Question 1

For a corporation, financing decisions are typically harder to reverse than investment decisions.

Accepted Answer

A) True 
 B)False  False

Question 2

When a firm announces a dividend change, or publishes its latest earnings, the major part of any price adjustment usually takes place within a few minutes of the announcement.

Accepted Answer

A) True 
 B)False

Question 3

Weak-form efficiency implies that past stock returns

Accepted Answer

A)  form patterns that tend to repeat.
B)  are major inputs to investors for forming trading strategies.
C)  do not help to predict future returns.
D)  are difficult to explain.

Question 4

Behavioral finance deals with the idea that individual investors have built-in biases and misconceptions that can drive prices away from fair values.

Accepted Answer

A) True 
 B)False

Question 5

List the five lessons of market efficiency.

Accepted Answer

Markets have no memory.
Trust ...

Question 6

The study of behavioral finance has best helped explain which of the following investor behaviors?

Accepted Answer

A)  Investors are often unable to short-sell unfavorable stocks.
B)  Investors often create undiversified portfolios.
C)  Investors tend to sell their losing stocks and retain stocks that have capital gains.
D)  Investors are generally too slow to update their beliefs in the face of new evidence.

Question 7

Strong-form market efficiency states that the market incorporates all information into stock prices.Strong-form efficiency implies that

Accepted Answer

A)  an investor can only earn risk-free rates of return.
B)  an investor can always rely on technical analysis.
C)  professional investors cannot consistently outperform the market.
D)  an investor can only earn risk-free rates of return and can always rely on technical analysis, and professional investors cannot consistently outperform the market.

Question 8

If a stock's returns follow a random walk pattern, then one should expect to calculate a statistically insignificant autocorrelation coefficient, calculated between each successive day's stock returns.

Accepted Answer

A) True 
 B)False

Question 9

The various lessons of market efficiency are

Accepted Answer

A)  markets have no memory and trust market prices only.
B)  markets have no memory, trust market prices, read the entrails, and the do-it yourself alternative.
C)  markets have no memory and seen one stock, seen them all.
D)  markets have no memory; trust market prices; read the entrails; the do-it yourself alternative; and seen one stock, seen them all.

Question 10

In an efficient market, investors will not pay others what they can do equally well themselves.

Accepted Answer

A) True 
 B)False

Question 11

Which of the following is a statement of weak-form efficiency?

Accepted Answer

A)  If markets are efficient in the weak form, then it is impossible to make consistently superior profits by using trading rules based on past returns.
B)  If markets are efficient in the weak form, then prices will adjust immediately to public information.
C)  If markets are efficient in the weak form, then prices will adjust immediately to public information and prices reflect all information.
D)  If markets are efficient in the weak form, then prices reflect all information.

Question 12

One important implication of the efficient markets hypothesis is that most investors

Accepted Answer

A)  should avoid active trading.
B)  can benefit by purchasing high-beta stocks.
C)  should trade actively to help ensure the highest overall gain in their portfolios.
D)  should hold IPO stock issues for the longterm.

Question 13

The semistrong form of efficiency focuses on the economic ineffectiveness of the following type of information:

Accepted Answer

A)  insider information.
B)  publicly available information.
C)  privileged information.
D)  only information provided by the SEC.

Question 14

Analysis of past monthly movements in IBM's stock price produces the following estimates: α = 2.5 percent and β = 1.6.If the market index subsequently rises by 12 percent in one month and IBM's stock price increases by 20 percent, what is the abnormal change in IBM's stock price?

Accepted Answer

A)  +1.7 percent
B)  +8 percent
C)  -1.7 percent
D)  +2.5 percent

Question 15

Behavioral finance and technical analysis are basically the same theory.

Accepted Answer

A) True 
 B)False

Question 16

Strong-form efficiency implies that mutual fund managers should

Accepted Answer

A)  buy the index that maximizes diversification and minimizes the cost of managing portfolios.
B)  actively seek underperforming stocks and buy them.
C)  generally earn superior returns each year.
D)  attempt to earn superior returns by using technical analysis.

Question 17

Which of the following statements is (are)  true if the strong-form efficient market hypothesis holds?

Accepted Answer

A)  Analysts can easily forecast stock price changes.
B)  Financial markets are irrational.
C)  Analysts can easily forecast stock price changes and stock returns follow a particular pattern.
D)  Stock prices reflect all available information. D

Question 18

Which of the following is a statement of semistrong form efficiency?

Accepted Answer

A)  Stock prices will adjust immediately to public information.
B)  Stock prices reflect all information.
C)  Stock prices reflect all information and stock prices will adjust to newly published information after a long time delay.
D)  Stock prices will adjust to newly published information after a long time delay. A

Question 19

The small-firm effect may constitute evidence against market efficiency.

Accepted Answer

A) True 
 B)False

Question 20

In an efficient market, information is costless.

Accepted Answer

A) True 
 B)False

Exam 13: Efficient Markets and Behavioral Finance

For a corporation, financing decisions are typically harder to reverse than investment decisions.

Correct AnswerverifiedFalse

When a firm announces a dividend change, or publishes its latest earnings, the major part of any price adjustment usually takes place within a few minutes of the announcement.

Correct AnswerverifiedShow Answer

Weak-form efficiency implies that past stock returns

Correct AnswerverifiedShow Answer

Behavioral finance deals with the idea that individual investors have built-in biases and misconceptions that can drive prices away from fair values.

Correct AnswerverifiedShow Answer

List the five lessons of market efficiency.

Correct AnswerverifiedMarkets have no memory.Trust ...View AnswerShow Answer

The study of behavioral finance has best helped explain which of the following investor behaviors?

Correct AnswerverifiedShow Answer

Strong-form market efficiency states that the market incorporates all information into stock prices.Strong-form efficiency implies that

Correct AnswerverifiedShow Answer

If a stock's returns follow a random walk pattern, then one should expect to calculate a statistically insignificant autocorrelation coefficient, calculated between each successive day's stock returns.

Correct AnswerverifiedShow Answer

The various lessons of market efficiency are

Correct AnswerverifiedShow Answer

In an efficient market, investors will not pay others what they can do equally well themselves.

Correct AnswerverifiedShow Answer

Which of the following is a statement of weak-form efficiency?

Correct AnswerverifiedShow Answer

One important implication of the efficient markets hypothesis is that most investors

Correct AnswerverifiedShow Answer

The semistrong form of efficiency focuses on the economic ineffectiveness of the following type of information:

Correct AnswerverifiedShow Answer

Analysis of past monthly movements in IBM's stock price produces the following estimates: α = 2.5 percent and β = 1.6.If the market index subsequently rises by 12 percent in one month and IBM's stock price increases by 20 percent, what is the abnormal change in IBM's stock price?

Correct AnswerverifiedShow Answer

Behavioral finance and technical analysis are basically the same theory.

Correct AnswerverifiedShow Answer

Strong-form efficiency implies that mutual fund managers should

Correct AnswerverifiedShow Answer

Which of the following statements is (are) true if the strong-form efficient market hypothesis holds?

Correct AnswerverifiedD

Which of the following is a statement of semistrong form efficiency?

Correct AnswerverifiedA

The small-firm effect may constitute evidence against market efficiency.

Correct AnswerverifiedShow Answer

In an efficient market, information is costless.

Correct AnswerverifiedShow Answer

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False

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Markets have no memory.
Trust ...
View Answer

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D

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A

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