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Flashcards in ch8 kawncehpts Deck (43):
1

2., In a 1953 study of stock prices, Maurice Kendall found that ________.


A. , there were no predictable patterns in stock prices

B. , stock prices exhibited strong serial autocorrelation

C. , day-to-day stock prices followed consistent trends

D. , fundamental analysis could be used to generate abnormal returns

A. , there were no predictable patterns in stock prices

2

3., The weak form of the EMH states that ________ must be reflected in the current stock price.


A. , all past information, including security price and volume data

B. , all publicly available information

C. , all information, including inside information

D. , all costless information

A. , all past information, including security price and volume data

3

4., The semistrong form of the EMH states that ________ must be reflected in the current stock price.


A. , all security price and volume data

B. , all publicly available information

C. , all information, including inside information

D. , all costless information

B. , all publicly available information

4

5., The strong form of the EMH states that ________ must be reflected in the current stock price.


A. , all security price and volume data

B. , all publicly available information

C. , all information, including inside information

D. , all costless information

C. , all information, including inside information

5

6., Random price movements indicate ________.


A. , irrational markets

B. , that prices cannot equal fundamental values

C. , that technical analysis to uncover trends can be quite useful

D. , that markets are functioning efficiently

D. , that markets are functioning efficiently

6

11., Stock prices that are stable over time _______.


A. , indicate that prices are useful indicators of true economic value

B. , indicate that the market is not incorporating new information into current stock prices

C. , ensure that an economy allocates its resources efficiently

D. , indicates that returns follow a random-walk process

B. , indicate that the market is not incorporating new information into current stock prices

7

16., If you believe in the __________ form of the EMH, you believe that stock prices reflect all publicly available information but not information that is available only to insiders.


A. , semistrong

B. , strong

C. , weak

D. , perfect

A. , semistrong

8

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


A. , semistrong

B. , strong

C. , weak

D. , perfect

B. , strong

9

18., Most of the stock price response to a corporate earnings or dividend announcement occurs within ________________.


A. , about 30 seconds

B. , about 10 minutes

C. , 6 months

D. , 2 years

B. , about 10 minutes

10

20., You believe that stock prices reflect all information that can be derived by examining market trading data such as the history of past stock prices, trading volume, or short interest, but you do not believe stock prices reflect all publicly available and inside information. You are a proponent of the ____________ form of the EMH.


A. , semistrong

B. , strong

C. , weak

D. , perfect

C. , weak

11

34., Joe bought a stock at $57 per share. The price promptly fell to $55. Joe held on to the stock until it again reached $57, and then he sold it once he had eliminated his loss. If other investors do the same to establish a trading pattern, this would contradict _______.


A. , the strong-form EMH

B. , the weak-form EMH

C. , technical analysis

D. , the semistrong-form EMH

B. , the weak-form EMH

12

50., The broadest information set is included in the _____.


A. , weak-form efficiency argument

B. , semistrong-form efficiency argument

C. , strong-form efficiency argument

D. , technical analysis trading method

C. , strong-form efficiency argument

13

53., If the daily returns on the stock market are normally distributed with a mean of .05% and a standard deviation of 1%, the probability that the stock market would have a return of -23% or worse on one particular day (as it did on Black Monday) is approximately __________.


A. , .0%

B. , .1%

C. , 1%

D. , 10%

A. , .0%
Prob = 1 - N[(-.2300 - .0005)/.01] ≈ 0


14

54., According to the semistrong form of the efficient markets hypothesis, ____________.


A. , stock prices do not rapidly adjust to new information

B. , future changes in stock prices cannot be predicted from any information that is publicly available

C. , corporate insiders should have no better investment performance than other investors even if allowed to trade freely

D. , arbitrage between futures and cash markets should not produce extraordinary profits

B. , future changes in stock prices cannot be predicted from any information that is publicly available

15

55., The term random walk is used in investments to refer to ______________.


A. , stock price changes that are random but predictable

B. , stock prices that respond slowly to both old and new information

C. , stock price changes that are random and unpredictable

D. , stock prices changes that follow the pattern of past price changes

C. , stock price changes that are random and unpredictable

16

56., Among the important characteristics of market efficiency is (are) that:

I. There are no arbitrage opportunities.
II. Security prices react quickly to new information.
III. Active trading strategies will not consistently outperform passive strategies.


