Question 1

Which of the following statements about market efficiency is least accurate? A) The semi-strong form EMH addresses market and non-market public information. B) The weak-form EMH suggests that fundamental analysis will not provide excess returns while the semi-strong form suggests that technical analysis cannot achieve excess returns. C) The strong-form EMH assumes cost free availability of all information, both public and private.

Accepted Answer

B The weak-form EMH suggests that technical analysis will not provide excess returns while the semi-strong form suggests that fundamental analysis cannot achieve excess returns. The weak-form EMH assumes the price of a security reflects all currently available historical information. Thus, the past price and volume of trading has no relationship with the future, hence technical analysis is not useful in achieving superior returns. The other choices are correct. The strong-form EMH states that stock prices reflect all types of information: market, non-public market, and private. No group has monopolistic access to relevant information; thus no group can achieve excess returns. For these assumptions to hold, the strong-form assumes perfect markets - information is free and available to all.

Question 2

____ reflects current available security market data ____ reflects info from both public and private source ____ reflects without bias to new public information

Accepted Answer

p - weak form market efficiency f - strong form market efficiency mf - semi-strong form market efficiency

Question 3

Investors ___ (can/cannot) achieve positive risk adjusted returns on average by using technical analysis in weak form market efficiency

Accepted Answer

cannot

Question 4

Investors ___ (can/cannot) achieve positive risk adjusted returns on average by using _____ analysis in weak form market efficiency

Accepted Answer

technical

Question 5

Investors cannot achieve positive risk adjusted returns on average by using technical analysis in ___ form market efficiency

Accepted Answer

weak

Question 6

Investors ___ (can/cannot) achieve positive risk adjusted returns on average by using fundamental analysis in semi strong form market efficiency

Accepted Answer

cannot

Question 7

Investors cannot achieve positive risk adjusted returns on average by using ____ analysis in semi strong form market efficiency

Accepted Answer

fundamental or technical - not consistently achieve However, fundamental analysis is necessary if market prices are to be semi-strong form efficient.

Question 8

Investors cannot achieve positive risk adjusted returns on average by using fundamental analysis in ____ form market efficiency

Accepted Answer

semi strong

Question 9

____ form market efficiency doesn't really exist in real life since markets prohibit inside trading

Accepted Answer

strong

Question 10

Which of the following forms of the EMH assumes that no group of investors has monopolistic access to relevant information? A) Weak-form. B) Both weak and semistrong form. C) Strong-form.

Accepted Answer

C According to the strong-form EMH, security prices reflect all information, which includes the privately available (monopolistic) information.

Question 11

An efficient capital market: A) fully reflects all of the information currently available about a given security, including risk. B) does not fully reflect all of the information currently available about a given security, including risk. C) fully reflects all of the information currently available about a given security, excluding risk.

Accepted Answer

A An efficient capital market fully reflects all of the information currently available about a given security, including risk.

Question 12

The more ____ a market is, the ____ its reaction will be to new information.

Accepted Answer

efficient; quicker

Question 13

If the market is ____, active investment strategies cannot earn positive risk-adjusted returns consistently, and investors should therefore use a passive strategy.

Accepted Answer

fully efficient

Question 14

If the market is fully efficient, active investment strategies ____ earn positive risk-adjusted returns consistently, and investors should therefore use a _____ strategy.

Accepted Answer

cannot; passive

Question 15

The statement, "Stock prices fully reflect all information from public and private sources," can be attributed to which form of the efficient market hypothesis (EMH)? A) Strong-form EMH. B) Weak-form EMH. C) Semistrong-form EMH.

Accepted Answer

A This is the definition of the strong-form EMH. Private sources include insider information, such as persons holding monopolistic access to information relevant to the formation of prices.

Question 16

Octagon Advisors believes that the market is semi-strong efficient. The firm's portfolio managers most likely will use: A) an enhanced indexing strategy that relies on trading patterns. B) passive portfolio management strategies. C) active portfolio management strategies.

Accepted Answer

B If the market is semi-strong efficient, portfolio managers should use passive management because neither technical analysis nor fundamental analysis will generate positive abnormal returns on average over time. - price rapidly adjust according to new information, so using passive technique is better

Question 17

If markets are strong-form efficient, ___ (active/passive) investment management does not consistently result in abnormal profits.

