Question 1

In his original article, Fama divided the efficient market hypothesis into two subhypotheses.

Accepted Answer

A) True 
 B)False  False

Question 2

The weak form of the efficient market hypothesis contends that stock prices fully reflect all public and private information.

Accepted Answer

A) True 
 B)False  False

Question 3

Exhibit 5-1
USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S) $\begin{array}{ccccc}
\text { Stock } & \mathrm{R}_{\text {it }} & \mathrm{R}_{\mathrm{mt}} & \mathrm{a}_{\mathrm{i}} & \text { Beta } \
\hline \text { C } & 12 & 10 & 0 & 0.8 \
\mathrm{E} & 10 & 8.0 & 0 & 1.1
\end{array}$ 
RS1U1B1itS1U1B0 = return for stock i during period t
RS1U1B1mtS1U1B0 = return for the aggregate market during period t
-Refer to Exhibit 5-1. What is the abnormal rate of return for Stock C when you consider its systematic risk measure (beta)?

Accepted Answer

A)  4.0% 
B)  1.2% 
C)  2.0% 
D)  -1.05% 
E)  -8.5% 
A)  4.0% 
B)  1.2% 
C)  2.0% 
D)  -1.05% 
E)  -8.5% A

Question 4

Some studies have attempted to determine whether it is possible to predict future returns for a stock based on publicly available quarterly earnings reports. The results of these studies indicate

Accepted Answer

A)  Stock prices adjust to reflect quarterly earnings reports. 
B)  Stock prices do not adjust to reflect quarterly earnings reports. 
C)  Support for the semi-strong EMH. 
D)  Stock prices adjust if earnings reports are released in January. 
E)  Stock prices do not adjust if earnings reports are released in January. 
A)  Stock prices adjust to reflect quarterly earnings reports. 
B)  Stock prices do not adjust to reflect quarterly earnings reports. 
C)  Support for the semi-strong EMH. 
D)  Stock prices adjust if earnings reports are released in January. 
E)  Stock prices do not adjust if earnings reports are released in January.

Question 5

A trading rule which signals purchase of a stock if it rises X percent and sale of a stock if it falls X percent is known as a

Accepted Answer

A)  Breakout. 
B)  Short sale. 
C)  Sieve. 
D)  Filter. 
E)  Relative strength. 
A)  Breakout. 
B)  Short sale. 
C)  Sieve. 
D)  Filter. 
E)  Relative strength.

Question 6

Investigators have tested the strong form EMH by examining the performance of the following type of investor

Accepted Answer

A)  Corporate insiders. 
B)  Stock exchange specialists. 
C)  Security analysts. 
D)  Professional money managers. 
E)  All of the above. 
A)  Corporate insiders. 
B)  Stock exchange specialists. 
C)  Security analysts. 
D)  Professional money managers. 
E)  All of the above.

Question 7

Technical analysis and the efficient market hypothesis have a consistent set of assumptions concerning stock market behaviour.

Accepted Answer

A) True 
 B)False

Question 8

According to prospect theory

Accepted Answer

A)  Investors have a propensity to sell winners too soon and hang on to losers too long. 
B)  Investors ignore bad news and overemphasize good news. 
C)  Investors tend to follow the herd. 
D)  Investors put more money into a failure rather than into a success. 
E)  Investors are all noise traders. 
A)  Investors have a propensity to sell winners too soon and hang on to losers too long. 
B)  Investors ignore bad news and overemphasize good news. 
C)  Investors tend to follow the herd. 
D)  Investors put more money into a failure rather than into a success. 
E)  Investors are all noise traders.

Question 9

The opportunity to take advantage of the downward pressure on stock prices that result from end-of-the-year tax selling is known as

Accepted Answer

A)  The End-of-the-Year Effect. 
B)  The December Anomaly. 
C)  The End-of-the-Year Anomaly. 
D)  The January Anomaly. 
E)  The New Years Anomaly. 
A)  The End-of-the-Year Effect. 
B)  The December Anomaly. 
C)  The End-of-the-Year Anomaly. 
D)  The January Anomaly. 
E)  The New Years Anomaly.

Question 10

Exhibit 5-5
USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S) $\begin{array}{ccccc}
\text { Stock } & \mathrm{R}_{\text {it }} & \mathrm{R}_{\text {mt }} & \mathrm{a}_{\mathrm{i}} & \text { Beta } \
\hline \mathrm{A} & 10.6 & 15 & 0 & 0.8 \
\mathrm{Z} & 9.8 & 8.0 & 0 & 1.1
\end{array}$ 
RS1U1B1itS1U1B0 = return for stock i during period t
RS1U1B1mtS1U1B0 = return for the aggregate market during period t
-Refer to Exhibit 5-5. What is the abnormal rate of return for Stock Z when you consider its systematic risk measure (beta)?

Accepted Answer

A)  0.1% 
B)  1.0% 
C)  0.5% 
D)  -1.0% 
E)  -2.0% 
A)  0.1% 
B)  1.0% 
C)  0.5% 
D)  -1.0% 
E)  -2.0%

Question 11

Escalation bias refers to the situation where

Accepted Answer

A)  Investors have a propensity to sell winners too soon and hang on to losers too long. 
B)  Investors ignore bad news and overemphasize good news. 
C)  Investors tend to follow the herd. 
D)  Investors put more money into a failure rather than into a success. 
E)  Investors are all noise traders. 
A)  Investors have a propensity to sell winners too soon and hang on to losers too long. 
B)  Investors ignore bad news and overemphasize good news. 
C)  Investors tend to follow the herd. 
D)  Investors put more money into a failure rather than into a success. 
E)  Investors are all noise traders.

