Question 1

Superior analysts are encouraged to concentrate their efforts in "middle tier" stocks. This is recommended because

Accepted Answer

A)  it works to minimize taxes for the client. 
B)  only individuals deal in the middle tier stocks. 
C)  prices may not adjust quite as rapidly for middle tier stocks as they do in the top tier; therefore, the chances of temporarily undervalued securities are greater. 
D)  it includes companies too small to be considered by institutions. 
E)  Technical analysts never look at "middle tier" stocks. 
A)  it works to minimize taxes for the client. 
B)  only individuals deal in the middle tier stocks. 
C)  prices may not adjust quite as rapidly for middle tier stocks as they do in the top tier; therefore, the chances of temporarily undervalued securities are greater. 
D)  it includes companies too small to be considered by institutions. 
E)  Technical analysts never look at "middle tier" stocks.

Question 2

Which of the following assumptions imply capital markets will be efficient?

Accepted Answer

A)  A large number of independent profit-maximizing participants analyze securities. 
B)  New information regarding securities comes to the market in a random fashion. 
C)  Investors adjust security prices rapidly to reflect the effect of new information. 
D)  Both b and c only. 
E)  All of the above are assumptions that imply a market will be efficient. 
A)  A large number of independent profit-maximizing participants analyze securities. 
B)  New information regarding securities comes to the market in a random fashion. 
C)  Investors adjust security prices rapidly to reflect the effect of new information. 
D)  Both b and c only. 
E)  All of the above are assumptions that imply a market will be efficient.

Question 3

Exhibit 5-3
USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S) $$\begin{array} { l c c c c } 
\text { Stack } & R _ { \text {in } } & R _ { \text {mi } } & a _ { i } & \text { Beta } \
\hline \text { Elliat } & 9.9 & 15.0 & 0 & 0.8 \
\text { Hemlick } & 9.1 & 8.0 & 0 & 1.1
\end{array}$$ 
RS1U1B1itS1U1B0 = return for stock i during period t
RS1U1B1mtS1U1B0 = return for the aggregate market during period t
-Refer to Exhibit 5-3. What is the abnormal rate of return for Elliot when you consider its systematic risk measure (beta)?

Accepted Answer

A)  -2.10% 
B)  -2.00% 
C)  5.20% 
D)  14.10% 
E)  None of the above 
A)  -2.10% 
B)  -2.00% 
C)  5.20% 
D)  14.10% 
E)  None of the above

Question 4

According to the weak-form efficient market hypothesis, which of the following types of information are fully reflected in stock prices?

Accepted Answer

A)  Rates of return, trading volume, and news about the economy. 
B)  Dividend and earnings announcements. 
C)  Rates of return, trading volume, and block trades. 
D)  Earnings announcements and rates of return. 
E)  All of the above. 
A)  Rates of return, trading volume, and news about the economy. 
B)  Dividend and earnings announcements. 
C)  Rates of return, trading volume, and block trades. 
D)  Earnings announcements and rates of return. 
E)  All of the above.

Question 5

Autocorrelation and runs tests are used to test the

Accepted Answer

A)  Weak-form efficient market hypothesis (EMH). 
B)  Semistrong-form efficient market hypothesis (EMH). 
C)  Strong-form efficient market hypothesis (EMH). 
D)  Choices a and b 
E)  All of the above. 
A)  Weak-form efficient market hypothesis (EMH). 
B)  Semistrong-form efficient market hypothesis (EMH). 
C)  Strong-form efficient market hypothesis (EMH). 
D)  Choices a and b 
E)  All of the above.

Question 6

Examples of anomalies providing contrary evidence to the semi-strong efficient market hypothesis include studies of all of the following except

Accepted Answer

A)  Quarterly earnings reports. 
B)  Price earnings ratios. 
C)  Total market value. 
D)  Stocks ranked by Canadian Bond Rating Service. 
E)  The January effect. 
A)  Quarterly earnings reports. 
B)  Price earnings ratios. 
C)  Total market value. 
D)  Stocks ranked by Canadian Bond Rating Service. 
E)  The January effect.

Question 7

Which of the following has not been involved in a direct test of the semi-strong form of the efficient market hypothesis?

Accepted Answer

A)  Stock splits 
B)  New Issues 
C)  Exchange listing 
D)  Accounting changes 
E)  Specialists' returns 
A)  Stock splits 
B)  New Issues 
C)  Exchange listing 
D)  Accounting changes 
E)  Specialists' returns

Question 8

The results of studies that have looked at the relationship between PEG ratios and subsequent stock returns

Accepted Answer

A)  Find an inverse relationship, with annual rebalancing. 
B)  Find no relationship, with monthly or quarterly rebalancing. 
C)  Find an inverse relationship, with monthly or quarterly rebalancing. 
D)  Find a direct relationship, with monthly or quarterly rebalancing. 
E)  Find an direct relationship with annual rebalancing 
A)  Find an inverse relationship, with annual rebalancing. 
B)  Find no relationship, with monthly or quarterly rebalancing. 
C)  Find an inverse relationship, with monthly or quarterly rebalancing. 
D)  Find a direct relationship, with monthly or quarterly rebalancing. 
E)  Find an direct relationship with annual rebalancing

Question 9

If the efficient market hypothesis is true price changes are independent and biased.

