Question 1

The weak form of the efficient market hypothesis contends that technical trading rules are of little value.

Accepted Answer

A) True 
 B)False

Question 2

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 during period t using only the aggregate market return (ignore differential systematic risk)?

Accepted Answer

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

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 Hemlick during period t using only the aggregate market return (ignore differential systematic risk)?

Accepted Answer

A)  0.11 
B)  1.10 
C)  -1.70 
D)  -1.80 
E)  -4.60 
A)  0.11 
B)  1.10 
C)  -1.70 
D)  -1.80 
E)  -4.60

Question 4

There is little evidence from studies examining initial public offerings (IPOs) that suggest markets are semi-strong form efficient.

Accepted Answer

A) True 
 B)False

Question 5

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

Accepted Answer

A)  1.40% 
B)  -1.40% 
C)  2.80% 
D)  -2.80% 
E)  None of the above 
A)  1.40% 
B)  -1.40% 
C)  2.80% 
D)  -2.80% 
E)  None of the above

Question 6

Exhibit 5-2
USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S) $\begin{array}{lcccc}
\text { Stock } & \mathrm{R}_{\text {it }} & \mathrm{R}_{\text {mt }} & \mathrm{a}_{\mathrm{i}} & \text { Beta } \
\hline \text { ABC } & 11.5 & 13.0 & 0 & 0.7 \
\text { XYZ } & 9.0 & 7.0 & 0 & 1.1
\end{array}$ 
RS1U1B1itS1U1B0 = return for stock i during period t
RS1U1B1mtS1U1B0 = return for the aggregate market during period t
-Refer to Exhibit 5-2. What is the abnormal rate of return for Stock ABC during period t using only the aggregate market return (ignore differential systematic risk)?

Accepted Answer

A)  3.2% 
B)  2.4% 
C)  1.3% 
D)  -1.5% 
E)  2.0% 
A)  3.2% 
B)  2.4% 
C)  1.3% 
D)  -1.5% 
E)  2.0%

Question 7

Exhibit 5-4
USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S) $\begin{array}{ccccc}
\text { Stock } & \mathrm{R}_{\text {it }} & \mathrm{R}_{\text {mt }} & \mathrm{a}_{\mathrm{i}} & \text { Beta } \
\hline \mathrm{A} & 10.3 & 12 & 0 & 0.6 \
\text { B } & 9.4 & 9.0 & 0 & 1.2
\end{array}$ 
RS1U1B1itS1U1B0 = return for stock i during period t
RS1U1B1mtS1U1B0 = return for the aggregate market during period t
-Refer to Exhibit 5-4. What is the abnormal rate of return for Stock A during period t using only the aggregate market return (ignore differential systematic risk)?

Accepted Answer

A)  3.34 
B)  1.75 
C)  -1.75 
D)  -3.70 
E)  -1.70 
A)  3.34 
B)  1.75 
C)  -1.75 
D)  -3.70 
E)  -1.70

Question 8

Exhibit 5-4
USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S) $\begin{array}{ccccc}
\text { Stock } & \mathrm{R}_{\text {it }} & \mathrm{R}_{\text {mt }} & \mathrm{a}_{\mathrm{i}} & \text { Beta } \
\hline \mathrm{A} & 10.3 & 12 & 0 & 0.6 \
\text { B } & 9.4 & 9.0 & 0 & 1.2
\end{array}$ 
RS1U1B1itS1U1B0 = return for stock i during period t
RS1U1B1mtS1U1B0 = return for the aggregate market during period t
-Refer to Exhibit 5-4. What is the abnormal rate of return for Stock A when you consider its systematic risk measure (beta)?