Question 12

According to the strong-form efficient market hypothesis, stock prices fully reflect

Accepted Answer

A)  All security market information only. 
B)  All public information only. 
C)  All public and private information only. 
D)  All of the above. 
E)  None of the above. 
A)  All security market information only. 
B)  All public information only. 
C)  All public and private information only. 
D)  All of the above. 
E)  None of the above.

Question 13

The weak form of the efficient market hypothesis states that

Accepted Answer

A)  Successive price changes are dependent. 
B)  Successive price changes are independent. 
C)  Successive price changes are biased. 
D)  Successive price changes depend on trading volume. 
E)  Properly specified trading rules are of value. 
A)  Successive price changes are dependent. 
B)  Successive price changes are independent. 
C)  Successive price changes are biased. 
D)  Successive price changes depend on trading volume. 
E)  Properly specified trading rules are of value.

Question 14

An efficient market requires a large number of profit-maximizing investors.

Accepted Answer

A) True 
 B)False

Question 15

If statistical tests of stock returns over time support the efficient market hypothesis the resulting correlations should be

Accepted Answer

A)  Positive. 
B)  Negative. 
C)  Zero. 
D)  Lagged. 
E)  Skewed. 
A)  Positive. 
B)  Negative. 
C)  Zero. 
D)  Lagged. 
E)  Skewed.

Question 16

A "runs test" on successive stock price changes which supports the efficient market hypothesis would show the actual number of runs

Accepted Answer

A)  Falls into the range expected of a random series. 
B)  Falls into the range expected of a dependent series. 
C)  Is small. 
D)  Is large. 
E)  Would approximate N/2. 
A)  Falls into the range expected of a random series. 
B)  Falls into the range expected of a dependent series. 
C)  Is small. 
D)  Is large. 
E)  Would approximate N/2.

Question 17

The strongest explanations for the size anomaly are

Accepted Answer

A)  risk measurements 
B)  higher transaction costs 
C)  P/E ratio 
D)  Choices a and b. 
E)  Choices b and c. 
A)  risk measurements 
B)  higher transaction costs 
C)  P/E ratio 
D)  Choices a and b. 
E)  Choices b and c.

Question 18

Tests have shown that if small filters are used in simulating trading rules, these trading rules have produced above average returns after transactions costs are factored in.

Accepted Answer

A) True 
 B)False

Question 19

In tests of the semi-strong form EMH, it is not necessary to use risk-adjusted rates of return.

Accepted Answer

A) True 
 B)False

Question 20

Fama and French examined the relationship between the Book Value to Market Value ratio and average stock returns and found

Accepted Answer

A)  No evidence of a relationship for Canadian stocks. 
B)  Evidence of a negative relationship in Canadian stocks only. 
C)  Evidence of a positive relationship for Japanese stocks only. 
D)  Evidence of a negative relationship for Canadian and Japanese stocks. 
E)  Evidence of a positive relationship for U.S. and Japanese stocks. 
A)  No evidence of a relationship for Canadian stocks. 
B)  Evidence of a negative relationship in Canadian stocks only. 
C)  Evidence of a positive relationship for Japanese stocks only. 
D)  Evidence of a negative relationship for Canadian and Japanese stocks. 
E)  Evidence of a positive relationship for U.S. and Japanese stocks.

Exam 5: Efficient Capital Markets

In his original article, Fama divided the efficient market hypothesis into two subhypotheses.

The weak form of the efficient market hypothesis contends that stock prices fully reflect all public and private information.

Some studies have attempted to determine whether it is possible to predict future returns for a stock based on publicly available quarterly earnings reports. The results of these studies indicate

A trading rule which signals purchase of a stock if it rises X percent and sale of a stock if it falls X percent is known as a

Investigators have tested the strong form EMH by examining the performance of the following type of investor

Technical analysis and the efficient market hypothesis have a consistent set of assumptions concerning stock market behaviour.

According to prospect theory

The opportunity to take advantage of the downward pressure on stock prices that result from end-of-the-year tax selling is known as

Escalation bias refers to the situation where

According to the strong-form efficient market hypothesis, stock prices fully reflect

The weak form of the efficient market hypothesis states that

An efficient market requires a large number of profit-maximizing investors.

If statistical tests of stock returns over time support the efficient market hypothesis the resulting correlations should be

A "runs test" on successive stock price changes which supports the efficient market hypothesis would show the actual number of runs

The strongest explanations for the size anomaly are

Tests have shown that if small filters are used in simulating trading rules, these trading rules have produced above average returns after transactions costs are factored in.

In tests of the semi-strong form EMH, it is not necessary to use risk-adjusted rates of return.

Fama and French examined the relationship between the Book Value to Market Value ratio and average stock returns and found

The Investment Setting

The Asset Allocation Decision

Selecting Investments in a Global Market

Securities Markets and the Economy

An Introduction to Portfolio Management

Asset Pricing Models: Capm and Apt

Economic and Industry Analysis

Company Analysis and Stock Valuation

Technical Analysis

Bond Fundamentals

The Analysis and Valuation of Bonds

An Introduction to Derivative Markets and Securities

Derivatives: Analysis and Valuation

Equity Portfolio Management Strategies

Bond Portfolio Management Strategies

Professional Money Management, Alternative Assets, and Industry Ethics

Evaluation of Portfolio Performance

Analysis of Financial Statements

An Introduction to Security Valuation

Web Appendix: A Review of Statistics and the Security Market Line

Web Appendix: A Review of Statistics and the Security Market Line

Appendix: Objectives and Constraints of Institutional Investors

Filters