A. , I only

B. , II only

C. , I and III only

D. , I, II, and III

D. , I, II, and III

17

58., Assume that a company announces unexpectedly high earnings in a particular quarter. In an efficient market one might expect _____________.


A. , an abnormal price change immediately after the announcement

B. , an abnormal price increase before the announcement

C. , an abnormal price decrease after the announcement

D. , no abnormal price change before or after the announcement

A. , an abnormal price change immediately after the announcement

18

60., Which of the following contradicts the proposition that the stock market is weakly efficient?


A. , Over 25% of mutual funds outperform the market on average.

B. , Insiders earn abnormal trading profits.

C. , Every January, the stock market earns above-normal returns.

D. , Applications of technical trading rules fail to earn abnormal returns.

C. , Every January, the stock market earns above-normal returns.

19

61., Which of the following would violate the efficient market hypothesis?


A. , Intel has consistently generated large profits for years.

B. , Prices for stocks before stock splits show, on average, consistently positive abnormal returns.

C. , Investors earn abnormal returns months after a firm announces surprise earnings.

D. , High-earnings growth stocks fail to generate higher returns for investors than do low earnings growth stocks.

C. , Investors earn abnormal returns months after a firm announces surprise earnings.

20

62., Which of the following stock price observations would appear to contradict the weak form of the efficient market hypothesis?


A. , The average rate of return is significantly greater than zero.

B. , The correlation between the market return one week and the return the following week is zero.

C. , You could have consistently made superior returns by buying stock after a 10% rise in price and selling after a 10% fall.

D. , You could have consistently made superior returns by forecasting future earnings performance with your new Crystal Ball forecast methodology.

C. , You could have consistently made superior returns by buying stock after a 10% rise in price and selling after a 10% fall.

21

63., The semistrong form of the efficient market hypothesis implies that ____________ generate abnormal returns and ____________ generate abnormal returns.


A. , technical analysis cannot; fundamental analysis can

B. , technical analysis can; fundamental analysis can

C. , technical analysis can; fundamental analysis cannot

D. , technical analysis cannot; fundamental analysis cannot

D. , technical analysis cannot; fundamental analysis cannot

22


74., Insiders are able to profitably trade and earn abnormal returns prior to the announcement of positive news. This is a violation of which form of efficiency?


A. , Weak-form efficiency

B. , Semistrong-form efficiency

C. , Strong-form efficiency

D. , Technical analysis

C. , Strong-form efficiency

23

84., Which of the following statements is (are) correct?


A. , If a market is weak-form efficient, it is also semistrong- and strong-form efficient.

B. , If a market is semistrong-form efficient, it is also strong-form efficient.

C. , If a market is strong-form efficient, it is also semistrong- but not weak-form efficient.

D. , If a market is strong-form efficient, it is also semistrong- and weak-form efficient.

D. , If a market is strong-form efficient, it is also semistrong- and weak-form efficient.

24

7., When the market risk premium rises, stock prices will ________.


A. , rise

B. , fall

C. , recover

D. , have excess volatility

B. , fall

25

24., Which of the following is not an issue that is central to the debate regarding market efficiency?


A. , The magnitude issue

B. , The tax-loss selling issue

C. , The lucky event issue

D. , The selection bias issue

B. , The tax-loss selling issue

26

25., Most people would readily agree that the stock market is not _________.


A. , weak-form efficient

B. , semistrong-form efficient

C. , strong-form efficient

D. , efficient at all

C. , strong-form efficient

27

31., Jaffe found that stock prices __________ after insiders intensively bought shares and __________ after insiders intensively sold shares.


A. , decreased; decreased

B. , decreased; increased

C. , increased; decreased

D. , increased; increased

C. , increased; decreased

28

32., In a 1988 study, Fama and French found that the return on the aggregate stock market was __________ when the dividend yield was higher.


A. , higher

B. , lower

C. , unaffected

D. , more skewed

A. , higher

29

35., According to 1968 research by Ball and Brown, securities markets fully adjust to earnings announcements _______.


A. , instantly

B. , in 1 day

C. , in 1 week

D. , gradually over time

D. , gradually over time

30

36., When stock returns exhibit positive serial correlation, this means that __________ returns tend to follow ___________ returns.


