Question 1

Managers are probably best qualified to predict when

Accepted Answer

A) currency exchange rates are most favorable. 
B) a firm they wish to acquire is most undervalued. 
C) market interest rates are at their lowest point. 
D) interest rates are peaking. 
E) their company's stock is overvalued.

Question 2

Your best friend works in the finance office of the Delta Corporation.You are aware that this friend trades Delta stock based on information he overhears in the office.You know that this information is not known to the general public.Your friend continually brags to you about the profits he earns trading Delta stock.Based on this information,you would tend to argue that the financial markets are at best ________ form efficient.

Accepted Answer

A) weak 
B) semistrong 
C) semiweak 
D) strong 
E) perfect

Question 3

Which of the following tend to reinforce the argument that the financial markets are efficient? I.Information spreads rapidly in today's world.
II)There is tremendous competition in the financial markets.
III)Market prices continually fluctuate.
IV)Market prices react suddenly to unexpected news announcements.

Accepted Answer

A) I and III only 
B) II and IV only 
C) I,II,and III only 
D) II,III,and IV only 
E) I,II,III,and IV

Question 4

The efficient market hypothesis implies that

Accepted Answer

A) all investments should earn the same average rate of return over time. 
B) any investment should earn a normal return commensurate with the investment's risk. 
C) efficient markets will tend to have fixed prices from one day to the next. 
D) stock prices are only efficient when all investors review their portfolios on a daily basis. 
E) investors must be disinterested in their investments for the markets to be efficient.

Question 5

The principle that investors slowly adjust their beliefs to new information is referred to as

Accepted Answer

A) conservatism. 
B) stockholder disinterest. 
C) reversal. 
D) insider trading. 
E) continuation.

Question 6

Research has found that investors tend to react to earnings surprises

Accepted Answer

A) slowly,which illustrates conservatism. 
B) immediately and fully on the day the information becomes public. 
C) quickly and efficiently. 
D) in the same manner whether they are positive or negative surprises. 
E) always in a negative manner as they do not like any surprises.

Question 7

Efficient markets require which one of these?

Accepted Answer

A) Dart thrower investors 
B) Only rational investors 
C) Overly optimistic amateur investors 
D) Countervailing irrationalities 
E) Investors adhering to the conservatism principle

Question 8

Sam,an avid day trader,has noticed that a particular stock has increased in value in each of the last three trading days.Given this trend,he believes the stock price will increase over the next two trading days.This is an example of

Accepted Answer

A) a timing decision. 
B) irrational exuberance. 
C) representativeness. 
D) conservatism. 
E) arbitrage.

Question 9

Market efficiency

Accepted Answer

A) or the lack thereof,is highly controversial. 
B) has been proven to exist only during times when earnings surprises are minimal. 
C) has been proven to be strong form efficient for all publicly traded markets. 
D) advocates that market prices are correct with both perfect foresight and hindsight. 
E) as a hypothesis has been disproven in its entirety.

Question 10

Which one of these serial coefficient values is most consistent with weak form market efficiency?

Accepted Answer

A) -1 
B) -0.5 
C) 0 
D) +0.5 
E) +1

Question 11

Weak form efficiency is best defined as a market where current prices are based on

Accepted Answer

A) totally rational decisions. 
B) historical prices. 
C) information known to any person or organization. 
D) all publicly available information. 
E) irrational decisions by amateur investors.

Question 12

Which one of these terms is used to describe a principle where investors draw conclusions from insufficient data?

Accepted Answer

A) Representativeness 
B) Synergy 
C) Conservatism 
D) Arbitrage 
E) Independent deviations from rationality

Question 13

Market prices can be efficiently priced if

Accepted Answer

A) brokerage commissions are zero. 
B) a number of interested traders use the publicly available information. 
C) securities always offer a positive rate of return to investors. 
D) the prices are guaranteed by the U.S.Securities and Exchange Commission. 
E) taxes are irrelevant.

Question 14

Markets tend to be efficient when

Accepted Answer

A) arbitrage is unlawful. 
B) amateurs dominate the market. 
C) all investors are required to be rational. 
D) professional arbitrage exceeds amateur speculation. 
E) prices adjust to new information slowly.

Question 15

The hypothesis that market prices reflect all publicly available information is called ________ form efficiency.

Accepted Answer

A) open 
B) strong 
C) semistrong 
D) weak 
E) stable

Question 16

If you live in a remote area with limited access to the news but do a lot of historical research on firms,you would prefer that the financial markets be ________ form efficient so you can have an advantage in the marketplace.

Accepted Answer

A) strong 
B) semiweak 
C) semistrong 
D) perfect 
E) weak

Question 17

Serial correlation

Accepted Answer

A) indicates a reversal in the direction of returns when the coefficient is positive. 
B) involves the relationship of one stock's returns over various time periods. 
C) indicates a tendency toward reversal when its coefficient is positive. 
D) measures the cumulative difference between the returns on two similar securities. 
E) measures the current relationship between the returns on two securities.

Question 18

The abnormal return in an event study is described as the

Accepted Answer

A) actual return on a security minus the market rate of return on the same date. 
B) total return earned by a security on the date of an announcement affecting that security. 
C) total return earned on a security for the 7-day period commencing 3 days prior to an announcement affecting that security. 
D) change in market value of a security on the day of an announcement affecting that security. 
E) any change in the market price of a security that exceeds 5 percent over a 7-day period.

Question 19

In an efficient market,the price of a security will

Accepted Answer

A) react immediately to new information with no further price adjustments related to that information. 
B) react to new information over a 2-day period after which time no further price adjustments related to that information will occur. 
C) rise sharply when new information is first released and then decline to a new stable level by the following day. 
D) always rise immediately upon the release of new information with no further price adjustments related to that information. 
E) be slow to react for the first few hours after new information is released allowing time for that information to be reviewed and analyzed.

Question 20

Choices between various accounting methods should not affect stock prices if

Accepted Answer

A) and only if the financial markets are strong form efficient. 
B) the financial market is weak form efficient and the investors are at least somewhat rational. 
C) the markets have recently experienced the bursting of a market bubble. 
D) companies consistently select the most conservative of the allowable methods. 
E) markets are at least semistrong form efficient and firms provide sufficient information so investors can analyze those choices.

Exam 13: Efficient Capital Markets Amcq Behavioral Challenges