Accepted Answer

A) True 
 B)False

Question 10

Event studies are used to test the

Accepted Answer

A)  Weak-form efficient market hypothesis (EMH). 
B)  Semistrong-form efficient market hypothesis (EMH). 
C)  Strong-form efficient market hypothesis (EMH). 
D)  Choices b and b 
E)  All of the above. 
A)  Weak-form efficient market hypothesis (EMH). 
B)  Semistrong-form efficient market hypothesis (EMH). 
C)  Strong-form efficient market hypothesis (EMH). 
D)  Choices b and b 
E)  All of the above.

Question 11

In order to confirm the weak-form efficient market hypothesis you could develop trading rules that consider,

Accepted Answer

A)  Advance-decline ratios. 
B)  Short sales. 
C)  Specialist activities. 
D)  Any of the above. 
E)  None of the above. 
A)  Advance-decline ratios. 
B)  Short sales. 
C)  Specialist activities. 
D)  Any of the above. 
E)  None of the above.

Question 12

Evidence supporting the strong form efficient market hypothesis (EMH) resulted from examining

Accepted Answer

A)  Value Line rankings. 
B)  Corporate insiders. 
C)  Stock exchange specialists. 
D)  Choices b and c 
E)  All of the above. 
A)  Value Line rankings. 
B)  Corporate insiders. 
C)  Stock exchange specialists. 
D)  Choices b and c 
E)  All of the above.

Question 13

Confirmation 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 14

The results of return prediction studies have found

Accepted Answer

A)  Limited success predicting short-horizon returns. 
B)  Limited success predicting long-horizon returns. 
C)  Good success predicting long-horizon returns. 
D)  Choices a and b. 
E)  Choices a and c. 
A)  Limited success predicting short-horizon returns. 
B)  Limited success predicting long-horizon returns. 
C)  Good success predicting long-horizon returns. 
D)  Choices a and b. 
E)  Choices a and c.

Question 15

A portfolio manager without superior analytical skills should

Accepted Answer

A)  Determine and quantify the risk preferences of a client. 
B)  Minimize transaction costs. 
C)  Maintain the specified risk level. 
D)  Ensure that the portfolio is completely diversified. 
E)  All of the above. 
A)  Determine and quantify the risk preferences of a client. 
B)  Minimize transaction costs. 
C)  Maintain the specified risk level. 
D)  Ensure that the portfolio is completely diversified. 
E)  All of the above.

Question 16

The strong form of the efficient market hypothesis contends that only insiders can earn abnormal returns.

Accepted Answer

A) True 
 B)False

Question 17

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 E when you consider its systematic risk measure (beta)?

Accepted Answer

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

Question 18

Researchers have found a positive relationship between default spread and stock returns in the long run because a large default spread implies

Accepted Answer

A)  a high risk premium and higher expected returns. 
B)  a high risk premium and lower expected returns. 
C)  a low risk premium and higher expected returns. 
D)  a low risk premium and lower expected returns. 
E)  None of the above. 
A)  a high risk premium and higher expected returns. 
B)  a high risk premium and lower expected returns. 
C)  a low risk premium and higher expected returns. 
D)  a low risk premium and lower expected returns. 
E)  None of the above.

Question 19

In order to confirm the weak-form efficient market hypothesis, an examination of stock price runs over time would reveal that stock price changes over time were

Accepted Answer

A)  Highly positively correlated. 
B)  Moderately positively correlated. 
C)  Highly negatively correlated. 
D)  Moderately negatively correlated. 
E)  None of the above. 
A)  Highly positively correlated. 
B)  Moderately positively correlated. 
C)  Highly negatively correlated. 
D)  Moderately negatively correlated. 
E)  None of the above.

Question 20

Studies examining stock splits support the semi-strong form efficient market hypothesis.

Accepted Answer

A) True 
 B)False

Exam 5: Efficient Capital Markets

Superior analysts are encouraged to concentrate their efforts in "middle tier" stocks. This is recommended because

Which of the following assumptions imply capital markets will be efficient?

According to the weak-form efficient market hypothesis, which of the following types of information are fully reflected in stock prices?

Autocorrelation and runs tests are used to test the

Examples of anomalies providing contrary evidence to the semi-strong efficient market hypothesis include studies of all of the following except

Which of the following has not been involved in a direct test of the semi-strong form of the efficient market hypothesis?

The results of studies that have looked at the relationship between PEG ratios and subsequent stock returns

If the efficient market hypothesis is true price changes are independent and biased.

Event studies are used to test the

In order to confirm the weak-form efficient market hypothesis you could develop trading rules that consider,

Evidence supporting the strong form efficient market hypothesis (EMH) resulted from examining

Confirmation bias refers to the situation where

The results of return prediction studies have found

A portfolio manager without superior analytical skills should

The strong form of the efficient market hypothesis contends that only insiders can earn abnormal returns.

Researchers have found a positive relationship between default spread and stock returns in the long run because a large default spread implies

In order to confirm the weak-form efficient market hypothesis, an examination of stock price runs over time would reveal that stock price changes over time were

Studies examining stock splits support the semi-strong form efficient market hypothesis.

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

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