Question 1

How is it possible that a firm can announce a record-breaking loss, yet its stock price rises when the announcement is made?

Accepted Answer

not answered

Question 2

Evidence that stock prices sometimes fall when a firm announces good news contradicts the efficient market hypothesis.

Accepted Answer

A) True 
 B)False  False

Question 3

To say that stock prices follow a "random walk" is to argue that

Accepted Answer

A) stock prices rise, then fall, then rise again. 
B) stock prices rise, then fall in a predictable fashion. 
C) stock prices tend to follow trends. 
D) stock prices cannot be predicted based on past trends. 
A) stock prices rise, then fall, then rise again. 
B) stock prices rise, then fall in a predictable fashion. 
C) stock prices tend to follow trends. 
D) stock prices cannot be predicted based on past trends. D

Question 4

Another way to state the efficient market hypothesis is that in an efficient market,

Accepted Answer

A) unexploited profit opportunities will never exist as market participants, such as arbitrageurs, ensure that they are instantaneously dissipated. 
B) unexploited profit opportunities will not exist for long, as market participants will act quickly to eliminate them. 
C) every financial market participant must be well informed about securities. 
D) only A and C of the above. 
A) unexploited profit opportunities will never exist as market participants, such as arbitrageurs, ensure that they are instantaneously dissipated. 
B) unexploited profit opportunities will not exist for long, as market participants will act quickly to eliminate them. 
C) every financial market participant must be well informed about securities. 
D) only A and C of the above.

Question 5

Ivan Boesky, the most successful of the so-called arbs in the 1980s, was able to outperform the market on a consistent basis, indicating that

Accepted Answer

A) securities markets are not efficient. 
B) unexploited profit opportunities were abundant. 
C) investors can outperform the market with inside information. 
D) only B and C of the above. 
A) securities markets are not efficient. 
B) unexploited profit opportunities were abundant. 
C) investors can outperform the market with inside information. 
D) only B and C of the above.

Question 6

Which of the following is an insight from behavioral finance?

Accepted Answer

A) The price of securities fully reflects all available information. 
B) Investor overconfidence leads to high trading volumes. 
C) The optimal forecast of a security's return equals the security's equilibrium return. 
D) Investment advisers cannot consistently beat the market. 
A) The price of securities fully reflects all available information. 
B) Investor overconfidence leads to high trading volumes. 
C) The optimal forecast of a security's return equals the security's equilibrium return. 
D) Investment advisers cannot consistently beat the market.

Question 7

Rules used to predict movements in stock prices based on past patterns are, according to the efficient markets theory,

Accepted Answer

A) a waste of time. 
B) profitably employed by all financial analysts. 
C) the most efficient rules to employ. 
D) consistent with the random walk hypothesis. 
A) a waste of time. 
B) profitably employed by all financial analysts. 
C) the most efficient rules to employ. 
D) consistent with the random walk hypothesis.

Question 8

If the security markets are truly efficient, there is no need to pay for help selecting securities.

Accepted Answer

A) True 
 B)False

Question 9

A situation in which the price of an asset differs from its fundamental market value is called

Accepted Answer

A) an unexploited profit opportunity. 
B) a bubble. 
C) a correction. 
D) a mean reversion. 
A) an unexploited profit opportunity. 
B) a bubble. 
C) a correction. 
D) a mean reversion.

Question 10

What is a rational bubble?

Accepted Answer

The answer of What is a rational bubble?...

Question 11

Studies of mutual fund performance indicate that mutual funds that outperformed the market in one time period

Accepted Answer

A) usually beat the market in the next time period. 
B) usually beat the market in the next two subsequent time periods. 
C) usually beat the market in the next three subsequent time periods. 
D) usually do not beat the market in the next time period. 
A) usually beat the market in the next time period. 
B) usually beat the market in the next two subsequent time periods. 
C) usually beat the market in the next three subsequent time periods. 
D) usually do not beat the market in the next time period.

Question 12

How expectations are formed is important because expectations influence

Accepted Answer

A) the demand for assets. 
B) bond prices. 
C) the risk structure of interest rates. 
D) the term structure of interest rates. 
E) all of the above. 
A) the demand for assets. 
B) bond prices. 
C) the risk structure of interest rates. 
D) the term structure of interest rates. 
E) all of the above.

Question 13

Technical analysis is a popular technique used to predict stock prices by studying past stock price data and searching for patterns such as trends and regular cycles.