Accepted Answer

A)  2.30% 
B)  2.10% 
C)  3.10% 
D)  12.40% 
E)  None of the above 
A)  2.30% 
B)  2.10% 
C)  3.10% 
D)  12.40% 
E)  None of the above

Question 9

Exhibit 5-2
USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S) $\begin{array}{lcccc}
\text { Stock } & \mathrm{R}_{\text {it }} & \mathrm{R}_{\text {mt }} & \mathrm{a}_{\mathrm{i}} & \text { Beta } \
\hline \text { ABC } & 11.5 & 13.0 & 0 & 0.7 \
\text { XYZ } & 9.0 & 7.0 & 0 & 1.1
\end{array}$ 
RS1U1B1itS1U1B0 = return for stock i during period t
RS1U1B1mtS1U1B0 = return for the aggregate market during period t
-Refer to Exhibit 5-2. What is the abnormal rate of return for Stock XYZ during period t using only the aggregate market return (ignore differential systematic risk)?

Accepted Answer

A)  -3.2% 
B)  2.4% 
C)  2.0% 
D)  1.3% 
E)  -1.5% 
A)  -3.2% 
B)  2.4% 
C)  2.0% 
D)  1.3% 
E)  -1.5%

Question 10

According to the semi-strong 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 11

Studies concerning quarterly earnings reports indicate that information in quarterly statements is of value and can provide an above-average risk-adjusted return.

Accepted Answer

A) True 
 B)False

Question 12

The January anomaly refers to the phenomenon where stock prices

Accepted Answer

A)  Decline in December. 
B)  Decline in January. 
C)  Rise in January. 
D)  Decline in December and rise in January. 
E)  Rise in December and decline in January. 
A)  Decline in December. 
B)  Decline in January. 
C)  Rise in January. 
D)  Decline in December and rise in January. 
E)  Rise in December and decline in January.

Question 13

When considering markets in Europe, it is inappropriate to assume a level of efficiency similar to that for Canadian markets.

Accepted Answer

A) True 
 B)False

Question 14

In tests of the semi-strong form efficient market hypothesis, an adjustment for market effects is carried out by

Accepted Answer

A)  Calculating the historical return. 
B)  Calculating the market rate of return. 
C)  Calculating the abnormal rate of return. 
D)  Calculating the cross-sectional return. 
E)  None of the above. 
A)  Calculating the historical return. 
B)  Calculating the market rate of return. 
C)  Calculating the abnormal rate of return. 
D)  Calculating the cross-sectional return. 
E)  None of the above.

Question 15

Studies of the relationship between P/E ratios and stock returns have found that

Accepted Answer

A)  Low P/E stocks of large cap stocks outperformed low P/E stocks of small cap stocks. 
B)  Low P/E stocks of small cap stocks outperformed high P/E stocks of large cap stocks. 
C)  High P/E stocks of large cap stocks outperformed low P/E stocks of small cap stocks. 
D)  High P/E stocks of large cap stocks outperformed high P/E stocks of small cap stocks. 
E)  None of the above. 
A)  Low P/E stocks of large cap stocks outperformed low P/E stocks of small cap stocks. 
B)  Low P/E stocks of small cap stocks outperformed high P/E stocks of large cap stocks. 
C)  High P/E stocks of large cap stocks outperformed low P/E stocks of small cap stocks. 
D)  High P/E stocks of large cap stocks outperformed high P/E stocks of small cap stocks. 
E)  None of the above.

Question 16

Exhibit 5-2
USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S) $\begin{array}{lcccc}
\text { Stock } & \mathrm{R}_{\text {it }} & \mathrm{R}_{\text {mt }} & \mathrm{a}_{\mathrm{i}} & \text { Beta } \
\hline \text { ABC } & 11.5 & 13.0 & 0 & 0.7 \
\text { XYZ } & 9.0 & 7.0 & 0 & 1.1
\end{array}$ 
RS1U1B1itS1U1B0 = return for stock i during period t
RS1U1B1mtS1U1B0 = return for the aggregate market during period t
-Refer to Exhibit 5-2. What is the abnormal rate of return for Stock XYZ when you consider its systematic risk measure (beta)?