Accepted Answer

active

Question 18

Even if markets are strong-form efficient, portfolio managers can add value by establishing and implementing portfolio risk and return objectives and assisting with ____ (3)

Accepted Answer

- portfolio diversification - asset allocation - tax minimization

Question 19

Even if markets are ___ efficient, portfolio managers can add value by establishing and implementing portfolio risk and return objectives and assisting with portfolio diversification, asset allocation, and tax minimization.

Accepted Answer

strong-form

Question 20

The measure of an asset's value that can most likely be determined without estimation is its: A) fundamental value. B) market value. C) intrinsic value.

Accepted Answer

B The current price of a traded asset is its market value. An asset's intrinsic or fundamental value is the price a rational investor with complete information about the asset would pay for it.

Question 21

The value of an asset that a rational investor with full knowledge about the asset's characteristics would willingly pay is best described as the asset's: A) market value. B) intrinsic value. C) theoretical value.

Accepted Answer

B Intrinsic value is the price a rational investor with full knowledge about an asset's characteristics would willingly pay for the asset.

Question 22

If the momentum effect persists over time, it would provide evidence against which of the following forms of market efficiency? A) Both weak form and semistrong form. B) Weak form only. C) Semistrong form only.

Accepted Answer

A The momentum effect suggests it is possible to earn abnormal returns using market data. All three forms of market efficiency (weak form, semistrong form, and strong form) assume that market prices fully reflect market data.

Question 23

Investor overreaction that has been documented in securities markets is most likely attributable to investors exhibiting: A) loss aversion. B) conservatism. C) risk aversion.

Accepted Answer

A Loss aversion refers to the tendency for investors to dislike downside risks more than upside risks creating asymmetrical risk preferences. This dislike of losses may be a cause of investor overreaction. C - The standard economic notion of risk aversion assumes symmetric risk preferences. B - Conservatism is the behavioral bias whereby investors react slowly to new information and is unlikely to cause overreaction.

Question 24

A market's efficiency is most likely to negatively affected by: A) a ban on short selling. B) a high amount of trading activity. C) substantial analyst coverage of the exchange listed companies

Accepted Answer

A Research supports the conclusion that short selling helps to prevent market prices from becoming overvalued, while limiting short selling has the opposite effect. More analyst coverage and more liquidity contribute to market efficiency.

Question 25

A ____ is something that deviates from the efficient market hypothesis.

Accepted Answer

market anomaly

Question 26

What tend to make markets more efficient? (2)

Accepted Answer

- Large numbers of market participants - Greater information availability

Question 27

What tend to make markets less efficient? (2)

Accepted Answer

- Impediments to arbitrage short selling - High costs of trading and gathering information

Question 28

Impediments to arbitrage short selling makes markets ___ efficient

Accepted Answer

less

Question 29

Greater information availability makes markets ___ efficient

Accepted Answer

more

Question 30

High costs of trading and gathering information makes markets ___ efficient

Accepted Answer

less

Question 31

Large numbers of market participants makes markets ___ efficient

Accepted Answer

more

Question 32

Which of the following would provide evidence against the semistrong form of the efficient market theory? A) Low P/E stocks tend to have positive abnormal returns over the long run. B) All investors have learned to exploit signals related to future performance. C) Trend analysis is worthless in determining stock prices.

Accepted Answer

A P/E information is publicly available information and therefore this test relates to the semistrong-form EMH. C - Trend analysis is based on historical information and therefore relates to the weak-form EMH. B - In an efficient market one would expect 50% of pension fund managers to do better than average and 50% of pension fund managers to do worse than average. If all investors exploit the same information no excess returns are possible.

Question 33

Compared to a publicly traded firm, a private equity firm is most likely to: A) exhibit stronger corporate governance. B) be more concerned with short-term results. C) disclose less information about its financial performance.

Accepted Answer

C Private equity firms are not held to the same financial reporting requirements as publicly traded firms. Less public scrutiny and limited financial disclosure may lead to weaker corporate governance. However, with less pressure from public shareholders, a private equity firm is typically more able to focus on long-term performance.

Question 34

Compared to publicly traded firms, private equity firms have - ____ reporting costs - ____ ability to focus on long-term prospects - (potentially) _____ return for investors once the firm goes public.

Accepted Answer

- lower reporting costs, - greater ability to focus on long-term prospects, - (potentially) greater return for investors once the firm goes public.

