Question 1

Choosing stocks by searching for predictable patterns in stock prices is called ________.

Accepted Answer

A)  fundamental analysis 
B)  technical analysis 
C)  index management 
D)  random-walk investing 
A)  fundamental analysis 
B)  technical analysis 
C)  index management 
D)  random-walk investing

Question 2

According to Markowitz and other proponents of modern portfolio theory, which of the following activities would not be expected to produce any benefits?

Accepted Answer

A)  diversifying 
B)  investing in treasury bills 
C)  investing in stocks of utility companies 
D)  engaging in active portfolio management to enhance returns 
A)  diversifying 
B)  investing in treasury bills 
C)  investing in stocks of utility companies 
D)  engaging in active portfolio management to enhance returns

Question 3

Random price movements indicate ________.

Accepted Answer

A)  irrational markets 
B)  that prices cannot equal fundamental values 
C)  that technical analysis to uncover trends can be quite useful 
D)  that markets are functioning efficiently 
A)  irrational markets 
B)  that prices cannot equal fundamental values 
C)  that technical analysis to uncover trends can be quite useful 
D)  that markets are functioning efficiently

Question 4

The strong form of the EMH states that ________ must be reflected in the current stock price.

Accepted Answer

A)  all security price and volume data 
B)  all publicly available information 
C)  all information, including inside information 
D)  all costless information 
A)  all security price and volume data 
B)  all publicly available information 
C)  all information, including inside information 
D)  all costless information

Question 5

Jaffe found that stock prices ________ after insiders intensively bought shares and ________ after insiders intensively sold shares.

Accepted Answer

A)  decreased; decreased 
B)  decreased; increased 
C)  increased; decreased 
D)  increased; increased 
A)  decreased; decreased 
B)  decreased; increased 
C)  increased; decreased 
D)  increased; increased

Question 6

Most of the stock price response to a corporate earnings or dividend announcement occurs within ________.

Accepted Answer

A)  about 30 seconds 
B)  about 10 minutes 
C)  6 months 
D)  2 years 
A)  about 30 seconds 
B)  about 10 minutes 
C)  6 months 
D)  2 years

Question 7

Fundamental analysis is likely to yield best results for ________.

Accepted Answer

A)  NYSE stocks 
B)  neglected stocks 
C)  stocks that are frequently in the news 
D)  fast-growing companies 
A)  NYSE stocks 
B)  neglected stocks 
C)  stocks that are frequently in the news 
D)  fast-growing companies

Question 8

The semistrong-form of the efficient market hypothesis implies that ________ generate abnormal returns and ________ generate abnormal returns.

Accepted Answer

A)  technical analysis cannot; fundamental analysis can 
B)  technical analysis can; fundamental analysis can 
C)  technical analysis can; fundamental analysis cannot 
D)  technical analysis cannot; fundamental analysis cannot 
A)  technical analysis cannot; fundamental analysis can 
B)  technical analysis can; fundamental analysis can 
C)  technical analysis can; fundamental analysis cannot 
D)  technical analysis cannot; fundamental analysis cannot

Question 9

Most people would readily agree that the stock market is not ________.

Accepted Answer

A)  weak-form efficient 
B)  semistrong-form efficient 
C)  strong-form efficient 
D)  efficient at all 
A)  weak-form efficient 
B)  semistrong-form efficient 
C)  strong-form efficient 
D)  efficient at all

Question 10

Proponents of the EMH typically advocate ________.

Accepted Answer

A)  a conservative investment strategy 
B)  a liberal investment strategy 
C)  a passive investment strategy 
D)  an aggressive investment strategy 
A)  a conservative investment strategy 
B)  a liberal investment strategy 
C)  a passive investment strategy 
D)  an aggressive investment strategy

Question 11

In an efficient market and for an investor who believes in a passive approach to investing, what is the primary duty of a portfolio manager?

Accepted Answer

A)  accounting for results 
B)  diversification 
C)  identifying undervalued stocks 
D)  no need for a portfolio manager 
A)  accounting for results 
B)  diversification 
C)  identifying undervalued stocks 
D)  no need for a portfolio manager

Question 12

Del Guercio and Reuter (2014) find

Accepted Answer

A)  direct -purchase mutual fund investors outperform those who purchase through brokers. 
B)  broker -purchase mutual fund investors outperform those who direct purchase directly. 
C)  both types of investors did as well or better than index funds. 
D)  both types of investors underperformed index funds. 
A)  direct -purchase mutual fund investors outperform those who purchase through brokers. 
B)  broker -purchase mutual fund investors outperform those who direct purchase directly. 
C)  both types of investors did as well or better than index funds. 
D)  both types of investors underperformed index funds.

Question 13

Which of the following stock price observations would appear to contradict the weak form of the efficient market hypothesis?

Accepted Answer

A)  The average rate of return is significantly greater than zero. 
B)  The correlation between the market return one week and the return the following week is zero. 
C)  You could have consistently made superior returns by buying stock after a 10% rise in price and selling after a 10% fall. 
D)  You could have consistently made superior returns by forecasting future earnings performance with your new Crystal Ball forecast methodology. 
A)  The average rate of return is significantly greater than zero. 
B)  The correlation between the market return one week and the return the following week is zero. 
C)  You could have consistently made superior returns by buying stock after a 10% rise in price and selling after a 10% fall. 
D)  You could have consistently made superior returns by forecasting future earnings performance with your new Crystal Ball forecast methodology.

