Question 1

Which of the following are used by technical analysts to determine proper stock prices
I. Trendlines
II. Earnings
III. Dividend prospects
IV. Expectations of future interest rates
V. Resistance levels

Accepted Answer

A) I and V 
B) I, II, and III 
C) II, III, and IV 
D) II, IV, and V 
E) All of the items are used by fundamental analysts.

Question 2

Studies of negative earnings surprises have shown that there is

Accepted Answer

A) a negative abnormal return on the day that negative earnings surprises are announced. 
B) a positive drift in the stock price on the days following the earnings surprise announcement. 
C) a negative drift in the stock price on the days following the earnings surprise announcement. 
D) a negative abnormal return on the day that negative earnings surprises are announced and a positive drift in the stock price on the days following the earnings surprise announcement. 
E) a negative abnormal return on the day that negative earnings surprises are announced and a negative drift in the stock price on the days following the earnings surprise announcement.

Question 3

Proponents of the EMH typically advocate

Accepted Answer

A) buying individual stocks on margin and trading frequently. 
B) investing in hedge funds. 
C) a passive investment strategy. 
D) buying individual stocks on margin and trading frequently and investing in hedge funds. 
E) investing in hedge funds and a passive investment strategy.

Question 4

A common strategy for passive management is

Accepted Answer

A) creating an index fund. 
B) creating a small firm fund. 
C) creating an investment club. 
D) creating an index fund and creating an investment club. 
E) creating a small firm fund and creating an investment club.

Question 5

Jaffe (1974) found that stock prices _________ after insiders intensively bought shares.

Accepted Answer

A) decreased 
B) did not change 
C) increased 
D) became extremely volatile 
E) became much less volatile

Question 6

__________ focus more on past price movements of a firm's stock than on the underlying determinants of future profitability.

Accepted Answer

A) Credit analysts 
B) Fundamental analysts 
C) Systems analysts 
D) Technical analysts

Question 7

At freshman orientation, 1,500 students are asked to flip a coin 20 times.One student is crowned the winner (tossed 20 heads).This is most closely associated with

Accepted Answer

A) regret avoidance. 
B) selection bias. 
C) overconfidence. 
D) the lucky event issue.

Question 8

Discuss the small firm effect, the neglected firm effect, and the January effect, the tax effect and how the four effects may be related.

Accepted Answer

The answer of Discuss the small firm effect, the neglected...

Question 9

Proponents of the EMH think technical analysts

Accepted Answer

A) should focus on relative strength. 
B) should focus on resistance levels. 
C) should focus on support levels. 
D) should focus on financial statements. 
E) are wasting their time.

Question 10

Arbel (1985) found that

Accepted Answer

A) the January effect was highest for neglected firms. 
B) the book-to-market value ratio effect was highest in January. 
C) the liquidity effect was highest for small firms. 
D) the neglected firm effect was independent of the small firm effect. 
E) small firms had higher book-to-market value ratios.

Question 11

A finding that _________ would provide evidence against the semistrong form of the efficient market theory.

Accepted Answer

A) low P/E stocks tend to have positive abnormal returns 
B) trend analysis is worthless in determining stock prices 
C) one can consistently outperform the market by adopting the contrarian approach exemplified by the reversals phenomenon 
D) low P/E stocks tend to have positive abnormal returns and trend analysis is worthless in determining stock prices 
E) low P/E stocks tend to have positive abnormal returns and one can consistently outperform the market by adopting the contrarian approach exemplified by the reversals phenomenon

Question 12

When Maurice Kendall first examined stock price patterns in 1953, he found that

Accepted Answer

A) certain patterns tended to repeat within the business cycle. 
B) there were no predictable patterns in stock prices. 
C) stocks whose prices had increased consistently for one week tended to have a net decrease the following week. 
D) stocks whose prices had increased consistently for one week tended to have a net increase the following week. 
E) the direction of change in stock prices was unpredictable, but the amount of change followed a distinct pattern.

Question 13

The weak form of the efficient market hypothesis contradicts

Accepted Answer

A) technical analysis, but supports fundamental analysis as valid. 
B) fundamental analysis, but supports technical analysis as valid. 
C) both fundamental analysis and technical analysis. 
D) technical analysis, but is silent on the possibility of successful fundamental analysis.

Question 14

Fama and French (1992) found that the stocks of firms within the highest decile of book-to-market ratios had average monthly returns of _______, while the stocks of firms within the lowest decile of book-to-market ratios had average monthly returns of ________.

Accepted Answer

A) greater than 1%; greater than 1% 
B) greater than 1%; less than 1% 
C) less than 1%; greater than 1% 
D) less than 1%; less than 1% 
E) less than 0.5%; greater than 0.5%

Question 15

Studies of stock price reactions to news are called

Accepted Answer

A) reaction studies. 
B) event studies. 
C) drift studies. 
D) reaction studies and event studies. 
E) event studies and drift studies.

Question 16

___________ the return on a stock beyond what would be predicted from market movements alone.

Accepted Answer

A) An irrational return is 
B) An economic return is 
C) An abnormal return is 
D) None of the options 
E) All of the options

Question 17

Studies of positive earnings surprises have shown that there is

Accepted Answer

A) a positive abnormal return on the day positive earnings surprises are announced. 
B) a positive drift in the stock price on the days following the earnings surprise announcement. 
C) a negative drift in the stock price on the days following the earnings surprise announcement. 
D) a positive abnormal return on the day positive earnings surprises are announced and a positive drift in the stock price on the days following the earnings surprise announcement. 
E) a positive abnormal return on the day positive earnings surprises are announced and a negative drift in the stock price on the days following the earnings surprise announcement.

Question 18

The weather report says that a devastating and unexpected freeze is expected to hit Florida tonight, during the peak of the citrus harvest.In an efficient market one would expect the price of Florida Orange's stock to

Accepted Answer

A) drop immediately. 
B) remain unchanged. 
C) increase immediately. 
D) gradually decline for the next several weeks. 
E) gradually increase for the next several weeks.

Question 19

The stock market follows a

Accepted Answer

A) nonrandom walk. 
B) submartingale. 
C) predictable pattern that can be exploited. 
D) nonrandom walk and predictable pattern that can be exploited. 
E) submartingale and predictable pattern that can be exploited.

Question 20

A support level is the price range at which a technical analyst would expect the

Accepted Answer

A) supply of a stock to increase dramatically. 
B) supply of a stock to decrease substantially. 
C) demand for a stock to increase substantially. 
D) demand for a stock to decrease substantially. 
E) price of a stock to fall.

Exam 11: The Efficient Market Hypothesis

Which of the following are used by technical analysts to determine proper stock prices I. Trendlines II. Earnings III. Dividend prospects IV. Expectations of future interest rates V. Resistance levels