 
E) 0.2 percent

Question 15

Amy uses two approaches to trading stocks.First,she trades on what she believes is a repetitive pattern as seen in Delta Co's historical prices.Secondly,she analyzes the financial statements of The Atwater Co.to compute changes in the return on equity as a predictor of future stock prices for that firm.She trades based on both strategies.Amy earns excess profits on her return on equity strategy but not on her historical prices strategy.This suggests that the market is at least _____ efficient but less than _____ efficient.

Accepted Answer

A) weak-form; mild-form 
B) mild-form; semistrong-form 
C) weak-form; semistrong-form 
D) semistrong-form; full-form 
E) semistrong-form; strong-form 
A) weak-form; mild-form 
B) mild-form; semistrong-form 
C) weak-form; semistrong-form 
D) semistrong-form; full-form 
E) semistrong-form; strong-form

Question 16

By the end of 2002,the AMEX Internet Index was at a level approximately equal to _____ percent of the index high.

Accepted Answer

A) 75 
B) 50 
C) 25 
D) 17 
E) 9 
A) 75 
B) 50 
C) 25 
D) 17 
E) 9

Question 17

A.B.Pharmaceutical announced FDA approval for a new drug on October 12.Uptown Drug Co.announced FDA approval for its new drug on October 14.No other information was released that would affect returns over this time period.What is the combined cumulative abnormal return for the 5 day period commencing 2 days prior to the FDA approval announcement date? Use the following data to answer this question.No trading occurred on October 15 or 16.

Accepted Answer

A) 0.6 percent 
B) 1.0 percent 
C) 1.2 percent 
D) 1.3 percent 
E) 1.6 percent 
A) 0.6 percent 
B) 1.0 percent 
C) 1.2 percent 
D) 1.3 percent 
E) 1.6 percent

Question 18

If the S&P 500 falls by 20 percent,the NYSE will:

Accepted Answer

A) do nothing if the drop occurs after 2:30 P.M. 
B) halt trading for one hour. 
C) halt trading for one hour if the decline occurs before 3 P.M. 
D) halt trading for one-half hour if the decline occurs after noon. 
E) cease trading for the day. 
A) do nothing if the drop occurs after 2:30 P.M. 
B) halt trading for one hour. 
C) halt trading for one hour if the decline occurs before 3 P.M. 
D) halt trading for one-half hour if the decline occurs after noon. 
E) cease trading for the day.

Question 19

Approximately how many years did it take for the stock market to recover from the bear market of 1929 to 1932?

Accepted Answer

A) 5 
B) 10 
C) 15 
D) 20 
E) 25 
A) 5 
B) 10 
C) 15 
D) 20 
E) 25

Question 20

The following are the daily returns for both the overall market and for Dexter Inc.What is the cumulative abnormal return on Dexter,Inc.,stock for these 5 days?

Accepted Answer

A) -0.7 percent 
B) -0.3 percent 
C) -0.2 percent 
D) 0.3 percent 
E) 0.6 percent 
A) -0.7 percent 
B) -0.3 percent 
C) -0.2 percent 
D) 0.3 percent 
E) 0.6 percent

Independent deviations from rationality:

How should cumulative abnormal returns react in an efficient market?

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

Which one of the following is a research method used to study the effects news has on stock prices?

Which one of the following statements is correct?

Which one of the following terms is used to describe a stock price that moves over time creating no discernible pattern?

If the market is semistrong-form efficient,then which one of the following statements is true?

You are the chief financial officer of Donnelly 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 terms best describes the information you know about a company that will have a significant effect on the price of the company's stock once that information is released?

Which one of the following occurred following the Crash of 1987?

If the financial markets were regulated such that the markets maintained strong-form efficiency,then:

You analyze a firm's financial statements and invest based upon the results of this analysis.Which form of market efficiency must exist if you are able to earn excess profits on these investments?

Over the past 5 days,the common stock of Tyler Mfg.had daily returns of 0.2,-0.1,-0.2,0.3,and 0.1 percent,respectively.For the same 5 days,the market had daily returns of 0.0,0.1,-0.3,0.4,and 0.2 percent,respectively.What is the cumulative abnormal return on Tyler Mfg.stock for this time period?

By the end of 2002,the AMEX Internet Index was at a level approximately equal to _____ percent of the index high.

If the S&P 500 falls by 20 percent,the NYSE will:

Approximately how many years did it take for the stock market to recover from the bear market of 1929 to 1932?

The following are the daily returns for both the overall market and for Dexter Inc.What is the cumulative abnormal return on Dexter,Inc.,stock for these 5 days?

A Brief History of Risk and Return

The Investment Process

Overview of Security Types

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

Projecting Cash Flow and Earnings

Corporate and Government Bonds

Global Economic Activity and Industry Analysis

Mortgage-Backed Securities

Filters

Exam 7: Stock Price Behavior and Market Efficiency

Independent deviations from rationality:

How should cumulative abnormal returns react in an efficient market?

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

Which one of the following is a research method used to study the effects news has on stock prices?

Which one of the following statements is correct?

Which one of the following terms is used to describe a stock price that moves over time creating no discernible pattern?

If the market is semistrong-form efficient,then which one of the following statements is true?

You are the chief financial officer of Donnelly 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 terms best describes the information you know about a company that will have a significant effect on the price of the company's stock once that information is released?

Which one of the following occurred following the Crash of 1987?

If the financial markets were regulated such that the markets maintained strong-form efficiency,then:

You analyze a firm's financial statements and invest based upon the results of this analysis.Which form of market efficiency must exist if you are able to earn excess profits on these investments?

Over the past 5 days,the common stock of Tyler Mfg.had daily returns of 0.2,-0.1,-0.2,0.3,and 0.1 percent,respectively.For the same 5 days,the market had daily returns of 0.0,0.1,-0.3,0.4,and 0.2 percent,respectively.What is the cumulative abnormal return on Tyler Mfg.stock for this time period?

By the end of 2002,the AMEX Internet Index was at a level approximately equal to _____ percent of the index high.

If the S&P 500 falls by 20 percent,the NYSE will:

Approximately how many years did it take for the stock market to recover from the bear market of 1929 to 1932?

The following are the daily returns for both the overall market and for Dexter Inc.What is the cumulative abnormal return on Dexter,Inc.,stock for these 5 days?

A Brief History of Risk and Return

The Investment Process

Overview of Security Types

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

Projecting Cash Flow and Earnings

Corporate and Government Bonds

Global Economic Activity and Industry Analysis

Mortgage-Backed Securities

Filters