Question 14

The weak form of the EMH states that ________ must be reflected in the current stock price.

Accepted Answer

A)  all past information, including security price and volume data 
B)  all publicly available information 
C)  all information, including inside information 
D)  all costless information 
A)  all past information, including security price and volume data 
B)  all publicly available information 
C)  all information, including inside information 
D)  all costless information

Question 15

A day trade with an average stock holding period of under 8 minutes might be most closely associated with which trading philosophy?

Accepted Answer

A)  EMH 
B)  fundamental analysis 
C)  strong-form market efficiency 
D)  technical analysis 
A)  EMH 
B)  fundamental analysis 
C)  strong-form market efficiency 
D)  technical analysis

Question 16

Stock market analysts have tended to be ________ in their recommendations to investors.

Accepted Answer

A)  slightly overly optimistic 
B)  overwhelmingly optimistic 
C)  slightly overly pessimistic 
D)  overwhelmingly pessimistic 
A)  slightly overly optimistic 
B)  overwhelmingly optimistic 
C)  slightly overly pessimistic 
D)  overwhelmingly pessimistic

Question 17

Which of the following is not an issue that is central to the debate regarding market efficiency?

Accepted Answer

A)  the magnitude issue 
B)  the tax-loss selling issue 
C)  the lucky event issue 
D)  the selection bias issue 
A)  the magnitude issue 
B)  the tax-loss selling issue 
C)  the lucky event issue 
D)  the selection bias issue

Question 18

Basu found that firms with high P/E ratios ________.

Accepted Answer

A)  earned higher average returns than firms with low P/E ratios 
B)  earned the same average returns as firms with low P/E ratios 
C)  earned lower average returns than firms with low P/E ratios 
D)  had higher dividend yields than firms with low P/E ratios 
A)  earned higher average returns than firms with low P/E ratios 
B)  earned the same average returns as firms with low P/E ratios 
C)  earned lower average returns than firms with low P/E ratios 
D)  had higher dividend yields than firms with low P/E ratios

Question 19

Which of the following is not a topic related to the debate over market efficiency?

Accepted Answer

A)  IPO results 
B)  lucky event issue 
C)  magnitude issue 
D)  selection bias 
A)  IPO results 
B)  lucky event issue 
C)  magnitude issue 
D)  selection bias

Question 20

Testing many different trading rules until you find one that would have worked in the past is called ________.

Accepted Answer

A)  data mining 
B)  perceived patterning 
C)  pattern searching 
D)  behavioral analysis 
A)  data mining 
B)  perceived patterning 
C)  pattern searching 
D)  behavioral analysis

Exam 8: The Efficient Market Hypothesis

Choosing stocks by searching for predictable patterns in stock prices is called ________.

According to Markowitz and other proponents of modern portfolio theory, which of the following activities would not be expected to produce any benefits?

Random price movements indicate ________.

The strong form of the EMH states that ________ must be reflected in the current stock price.

Jaffe found that stock prices ________ after insiders intensively bought shares and ________ after insiders intensively sold shares.

Most of the stock price response to a corporate earnings or dividend announcement occurs within ________.

Fundamental analysis is likely to yield best results for ________.

The semistrong-form of the efficient market hypothesis implies that ________ generate abnormal returns and ________ generate abnormal returns.

Most people would readily agree that the stock market is not ________.

Proponents of the EMH typically advocate ________.

In an efficient market and for an investor who believes in a passive approach to investing, what is the primary duty of a portfolio manager?

Del Guercio and Reuter (2014) find

Which of the following stock price observations would appear to contradict the weak form of the efficient market hypothesis?

The weak form of the EMH states that ________ must be reflected in the current stock price.

A day trade with an average stock holding period of under 8 minutes might be most closely associated with which trading philosophy?

Stock market analysts have tended to be ________ in their recommendations to investors.

Which of the following is not an issue that is central to the debate regarding market efficiency?

Basu found that firms with high P/E ratios ________.

Which of the following is not a topic related to the debate over market efficiency?

Testing many different trading rules until you find one that would have worked in the past is called ________.

Investments: Background and Issues

Asset Classes and Financial Instruments

Securities Markets

Mutual Funds and Other Investment Companies

Risk, Return, and the Historical Record

Efficient Diversification

Capital Asset Pricing and Arbitrage Pricing Theory

Behavioral Finance and Technical Analysis

Bond Prices and Yields

Managing Bond Portfolios

Macroeconomic and Industry Analysis

Equity Valuation

Financial Statement Analysis

Options Markets

Option Valuation

Futures Markets and Risk Management

Evaluating Investment Performance

International Diversification

Hedge Funds

Taxes, Inflation, and Investment Strategy

Investors and the Investment Process

Filters

Jaffe found that stock prices after insiders intensively bought shares and after insiders intensively sold shares.

The semistrong-form of the efficient market hypothesis implies that generate abnormal returns and generate abnormal returns.