A. , positive; positive

B. , positive; negative

C. , negative; positive

D. , positive; zero

A. , positive; positive

31

37., Basu found that firms with high P/E ratios __________.


A. , earned higher average returns than firms with low P/E ratios

B. , earned the same average returns as firms with low P/E ratios

C. , earned lower average returns than firms with low P/E ratios

D. , had higher dividend yields than firms with low P/E ratios

C. , earned lower average returns than firms with low P/E ratios

32

39., You are looking to invest in one of three stocks. All other things being equal, Stock A has high expected earnings growth, stock B has only modest expected earnings growth, and stock C is expected to generate poor earnings growth. According to LaPorta's 1996 study, which stock is likely to generate the greatest alpha for you?


A. , Stock A

B. , Stock B

C. , Stock C

D. , The answer cannot be determined from the information given.

C. , Stock C

33

42., Banz found that, on average, the risk-adjusted returns of small firms __________.


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 negative

A. , were higher than the risk-adjusted returns of large firms

34

44., "Active investment management may at times generate additional returns of about .1%. However, the standard deviation of the typical well-diversified portfolio is about 20%, so it is very difficult to statistically identify any increase in performance." Even if true, this statement is an example of the _________ problem in deciding how efficient the markets are.


A. , magnitude

B. , selection bias

C. , lucky event

D. , allocation

A. , magnitude

35

45., DeBondt and Thaler (1985) found that the poorest-performing stocks in one time period experienced __________ performance in the following period and that the best-performing stocks in one time period experienced __________ performance in the following time period.


A. , good; good

B. , good; poor

C. , poor; good

D. , poor; poor

B. , good; poor

36

46., J. M. Keyes put all his money in one stock, and the stock doubled in value in a matter of months. He did this three times in a row with three different stocks. J. M. got his picture on the front page of the Wall Street Journal. However, the paper never mentioned the thousands of investors who made similar bets on other stocks and lost most of their money. This is an example of the ________ problem in deciding how efficient the markets are.


A. , magnitude

B. , selection bias

C. , lucky event

D. , small firm

C. , lucky event

37

47., Most tests of semistrong efficiency are _________.


A. , designed to test whether inside information can be used to generate abnormal returns

B. , based on technical trading rules

C. , unable to generate any evidence of market anomalies

D. , joint tests of market efficiency and the risk-adjustment measure

D. , joint tests of market efficiency and the risk-adjustment measure

38

52., According to results by Seyhun, __________.


A. , investors cannot usually earn abnormal returns by following inside trades after knowledge of the trades are made public

B. , investors can usually earn abnormal returns by following inside trades after knowledge of the trades are made public

C. , investors cannot earn abnormal returns by following inside trades before knowledge of the trades are made public

D. , investors cannot earn abnormal returns by trading before insiders

A. , investors cannot usually earn abnormal returns by following inside trades after knowledge of the trades are made public

39

76., Which of the following is not a topic related to the debate over market efficiency?


A. , IPO results

B. , Lucky event issue

C. , Magnitude issue

D. , Selection bias

A. , IPO results

40

78., The tendency of poorly performing stocks and well-performing stocks in one period to continue their performance into the next period is called the ________________.


A. , fad effect

B. , martingale effect

C. , momentum effect

D. , reversal effect

C. , momentum effect

41

82., When testing mutual fund performance over time, one must be careful of ___________, which means that a certain percentage of poorer-performing funds fail over time, making the performance of remaining funds seem more consistent over time.


A. , survivorship bias

B. , lucky event bias

C. , magnitude bias

D. , mean reversion bias

A. , survivorship bias

42

83., Most evidence indicates that U.S. stock markets are _______________________.


A. , reasonably weak-form and semistrong-form efficient

B. , strong-form efficient

C. , reasonably weak-form but not semistrong- or strong-form efficient

D. , neither weak-, semistrong-, nor strong-form efficient

A. , reasonably weak-form and semistrong-form efficient

43

86., According to results by Seyhun, the main reason that investors cannot earn excess returns by following inside trades after they become public is that ______________.


A. , the information isn't available for at least 2 weeks

B. , transaction costs offset abnormal returns

C. , the SEC late-disclosure rule doesn't apply to insiders

D. , insiders don't have to disclose their trades

B. , transaction costs offset abnormal returns