Question 1

Which of the following types of information will most likely enable the exploitation of a profit opportunity?

Accepted Answer

A) Financial analysts' published recommendations 
B) Technical analysis 
C) Hot tips from a stockbroker 
D) Insider information 
A) Financial analysts' published recommendations 
B) Technical analysis 
C) Hot tips from a stockbroker 
D) Insider information

Question 2

What is the optimal investment strategy according to the efficient market hypothesis? Why?

Accepted Answer

The answer of What is the optimal investment strategy according...

Question 3

Although the verdict is not yet in, the available evidence indicates that, for many purposes, the efficient market hypothesis is

Accepted Answer

A) a good starting point for analyzing expectations. 
B) not a good starting point for analyzing expectations. 
C) too general to be a useful tool for analyzing expectations. 
D) none of the above. 
A) a good starting point for analyzing expectations. 
B) not a good starting point for analyzing expectations. 
C) too general to be a useful tool for analyzing expectations. 
D) none of the above.

Question 4

An arrangement with a broker to borrow stocks from them and then sell it in the market, with the hope that they earn a profit by buying the stock back again after it has fallen in price is called

Accepted Answer

A) behavioral finance. 
B) short sales. 
C) smart money. 
D) random walk. 
A) behavioral finance. 
B) short sales. 
C) smart money. 
D) random walk.

Question 5

According to the efficient market hypothesis, the current price of a financial security

Accepted Answer

A) is the discounted net present value of future interest payments. 
B) is determined by the highest successful bidder. 
C) fully reflects all available relevant information. 
D) is a result of none of the above. 
A) is the discounted net present value of future interest payments. 
B) is determined by the highest successful bidder. 
C) fully reflects all available relevant information. 
D) is a result of none of the above.

Question 6

The advantage of a "buy and hold strategy" is that

Accepted Answer

A) net profits will tend to be higher because there will be fewer brokerage commissions. 
B) losses will eventually be eliminated. 
C) the longer a stock is held, the higher its price will be. 
D) only B and C of the above are true. 
A) net profits will tend to be higher because there will be fewer brokerage commissions. 
B) losses will eventually be eliminated. 
C) the longer a stock is held, the higher its price will be. 
D) only B and C of the above are true.

Question 7

Which of the following types of information will most likely enable the exploitation of a profit opportunity?

Accepted Answer

A) Financial analysts' published recommendations 
B) Technical analysis 
C) Hot tips from a stockbroker 
D) None of the above 
A) Financial analysts' published recommendations 
B) Technical analysis 
C) Hot tips from a stockbroker 
D) None of the above

Question 8

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

Accepted Answer

A) indicates that unexploited profit opportunities exist. 
B) indicates that unexploited profit opportunities do not exist. 
C) need not indicate that unexploited profit opportunities exist. 
D) indicates that the efficient market hypothesis is fundamentally flawed. 
A) indicates that unexploited profit opportunities exist. 
B) indicates that unexploited profit opportunities do not exist. 
C) need not indicate that unexploited profit opportunities exist. 
D) indicates that the efficient market hypothesis is fundamentally flawed.

Question 9

According to the January effect, stock prices

Accepted Answer

A) experience an abnormal price rise from December to January. 
B) experience an abnormal price decline from December to January. 
C) follow a random walk during January. 
D) set the pattern for the entire year in January. 
A) experience an abnormal price rise from December to January. 
B) experience an abnormal price decline from December to January. 
C) follow a random walk during January. 
D) set the pattern for the entire year in January.

Question 10

The efficient market hypothesis suggests that

Accepted Answer

A) investors should not try to outguess the market by constantly buying and selling securities. 
B) investors do better on average if they adopt a "buy and hold" strategy. 
C) buying into a mutual fund is a sensible strategy for a small investor. 
D) all of the above are sensible strategies. 
E) only A and B of the above are sensible strategies. 
A) investors should not try to outguess the market by constantly buying and selling securities. 
B) investors do better on average if they adopt a "buy and hold" strategy. 
C) buying into a mutual fund is a sensible strategy for a small investor. 
D) all of the above are sensible strategies. 
E) only A and B of the above are sensible strategies.

Question 11

Evidence in favor of market efficiency includes

Accepted Answer

A) performance of investment analysts and mutual funds. 
B) whether stock prices reflect publicly available information. 
C) the random-walk behavior of stock prices. 
D) all of the above. 
A) performance of investment analysts and mutual funds. 
B) whether stock prices reflect publicly available information. 
C) the random-walk behavior of stock prices. 
D) all of the above.

