Question 1

Studies of the performance of professionally managed mutual funds ﬁnd that these funds:

Accepted Answer

A)  do not outperform a market index.Assuming mutual fund managers rely primarily onPublic information, this ﬁnding refutes the semistrong form of the eﬃcient marketHypothesis.
B)  do not outperform a market index.Assuming mutual fund managers rely primarily onPublic information, this ﬁnding supports the semistrong form of the eﬃcient marketHypothesis.
C)  outperform a market index.Assuming mutual fund managers rely primarily on publicInformation, this ﬁnding refutes the strong form of the eﬃcient market hypothesis.
D)  outperform a market index.Assuming mutual fund managers rely primarily on publicInformation, this ﬁnding supports the semistrong form of the eﬃcient market hypothesis.
E)  Both C and D.F) A) and E)
G) A) and D)

Question 2

Suppose that ﬁrms with unexpectedly high earnings earn abnormally high returns for several months after the announcement.This would be evidence of:

Accepted Answer

A)  eﬃcient markets in the weak form.
B)  ineﬃcient markets in the weak form.
C)  eﬃcient markets in the semistrong form.
D)  ineﬃcient markets in the semistrong form.
E)  ineﬃcient markets in the strong form.F) A) and C)
G) B) and C)

Question 3

A semistrong form eﬃcient market is distinct from a weak form eﬃcient market in historical prices by:

Accepted Answer

A)  incorporating only random movements in the price.
B)  incorporating all publicly available information in the price.
C)  incorporating inside information in the price.
D)  incorporating all privately available information in the price.
E)  None of the above.F) A) and C)
G) None of the above

Question 4

Consider the following two statements: (i)  The representativeness principle results in an under reaction in share markets.
(ii)  The conservatism principle can explain why share prices underreact to new information as long
As there are enough conservative investors.

Accepted Answer

A)  (i)  is correct, (ii)  is incorrect.
B)  (ii)  is correct, (i)  is incorrect.
C)  Both (i)  and (ii)  are correct.
D)  Both (i)  and (ii)  are incorrect.
E)  Representativeness refers to the tendency for individual stocks to follow the market.F) A) and E)
G) A) and B) B

Question 5

The market price of a stock moves or ﬂuctuates daily.This ﬂuctuation is:

Accepted Answer

A)  inconsistent with the semistrong eﬃcient market hypothesis because prices should beStable.
B)  inconsistent with the weak form eﬃcient market hypothesis because all past informationShould be priced in.
C)  consistent with the semistrong form of the eﬃcient market hypothesis because as newInformation arrives daily prices will adjust to it.
D)  consistent with the strong form because prices are controlled by insiders.
E)  None of the above.F) None of the above
G) B) and C)

Question 6

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.F) B) and E)
G) A) and E)

Question 7

Which of the following would be indicative of ineﬃcient markets?

Accepted Answer

A)  Overreaction and reversion
B)  Delayed response
C)  Immediate and accurate response
D)  Both A and B.
E)  Both A and C.F) None of the above
G) A) and B)

Question 8

Do you think the lessons from capital market history will hold for each year in the future? That is, as an example, if you buy small company shares will your investment always outperform Treasury bonds?

Accepted Answer

The student should realize that we are w...

Question 9

Explain why it is that in an eﬃcient market, investments have an expected NPV of zero.

Accepted Answer

In an eﬃcient market, prices are "fair" ...

Question 10

In an eﬃcient market when a ﬁrm makes an announcement of a new product or product enhancement with superior technology providing positive NPV, the share price will:

Accepted Answer

A)  rise gradually over the next few days.
B)  decline gradually over the next few days.
C)  rise on the same day to the new price.
D)  stay at the same price, with no net effect.
E)  drop on the same day to the new price.F) C) and D)
G) A) and B) C

Question 11

If the ﬁnancial markets are eﬃcient, then investors should expect their investments in those markets to:

Accepted Answer

A)  earn extraordinary returns on a routine basis.
B)  generally have positive net present values.
C)  generally have zero net present values.
D)  produce arbitrage opportunities on a routine basis.
E)  produce negative returns on a routine basis.F) A) and C)
G) All of the above

Question 12

An investor discovers that for a certain group of equities, large positive price changes are always followed by large negative price changes.This ﬁnding is a violation of the:

Accepted Answer

A)  moderate form of the eﬃcient market hypothesis.
B)  semistrong form of the eﬃcient market hypothesis.
C)  strong form of the eﬃcient market hypothesis.
D)  weak form of the eﬃcient market hypothesis.
E)  None of the above.F) A) and C)
G) A) and E)

Question 13

A friend of yours tells you that in order for markets to be eﬃcient, all investors need to be rational all of the time.Is your friend correct? Why, or why not?