Accepted Answer

A) True 
 B)False

Question 14

Sometimes one observes that the price of a company's stock falls after the announcement of favorable earnings. This phenomenon is

Accepted Answer

A) clearly inconsistent with the efficient market hypothesis. 
B) consistent with the efficient market hypothesis if the earnings were not as high as anticipated. 
C) consistent with the efficient market hypothesis if the earnings were not as low as anticipated. 
D) the result of none of the above. 
A) clearly inconsistent with the efficient market hypothesis. 
B) consistent with the efficient market hypothesis if the earnings were not as high as anticipated. 
C) consistent with the efficient market hypothesis if the earnings were not as low as anticipated. 
D) the result of none of the above.

Question 15

Evidence that a mutual fund has performed extraordinarily well in the past contradicts the efficient market hypothesis.

Accepted Answer

A) True 
 B)False

Question 16

In an efficient market, abnormal returns are not possible, even using inside information.

Accepted Answer

A) True 
 B)False

Question 17

The evidence suggests technical analysts are not superior stock pickers.

Accepted Answer

A) True 
 B)False

Question 18

Which of the following is empirical evidence indicating that the efficient market hypothesis may not always be generally applicable?

Accepted Answer

A) Small-firm effect 
B) January effect 
C) Market overreaction 
D) All of the above 
A) Small-firm effect 
B) January effect 
C) Market overreaction 
D) All of the above

Question 19

The elimination of a riskless profit opportunity in a market is called

Accepted Answer

A) the efficient market hypothesis. 
B) random walk. 
C) arbitrage. 
D) market fundamentals. 
A) the efficient market hypothesis. 
B) random walk. 
C) arbitrage. 
D) market fundamentals.

Question 20

"Short selling" refers to the practice of buying a stock and holding it for only a short time before selling it.

Accepted Answer

A) True 
 B)False

Exam 6: Are Financial Markets Efficient

How is it possible that a firm can announce a record-breaking loss, yet its stock price rises when the announcement is made?

Evidence that stock prices sometimes fall when a firm announces good news contradicts the efficient market hypothesis.

To say that stock prices follow a "random walk" is to argue that

Another way to state the efficient market hypothesis is that in an efficient market,

Ivan Boesky, the most successful of the so-called arbs in the 1980s, was able to outperform the market on a consistent basis, indicating that

Which of the following is an insight from behavioral finance?

Rules used to predict movements in stock prices based on past patterns are, according to the efficient markets theory,

If the security markets are truly efficient, there is no need to pay for help selecting securities.

A situation in which the price of an asset differs from its fundamental market value is called

What is a rational bubble?

Studies of mutual fund performance indicate that mutual funds that outperformed the market in one time period

How expectations are formed is important because expectations influence

Technical analysis is a popular technique used to predict stock prices by studying past stock price data and searching for patterns such as trends and regular cycles.

Sometimes one observes that the price of a company's stock falls after the announcement of favorable earnings. This phenomenon is

Evidence that a mutual fund has performed extraordinarily well in the past contradicts the efficient market hypothesis.

In an efficient market, abnormal returns are not possible, even using inside information.

The evidence suggests technical analysts are not superior stock pickers.

Which of the following is empirical evidence indicating that the efficient market hypothesis may not always be generally applicable?

The elimination of a riskless profit opportunity in a market is called

"Short selling" refers to the practice of buying a stock and holding it for only a short time before selling it.

Why Study Financial Markets and Institutions

Overview of the Financial System

What Do Interest Rates Mean and What Is Their Role in Valuation

Why Do Interest Rates Change

How Do Risk and Term Structure Affect Interest Rates

Why Do Financial Institutions Exist

Why Do Financial Crises Occur and Why Are They so Damaging to the Economy

Central Banks and the Federal Reserve System

Conduct of Monetary Policy: Tools, Goals, Strategy, and Tactics

The Money Markets

The Bond Market

The Stock Market

The Mortgage Markets

The Foreign Exchange Market

The International Financial System

Banking and the Management of Financial Institutions

Financial Regulation

Banking Industry: Structure and Competition

The Mutual Fund Industry

Insurance Companies and Pension Funds

Investment Banks, Security Brokers and Dealers, and Venture Capital Firms

Risk Management in Financial Institutions

Hedging With Financial Derivatives

Savings Associations and Credit Unions

Finance Companies

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