Question 1

Which one of the following involves the study of a firm's stock price for the few days surrounding a news announcement?

Accepted Answer

A) web survey 
B) market analysis 
C) event study 
D) auditing review 
E) trend study

Question 2

Security A and Security B have similar risks.However,Security A has a higher rate of return than Security B.The return on Security A minus the return on Security B is referred to as which one of the following?

Accepted Answer

A)  market return 
B)  abnormal return 
C)  deviated return 
D)  excess return 
E)  real return

Question 3

In an efficient market,daily abnormal returns:

Accepted Answer

A) are very volatile. 
B) reflect news within the past week. 
C) reflect news since the prior trading day. 
D) remain constant. 
E) do not exist.

Question 4

Which type of trader is defined as one who decides to trade securities based on publicly available information and analysis?

Accepted Answer

A) public 
B) informed 
C) normal 
D) inside 
E) block

Question 5

Over the past 50 years,which day of the week,on average,has the lowest average rate of return?

Accepted Answer

A) Monday 
B) Tuesday 
C) Wednesday 
D) Thursday 
E) Friday

Question 6

If you believe that stock market prices follow a random walk,then:

Accepted Answer

A) historical price information provides no benefit in predicting future prices. 
B) there is no financial benefit from investing in the stock market. 
C) having inside information will not lead to excess profits. 
D) studying past price movements will lead to excess profits. 
E) you also believe the market is strong-form efficient.

Question 7

What are some of the key lessons to be learned from historical stock market crashes?

Accepted Answer

The answer of What are some of the key lessons...

Question 8

Which one of the following correctly identifies the phenomenon that states that one month has the greatest tendency for small stocks to earn large returns?

Accepted Answer

A) January effect 
B) March effect 
C) September effect 
D) October effect 
E) December effect

Question 9

Stocks A,B,and C have identical risks.Stock A earns an annual return of 9.9 percent as compared to 9.6 percent returns on stocks B and C.Given this,you can correctly assume that:

Accepted Answer

A)  Stock A is overpriced. 
B)  the market return is 9.75 percent. 
C)  Stock A represents the smallest-sized firm. 
D)  Stock A has a positive excess return. 
E)  Stocks B and C represent firms that are in the process of merging.

Question 10

The term "independent deviations from rationality" implies that:

Accepted Answer

A) irrational investors are absent from an efficient market. 
B) arbitrage traders act independent of each other. 
C) markets must be inefficient. 
D) irrational investors behave differently from one another. 
E) arbitrage traders act together to offset the actions of rational investors.

Question 11

Which one of the following statements related to insider trading is correct?

Accepted Answer

A) Licensed stockbrokers are exempt from insider trading laws. 
B) Individuals, such as Martha Stewart, who have been convicted of crimes, can be barred from being executive officers of publicly-traded companies. 
C) Because of the increased speed of information flows and the improved efficiency of the markets, insider trading laws were abolished in 2006. 
D) Martha Stewart was convicted of insider trading and subjected both to a fine and a jail sentence. 
E) An investor who receives advice from an investment advisor is automatically charged with insider trading when the advisor bases his recommendations on private information.

Question 12

Moving money in and out of the market based on your market expectations is called _____ and tends to lead to returns that are _____ than the overall market return,assuming that the market is relatively efficient.

Accepted Answer

A) asset allocation; higher 
B) asset allocation; lower 
C) market timing; higher 
D) market timing; lower 
E) security selection; higher

Question 13

Which one of the following terms is used to describe a market situation where prices are much higher than either fundamental or rational analysis would tend to support?

Accepted Answer

A) bear market 
B) cloud 
C) inversion 
D) bubble 
E) crash aversion

Question 14

Last week,New Plastics announced that it had developed a new plastic container that is stronger and more durable,yet easier to recycle.In response to this announcement,the firm's stock price rose from $21 a share to a high of $27 a share and has remained at that level.This is an example of a(n):

Accepted Answer

A) over-reaction and correction. 
B) post-activity reaction. 
C) delayed reaction. 
D) pre-activity action. 
E) efficient market reaction.

Question 15

Which one of the following is most apt to be considered insider trading?

Accepted Answer

A) Ann overhears Martha say she is being promoted to accounts payables manager and then she purchases shares in Martha's employer. 
B) Jennifer compiles the financial statements and knows that net income for the latest quarter is significantly below analyst's forecasts but continues to hold shares of her employer's stock. 
C) Kate is an outside auditor and has found what she believes are significant accounting irregularities in a company's financial reports but owns no shares in the firm. 
D) Les buys stock in Winter's Wear after he overhears a conversation between the firm's president and vice-president concerning a proposed acquisition. 
E) Jeff buys shares of stock in his employer's firm through the company retirement plan on a regular monthly basis.

Question 16

If the markets are efficient,then why is asset allocation still considered important?

Accepted Answer

A) because the risk-return relationship must still be considered 
B) because market timing is critical in efficient markets 
C) because individual security selection is the key to the markets being efficient 
D) because asset allocation combines market timing with individual security selection 
E) because the majority of market gains tend to occur only over long periods of time

Question 17

Which form of market efficiency exists if the market is efficient only in regard to historical information?

Accepted Answer

A) mild-form 
B) weak-form 
C) historical-form 
D) semistrong-form 
E) strong-form

Question 18

Market timing tends to lead to:

Accepted Answer

A) fairly consistent abnormal returns. 
B) increasing profits as experience is gained. 
C) superior returns but only if you are a professional money manager. 
D) a rate of return roughly equal to that of the overall market. 
E) underperforming the overall market.

Question 19

Immediately following the Crash of 1987,the stock market:

Accepted Answer

A) remained in a slump for five years. 
B) remained flat for an extended period of time. 
C) had one of the biggest short-term gains ever. 
D) began a very slow and choppy recovery. 
E) began a very slow and smooth recovery.

Question 20

Which of the following are offered as factors contributing to the Crash of October 1987?
I.bubble bursting
II.market volatility
III.negative economic signals
IV.activities in Congress

Accepted Answer

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

Exam 7: Stock Price Behavior and Market Efficiency