Accepted Answer

Your friend is not correct.Even if not all investors are rational, markets can be eﬃcient, as long as deviations from rationality are independent.

Question 14

If the eﬃcient market hypothesis holds, investors should expect:

Accepted Answer

A)  to earn only a normal return.
B)  to receive a fair price for their securities.
C)  always be able to pick stocks that will outperform the market averages.
D)  Both A and B.
E)  Both B and C.F) B) and E)
G) None of the above

Question 15

In testing whether a market is characterized by weak form eﬃciency:

Accepted Answer

A)  a positive coeﬃcient of serial correlation for a particular share indicates a tendency towardReversal.
B)  a negative coeﬃcient of serial correlation for a particular equity indicates a tendencyToward continuation.
C)  serial correlation coeﬃcients are consistent with weak form eﬃciency.
D)  Both A and C.
E)  Both A and B.F) B) and D)
G) A) and B)

Question 16

An investor discovers that predictions about weather patterns published years in advance and found in the Farmer's Almanac are amazingly accurate.In fact, these predictions enable the investor
To predict the health of the farm economy and therefore certain security prices.This ﬁnding is a
Violation of the:

Accepted Answer

A)  moderate form of the eﬃcient market hypothesis.
B)  semistrong form of the eﬃcient market hypothesis.
C)  weak form of the eﬃcient market hypothesis.
D)  strong form of the eﬃcient market hypothesis.
E)  None of the above.F) D) and E)
G) B) and E)

Question 17

An investor discovers that share prices change drastically as a result of certain events.This ﬁnding is a violation of the:

Accepted Answer

A)  moderate form of the eﬃcient market hypothesis.
B)  semistrong form of the eﬃcient market hypothesis.
C)  strong form of the eﬃcient market hypothesis.
D)  weak form of the eﬃcient market hypothesis.
E)  None of the above.F) B) and E)
G) B) and C)

Question 18

Eﬃcient capital markets are ﬁnancial markets:

Accepted Answer

A)  in which current market prices reﬂect available information.
B)  in which current market prices reﬂect the present value of securities.
C)  in which there is no excess proﬁt from using available information.
D)  in which the stock price would constantly react to new information.
E)  All of the above.F) B) and E)
G) A) and D)

Question 19

If you excel in analyzing the future outlook of ﬁrms, you would prefer that the ﬁnancial markets be ____ form eﬃcient so that you can have an advantage in the marketplace.

Accepted Answer

A)  weak
B)  semiweak
C)  semistrong
D)  strong
E)  perfectF) A) and D)
G) B) and D)

Question 20

Individuals that continually monitor the ﬁnancial markets seeking mispriced securities:

Accepted Answer

A)  tend to make substantial proﬁts on a daily basis.
B)  tend to make the markets more eﬃcient.
C)  are never able to ﬁnd a security that is temporarily mispriced.
D)  are always quite successful using only well-known public information as their basis ofEvaluation.
E)  are always quite successful using only historical price information as their basis ofEvaluation.F) A) and D)
G) A) and C)

Exam 13: Efficient Capital Markets and Behavioural Finance

Studies of the performance of professionally managed mutual funds ﬁnd that these funds:

Correct Answer
verified

Suppose that ﬁrms with unexpectedly high earnings earn abnormally high returns for several months after the announcement.This would be evidence of:

Correct Answer
verified

A semistrong form eﬃcient market is distinct from a weak form eﬃcient market in historical prices by:

Correct Answer
verified

Consider the following two statements: (i) The representativeness principle results in an under reaction in share markets. (ii) The conservatism principle can explain why share prices underreact to new information as long As there are enough conservative investors.

Correct Answer
verified
B

The market price of a stock moves or ﬂuctuates daily.This ﬂuctuation is:

Correct Answer
verified

Correct Answer
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Which of the following would be indicative of ineﬃcient markets?

Correct Answer
verified

Do you think the lessons from capital market history will hold for each year in the future? That is, as an example, if you buy small company shares will your investment always outperform Treasury bonds?

Correct Answer
verified
The student should realize that we are w...
View Answer

Explain why it is that in an eﬃcient market, investments have an expected NPV of zero.

