Question 1

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 2

Chartists practice

Accepted Answer

A)   technical analysis.
B)   fundamental analysis.
C)   regression analysis.
D)   insider analysis.
E)   psychoanalysis.

Question 3

The debate over whether markets are efficient will probably never be resolved because of

Accepted Answer

A)   the lucky event issue.
B)   the magnitude issue.
C)   the selection bias issue.
D)   All of the options are correct.
E)   None of the options are correct.

Question 4

If you believe in the reversal effect, you should

Accepted Answer

A)   buy bonds in this period if you held stocks in the last period.
B)   buy stocks in this period if you held bonds in the last period.
C)   buy stocks this period that performed poorly last period.
D)   go short.
E)   buy stocks this period that performed poorly last period and go short.

Question 5

In an efficient market the correlation coefficient between stock returns for two nonoverlapping time periods should be

Accepted Answer

A)   positive and large.
B)   positive and small.
C)   zero.
D)   negative and small.
E)   negative and large.

Question 6

Music Doctors just announced yesterday that its first quarter sales were 35% higher than last year's first quarter. You observe that Music Doctors had an abnormal return of −2% yesterday. This suggests that

Accepted Answer

A)   the market is not efficient.
B)   Music Doctors stock will probably rise in value tomorrow.
C)   investors expected the sales increase to be larger than what was actually announced.
D)   investors expected the sales increase to be smaller than what was actually announced.
E)   earnings are expected to decrease next quarter.

Question 7

Which of the following are used by technical analysts to determine proper stock prices?I)  TrendlinesII)  EarningsIII)  Dividend prospectsIV)  Expectations of future interest ratesV)  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 8

Using finance terminology, Billy Bean discovered a better estimate of ________________.

Accepted Answer

A)   intrinsic value.
B)   inflation.
C)   market efficiency.
D)   discount rates.

Question 9

Work by Amihud and Mendelson (1986, 1991)

Accepted Answer

A)   argues that investors will demand a rate of return premium to invest in less liquid stocks.
B)   may help explain the small firm effect.
C)   may be related to the neglected firm effect.
D)   may help explain the small firm effect and may be related to the neglected firm effect.
E)   All of the options are correct.

Question 10

XRCO just announced yesterday that its fourth quarter earnings will be 35% higher than last year's fourth quarter. You observe that XRCO had an abnormal return of −1.7% yesterday. This suggests that

Accepted Answer

A)   the market is not efficient.
B)   XRCO stock will probably rise in value tomorrow.
C)   investors expected the earnings increase to be larger than what was actually announced.
D)   investors expected the earnings increase to be smaller than what was actually announced.
E)   earnings are expected to decrease next quarter.

Question 11

A hybrid strategy is one where the investor

Accepted Answer

A)   uses both fundamental and technical analysis to select stocks.
B)   selects the stocks of companies that specialize in alternative fuels.
C)   selects some actively-managed mutual funds on their own and uses an investment advisor to select other actively-managed funds.
D)   maintains a passive core and augments the position with an actively-managed portfolio.

Question 12

___________ 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 are correct.
E)   All of the options are correct.

Question 13

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

Accepted Answer

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

Question 14

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 15

If you believe in the _________ form of the EMH, you believe that stock prices reflect all available information, including information that is available only to insiders.

Accepted Answer

A)   semistrong
B)   strong
C)   weak
D)   All of the options are correct.
E)   None of the options are correct.

Question 16

The weak form of the efficient-market hypothesis asserts that

Accepted Answer

A)   stock prices do not rapidly adjust to new information contained in past prices or past data.
B)   future changes in stock prices cannot be predicted from past prices.
C)   technicians cannot expect to outperform the market.
D)   stock prices do not rapidly adjust to new information contained in past prices or past data, and future changes in stock prices cannot be predicted from past prices.
E)   future changes in stock prices cannot be predicted from past prices, and technicians cannot expect to outperform the market.

Question 17

Banz (1981)  found that, on average, the risk-adjusted returns of large firms

Accepted Answer

A)   were higher than the risk-adjusted returns of small firms.
B)   were the same as the risk-adjusted returns of small firms.
C)   were lower than the risk-adjusted returns of small firms.
D)   were unrelated to the risk-adjusted returns of small firms.
E)   were negative.

Question 18

Banz (1981)  found that, on average, the risk-adjusted returns of small firms

Accepted Answer

A)   were higher than the risk-adjusted returns of large firms.
B)   were the same as the risk-adjusted returns of large firms.
C)   were lower than the risk-adjusted returns of large firms.
D)   were unrelated to the risk-adjusted returns of large firms.
E)   were negative.

Question 19

Sehun (1986)  finds that the practice of monitoring insider trade disclosures, and trading on that information, would be

Accepted Answer

A)   extremely profitable for long-term traders.
B)   extremely profitable for short-term traders.
C)   marginally profitable for long-term traders.
D)   marginally profitable for short-term traders.
E)   not sufficiently profitable to cover trading costs.

Question 20

What phrase actually measures the positive result of market inefficiency?

Accepted Answer

A)   CAMP
B)   beta
C)   volatility
D)   alpha

Exam 11: The Efficient Market Hypothesis

What phrase actually measures the positive result of market inefficiency?

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The weak form of the efficient-market hypothesis asserts that

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Which of the following are used by technical analysts to determine proper stock prices?I) TrendlinesII) EarningsIII) Dividend prospectsIV) Expectations of future interest ratesV) Resistance levels

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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

Correct AnswerverifiedShow Answer

In an efficient market the correlation coefficient between stock returns for two nonoverlapping time periods should be

Correct AnswerverifiedShow Answer

If you believe in the _________ form of the EMH, you believe that stock prices reflect all available information, including information that is available only to insiders.

Correct AnswerverifiedShow Answer

Chartists practice

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Work by Amihud and Mendelson (1986, 1991)

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Banz (1981) found that, on average, the risk-adjusted returns of large firms

Correct AnswerverifiedShow Answer

Banz (1981) found that, on average, the risk-adjusted returns of small firms

Correct AnswerverifiedShow Answer

A common strategy for passive management is

Correct AnswerverifiedShow Answer

Using finance terminology, Billy Bean discovered a better estimate of ________________.

Correct AnswerverifiedShow Answer

A hybrid strategy is one where the investor

Correct AnswerverifiedShow Answer

If you believe in the reversal effect, you should

Correct AnswerverifiedShow Answer

XRCO just announced yesterday that its fourth quarter earnings will be 35% higher than last year's fourth quarter. You observe that XRCO had an abnormal return of −1.7% yesterday. This suggests that

Correct AnswerverifiedShow Answer

The debate over whether markets are efficient will probably never be resolved because of

Correct AnswerverifiedShow Answer

Music Doctors just announced yesterday that its first quarter sales were 35% higher than last year's first quarter. You observe that Music Doctors had an abnormal return of −2% yesterday. This suggests that

Correct AnswerverifiedShow Answer

Sehun (1986) finds that the practice of monitoring insider trade disclosures, and trading on that information, would be

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

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