Question 12

Explain what the market reaction will be in an efficient market if a firm announces a fully anticipated filing for bankruptcy.

Accepted Answer

The answer of Explain what the market reaction will be...

Question 13

The efficient market hypothesis applies to

Accepted Answer

A) both the stock market and the foreign exchange market. 
B) the stock market but not the foreign exchange market. 
C) the foreign exchange market but not the stock market. 
D) neither the stock market nor the foreign exchange market. 
A) both the stock market and the foreign exchange market. 
B) the stock market but not the foreign exchange market. 
C) the foreign exchange market but not the stock market. 
D) neither the stock market nor the foreign exchange market.

Question 14

Which of the following does not weaken the efficient markets hypothesis?

Accepted Answer

A) Mean reversion 
B) Success of buy-and-hold strategy 
C) January effect 
D) Excessive volatility 
A) Mean reversion 
B) Success of buy-and-hold strategy 
C) January effect 
D) Excessive volatility

Question 15

The small-firm effect refers to the observation that small firms' stocks

Accepted Answer

A) follow a random walk but large firms' stocks do not. 
B) have earned abnormally low returns given their greater risk. 
C) have earned abnormally high returns even taking into account their greater risk. 
D) sell for lower prices than do large firms' stocks. 
A) follow a random walk but large firms' stocks do not. 
B) have earned abnormally low returns given their greater risk. 
C) have earned abnormally high returns even taking into account their greater risk. 
D) sell for lower prices than do large firms' stocks.

Question 16

Evidence in favor of market efficiency does not include

Accepted Answer

A) random-walk behavior. 
B) technical analysis. 
C) performance of investment analysts and mutual funds. 
D) the January effect. 
A) random-walk behavior. 
B) technical analysis. 
C) performance of investment analysts and mutual funds. 
D) the January effect.

Question 17

Important implications of the efficient market hypothesis include which of the following?

Accepted Answer

A) Future changes in stock prices should, for all practical purposes, be unpredictable. 
B) Stock prices will respond to announcements only when the information in these announcements is new. 
C) Sometimes a stock price declines when good news is announced. 
D) All of the above. 
E) Only A and B of the above. 
A) Future changes in stock prices should, for all practical purposes, be unpredictable. 
B) Stock prices will respond to announcements only when the information in these announcements is new. 
C) Sometimes a stock price declines when good news is announced. 
D) All of the above. 
E) Only A and B of the above.

Question 18

An important lesson from the Black Monday Crash of 1987 and the tech crash of 2000 is that

Accepted Answer

A) factors other than market fundamentals affect stock prices. 
B) the strong version of the efficient market hypothesis, that stock prices reflect the true fundamental value of securities, is correct. 
C) market psychology has little if any effect on stock prices. 
D) there is no such thing as a rational bubble. 
A) factors other than market fundamentals affect stock prices. 
B) the strong version of the efficient market hypothesis, that stock prices reflect the true fundamental value of securities, is correct. 
C) market psychology has little if any effect on stock prices. 
D) there is no such thing as a rational bubble.

Question 19

How do loss aversion, overconfidence of investors, and social contagion affect market efficiency?

Accepted Answer

Loss aversion, overconfidence of investo

Question 20

Having performed well in the past indicates that an investment adviser or a mutual fund will perform well in the future.

Accepted Answer

A) True 
 B)False

Exam 6: Are Financial Markets Efficient

Which of the following types of information will most likely enable the exploitation of a profit opportunity?

What is the optimal investment strategy according to the efficient market hypothesis? Why?

Although the verdict is not yet in, the available evidence indicates that, for many purposes, the efficient market hypothesis is

An arrangement with a broker to borrow stocks from them and then sell it in the market, with the hope that they earn a profit by buying the stock back again after it has fallen in price is called

According to the efficient market hypothesis, the current price of a financial security

The advantage of a "buy and hold strategy" is that

Which of the following types of information will most likely enable the exploitation of a profit opportunity?

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

According to the January effect, stock prices

The efficient market hypothesis suggests that

Evidence in favor of market efficiency includes

Explain what the market reaction will be in an efficient market if a firm announces a fully anticipated filing for bankruptcy.

The efficient market hypothesis applies to

Which of the following does not weaken the efficient markets hypothesis?

The small-firm effect refers to the observation that small firms' stocks

Evidence in favor of market efficiency does not include

Important implications of the efficient market hypothesis include which of the following?

An important lesson from the Black Monday Crash of 1987 and the tech crash of 2000 is that

How do loss aversion, overconfidence of investors, and social contagion affect market efficiency?

Having performed well in the past indicates that an investment adviser or a mutual fund will perform well in the future.

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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