Accepted Answer

A)  2.0% 
B)  -1.5% 
C)  2.4% 
D)  1.3% 
E)  -3.2% 
A)  2.0% 
B)  -1.5% 
C)  2.4% 
D)  1.3% 
E)  -3.2%

Question 17

Behavioural finance differs from the standard model of finance because behavioural finance

Accepted Answer

A)  Precludes the impact of investor psychology. 
B)  Includes the impact of investor psychology. 
C)  Accepts the Efficient Markets Hypothesis. 
D)  Rejects the idea of market anomalies. 
E)  None of the above. 
A)  Precludes the impact of investor psychology. 
B)  Includes the impact of investor psychology. 
C)  Accepts the Efficient Markets Hypothesis. 
D)  Rejects the idea of market anomalies. 
E)  None of the above.

Question 18

Exhibit 5-4
USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S) $\begin{array}{ccccc}
\text { Stock } & \mathrm{R}_{\text {it }} & \mathrm{R}_{\text {mt }} & \mathrm{a}_{\mathrm{i}} & \text { Beta } \
\hline \mathrm{A} & 10.3 & 12 & 0 & 0.6 \
\text { B } & 9.4 & 9.0 & 0 & 1.2
\end{array}$ 
RS1U1B1itS1U1B0 = return for stock i during period t
RS1U1B1mtS1U1B0 = return for the aggregate market during period t
-Refer to Exhibit 5-4. What is the abnormal rate of return for Stock B when you consider its systematic risk measure (beta)?

Accepted Answer

A)  0.1% 
B)  -1.4% 
C)  0.5% 
D)  1.5% 
E)  2.0% 
A)  0.1% 
B)  -1.4% 
C)  0.5% 
D)  1.5% 
E)  2.0%

Question 19

In an event study the objective is to

Accepted Answer

A)  Whether it is possible to predict stock prices. 
B)  How fast stock prices adjust to news. 
C)  Examine the cross-sectional distributions of returns. 
D)  Conduct a time series analysis of returns. 
E)  Determine normal P/E ratios. 
A)  Whether it is possible to predict stock prices. 
B)  How fast stock prices adjust to news. 
C)  Examine the cross-sectional distributions of returns. 
D)  Conduct a time series analysis of returns. 
E)  Determine normal P/E ratios.

Question 20

Results of initial public offering (IPOs) studies tend to support the semi-strong EMH, because it appears that prices adjusted rapidly after initial underpricing.

Accepted Answer

A) True 
 B)False

The weak form of the efficient market hypothesis contends that technical trading rules are of little value.

There is little evidence from studies examining initial public offerings (IPOs) that suggest markets are semi-strong form efficient.

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

Studies concerning quarterly earnings reports indicate that information in quarterly statements is of value and can provide an above-average risk-adjusted return.

The January anomaly refers to the phenomenon where stock prices

When considering markets in Europe, it is inappropriate to assume a level of efficiency similar to that for Canadian markets.

In tests of the semi-strong form efficient market hypothesis, an adjustment for market effects is carried out by

Studies of the relationship between P/E ratios and stock returns have found that

Behavioural finance differs from the standard model of finance because behavioural finance

In an event study the objective is to

Results of initial public offering (IPOs) studies tend to support the semi-strong EMH, because it appears that prices adjusted rapidly after initial underpricing.

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

Exam 5: Efficient Capital Markets

The weak form of the efficient market hypothesis contends that technical trading rules are of little value.

There is little evidence from studies examining initial public offerings (IPOs) that suggest markets are semi-strong form efficient.

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

Studies concerning quarterly earnings reports indicate that information in quarterly statements is of value and can provide an above-average risk-adjusted return.

The January anomaly refers to the phenomenon where stock prices

When considering markets in Europe, it is inappropriate to assume a level of efficiency similar to that for Canadian markets.

In tests of the semi-strong form efficient market hypothesis, an adjustment for market effects is carried out by

Studies of the relationship between P/E ratios and stock returns have found that

Behavioural finance differs from the standard model of finance because behavioural finance

In an event study the objective is to

Results of initial public offering (IPOs) studies tend to support the semi-strong EMH, because it appears that prices adjusted rapidly after initial underpricing.

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