Question 35

Private equity investments are ____ (illiquid/liquid) - firm financial disclosure may be ____ (more/less) than public companies - corporate governance may be ____ (stronger/weaker) than public companies - _____ focus on long-term prospects

Accepted Answer

- private equity investments are illiquid - firm financial disclosure may be limited - corporate governance may be weaker - less focus on long-term prospects.

Question 36

Private equity securities most likely: A) are issued to individual investors. B) trade in over-the-counter dealer markets. C) are illiquid and do not have quoted prices.

Accepted Answer

C Private equity securities are illiquid and do not trade in public securities markets. Holders of private equity must negotiate with other investors to sell the securities. Private equity securities are typically issued to qualified institutional investors.

Question 37

______ is the difference between the financial statement value of the firm's assets and liabilities.

Accepted Answer

Book value of equity

Question 38

The book value of equity is the difference between ____ and _____

Accepted Answer

- financial statement value of the firm's assets - liabilities

Question 39

____ of equity reflect the firm's past operating and financing choices.

Accepted Answer

BV

Question 40

____ (positive/negative) retained earnings increase the book value of equity.

Accepted Answer

Positive

Question 41

Positive retained earnings _____ (increase/decrease) the book value of equity.

Accepted Answer

increase

Question 42

The ____ value of equity is the share price multiplied by the number of shares outstanding.

Accepted Answer

market

Question 43

____ value of equity reflects investors' expectations about the timing, amount, and risk of the firm's future cash flows.

Accepted Answer

Market

Question 44

The market value of equity is _____.

Accepted Answer

the share price multiplied by the number of shares outstanding

Question 45

Market value reflects investors' expectations about the _____, ______, and _____ of the firm's future _____