Correct Answer
verified
In an eﬃcient market, prices are "fair" ...
View Answer

In an eﬃcient market when a ﬁrm makes an announcement of a new product or product enhancement with superior technology providing positive NPV, the share price will:

Correct Answer
verified
C

If the ﬁnancial markets are eﬃcient, then investors should expect their investments in those markets to:

Correct Answer
verified

An investor discovers that for a certain group of equities, large positive price changes are always followed by large negative price changes.This ﬁnding is a violation of the:

Correct Answer
verified

A friend of yours tells you that in order for markets to be eﬃcient, all investors need to be rational all of the time.Is your friend correct? Why, or why not?

Correct Answer
verified
Your friend is not correct.Even if not all investors are rational, markets can be eﬃcient, as long as deviations from rationality are independent.

If the eﬃcient market hypothesis holds, investors should expect:

Correct Answer
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In testing whether a market is characterized by weak form eﬃciency:

Correct Answer
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Correct Answer
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An investor discovers that share prices change drastically as a result of certain events.This ﬁnding is a violation of the:

Correct Answer
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Eﬃcient capital markets are ﬁnancial markets:

Correct Answer
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If you excel in analyzing the future outlook of ﬁrms, you would prefer that the ﬁnancial markets be ____ form eﬃcient so that you can have an advantage in the marketplace.

Correct Answer
verified

Individuals that continually monitor the ﬁnancial markets seeking mispriced securities:

Correct Answer
verified

Exam 13: Efficient Capital Markets and Behavioural Finance

Studies of the performance of professionally managed mutual funds ﬁnd that these funds:

Correct AnswerverifiedShow Answer

Suppose that ﬁrms with unexpectedly high earnings earn abnormally high returns for several months after the announcement.This would be evidence of:

Correct AnswerverifiedShow Answer

A semistrong form eﬃcient market is distinct from a weak form eﬃcient market in historical prices by:

Correct AnswerverifiedShow Answer

Consider the following two statements: (i) The representativeness principle results in an under reaction in share markets. (ii) The conservatism principle can explain why share prices underreact to new information as long As there are enough conservative investors.

Correct AnswerverifiedB

The market price of a stock moves or ﬂuctuates daily.This ﬂuctuation is:

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Which of the following would be indicative of ineﬃcient markets?

Correct AnswerverifiedShow Answer

Do you think the lessons from capital market history will hold for each year in the future? That is, as an example, if you buy small company shares will your investment always outperform Treasury bonds?

Correct AnswerverifiedThe student should realize that we are w...View AnswerShow Answer

Explain why it is that in an eﬃcient market, investments have an expected NPV of zero.

Correct AnswerverifiedIn an eﬃcient market, prices are "fair" ...View AnswerShow Answer

In an eﬃcient market when a ﬁrm makes an announcement of a new product or product enhancement with superior technology providing positive NPV, the share price will:

Correct AnswerverifiedC

If the ﬁnancial markets are eﬃcient, then investors should expect their investments in those markets to:

Correct AnswerverifiedShow Answer

An investor discovers that for a certain group of equities, large positive price changes are always followed by large negative price changes.This ﬁnding is a violation of the:

Correct AnswerverifiedShow Answer

A friend of yours tells you that in order for markets to be eﬃcient, all investors need to be rational all of the time.Is your friend correct? Why, or why not?

Correct AnswerverifiedYour friend is not correct.Even if not all investors are rational, markets can be eﬃcient, as long as deviations from rationality are independent.

If the eﬃcient market hypothesis holds, investors should expect:

Correct AnswerverifiedShow Answer

In testing whether a market is characterized by weak form eﬃciency:

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

An investor discovers that share prices change drastically as a result of certain events.This ﬁnding is a violation of the:

Correct AnswerverifiedShow Answer

Eﬃcient capital markets are ﬁnancial markets:

Correct AnswerverifiedShow Answer

If you excel in analyzing the future outlook of ﬁrms, you would prefer that the ﬁnancial markets be ____ form eﬃcient so that you can have an advantage in the marketplace.

Correct AnswerverifiedShow Answer

Individuals that continually monitor the ﬁnancial markets seeking mispriced securities:

Correct AnswerverifiedShow Answer

Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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B

Correct Answer
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Correct Answer
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Correct Answer
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The student should realize that we are w...
View Answer

Correct Answer
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In an eﬃcient market, prices are "fair" ...
View Answer

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C

Correct Answer
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Correct Answer
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Correct Answer
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Your friend is not correct.Even if not all investors are rational, markets can be eﬃcient, as long as deviations from rationality are independent.

Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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