Accepted Answer

``` timing, amount, and risk cash flows (value or prospect are both ok) ```

Question 46

Which of the following statements about book value of equity is most accurate? A) Book value of equity reflects the market's perception of the firm's prospects. B) Increases in retained earnings decrease book value. C) The primary goal of firm management is to increase the book value of the firm's equity.

Accepted Answer

C Increasing book value is the primary goal of firm management. B - Increases in retained earnings increase book value. A - The market value of equity reflects investor perception of the firm's future value.

Question 47

Other things equal, which of the following types of stock has the most risk from the investor's perspective? A) Callable common share. B) Callable preferred share. C) Putable common share.

Accepted Answer

A Callable shares have more risk than putable shares because the issuer can exercise the call option (which limits the investor's potential gains) while the investor can exercise the put option (which limits the investor's potential losses, assuming the firm is able to meet its obligation). B - Preferred shares have less risk for the investor than common shares because preferred shares have a higher priority claim on the firm's assets in the event of liquidation, and because preferred dividends typically must be paid before common dividends may be paid.

Question 48

_____ stockholders must receive dividends before ____ stock dividends can be paid

Accepted Answer

Preferred; common

Question 49

_____ stock is less risky than ____ stock because the former pays a known, fixed dividend to investors.

Accepted Answer

Preferred; common

Question 50

____ stockholders have a claim equal to ___value if the firm is liquidated.

Accepted Answer

Preferred; par

Question 51

Order of risk: - putable vs callable - non-cumulative preferred vs cumulative preferred - common vs preferred

Accepted Answer

- Putable shares are the least risky and callable shares are the most risky. - Cumulative preferred shares are less risky than non-cumulative preferred shares, as any dividends missed must be paid before a common stock dividend can be paid. - preferred stock is less risky than common stock

Question 52

Common equity share types ranked from least risky to most risky are: A) putable, option-free, callable. B) callable, putable, option-free. C) option-free, putable, callable.

Accepted Answer

A Putable shares are the least risky because the investor can sell the shares back to the issuer at a predetermined price. Callable shares are the most risky because the issuer can buy the securities back at a predetermined price, which limits the upside for the investor.

Question 53

The primary reason for a firm to issue equity securities is to: A) increase publicity for the firm's products. B) improve its solvency ratios. C) acquire the assets necessary to carry out its operations. what are some solvency ratios?

Accepted Answer

C While issuing equity securities can improve a company's solvency ratios and increase the firm's visibility with the public, the primary reason to issue equity is to raise the capital needed to acquire operating assets. solvency ratios include: - debt to equity - debt (total liabilities over total assets) low is bettter - equity ratio (total equity over total assets) high is better

Question 54

Which of the following statements about the role of equities in financing a company's assets is most accurate? A) The book value and market value of equities is usually the same. B) Equity capital is typically used for the purchase of long-term assets and expansion into new areas. C) Management can directly increase the market value of equity by increasing net income.

Accepted Answer

B Equity capital is used for the purchase of long-term assets, equipment, research and development and expansion into new businesses or geographic areas. A - Book value and market value of equities are almost always valued differently. C - Management can only indirectly affect the market value of equity.

Question 55

Two investors, Craig Tower and Erin Gray, own 100 shares each of the same company. Tower receives a quarterly dividend while Gray does not. This is most likely because Tower: A) owns common shares while Gray owns preferred shares. B) owns a different class of stock than Gray. C) purchased his shares after Gray purchased her shares.

Accepted Answer

B Different classes of common stocks can have different features with respect to dividends, stock splits, voting power and seniority if the firm's assets are liquidated. A - If Gray owns preferred shares, she would be more likely to receive a dividend than Tower's common shares. C - If Gray had purchased shares before an ex-dividend date and Tower purchased the same class of shares after that ex-dividend date, Gray would receive a dividend that Tower did not.

Question 56

Cheryl Brower and Todd Sutter each own 100 shares of Hills Company stock. In a recent proxy vote, Brower had 100 votes but Sutter had 10 votes. The most likely reason for this difference in voting rights is that: A) Brower is a director of Hills Company. B) Hills Company uses a statutory voting method. C) Brower and Sutter own different classes of stock.

Accepted Answer

C Companies may issue classes of stock (e.g., Class A and Class B shares) that differ in aspects such as voting rights, dividends, or priority of claims in liquidation.

Question 57

With which of the following types of equity shares does the investor typically have the greatest voting power? A) Common shares. B) Unsponsored depository receipts. C) Participating preference shares.

Accepted Answer

A While common shares have voting rights, preference shares typically do not. With unsponsored depository receipts, the depository bank retains the right to vote the shares.

Question 58

Liquidity of private equity is most likely: A) greater than liquidity of public equity. B) less than liquidity of public equity. C) about equal to liquidity of public equity.

Accepted Answer

B Private equity securities are not registered to be traded in a public market, and therefore are less liquid that public equity.

Question 59

When analyzing an industry characterized by increasing book values of equity, return on equity for a period is most appropriately calculated based on: A) beginning book value. B) ending book value. C) average book value.

Accepted Answer

C When book values are not stable, analysts should calculate ROE based on the average book value for the period. When book values are more stable, beginning book value is appropriate.

Question 60

In a period when U.S. equity prices are increasing and the U.S. dollar is depreciating, which of the following investors in U.S. equities is most likely to earn the highest return in the investor's local currency? A) U.S. investor who reinvests dividends. B) Non-U.S. investor who reinvests dividends. C) Non-U.S. investor who does not reinvest dividends.

Accepted Answer

A Sources of return on equity securities include price appreciation or depreciation, dividend income, and foreign exchange gains or losses for investors outside the country. In an increasing equity market, reinvesting dividends is likely to increase returns compared to not reinvesting dividends. If the currency is depreciating, investors from outside the country will experience foreign exchange losses that decrease their returns.

Question 61

A firm's cost of equity capital is least accurately described as the: A) minimum rate of return investors require to invest in the firm's equity securities. B) expected total return on the firm's equity shares in equilibrium. C) ratio of the firm's net income to its average book value.

Accepted Answer

C The ratio of the firm's net income to its average book value is the firm's return on equity, which can be greater than, equal to, or less than the firm's cost of equity. B and A - Cost of equity for a firm can be defined as the expected equilibrium total return in the market on its equity shares, or as minimum rate of return that investors require as compensation for the risk of the firm's equity securities.

Question 62

The ratio of the firm's net income to its average book value is the firm's _____, which can be greater than, equal to, or less than the firm's cost of equity.

Accepted Answer

return on equity

Question 63

The ratio of the firm's net income to its average book value is the firm's return on equity, which can be ____ than the firm's cost of equity.

Accepted Answer

greater than, equal to, or less

Question 64

The ratio of ______ is the firm's return on equity, which can be greater than, equal to, or less than the firm's cost of equity.

Accepted Answer

the firm's net income to its average book value

Brainscape's Knowledge GenomeTM

Equity - Market Efficiency + overview of equity securities + industry analysis (Rd 46-48) Flashcards

Brainscape's Knowledge Genome^TM