Chapter 08 - The Efficient Market Hypothesis
Chapter 08 The Efficient Market Hypothesis Multiple Choice Questions
1. Which of the following beliefs woul not preclue charting as a !etho of portfolio !anage!ent" #. The !arket is strong for! efficient. $. The !arket is se!i-strong for! efficient. C. The !arket is weak for! efficient. %. &tock prices follow recurring patterns.
'. (n a 1)*+ stuy of stock prices, Maurice enall foun that . #. there were no preictable patterns pa tterns in stock prices $. stock prices e/hibite strong serial autocorrelation C. ay to ay stock prices followe consistent trens %. funa!ental analysis coul be use to generate abnor!al returns
+. The weak for! of the EMH states that !ust be reflecte in the current stock price. #. all past infor!ation incluing security price an olu!e ata $. all publicly aailable infor!ation C. all infor!ation incluing insie infor!ation %. all costless infor!ation
. The se!i-strong for! of the EMH states that !ust be reflecte in the current stock price. #. all security price an olu!e ata $. all publicly aailable infor!ation C. all infor!ation incluing insie infor!ation %. all costless infor!ation
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Chapter 08 - The Efficient Market Hypothesis
*. The strong for! of the EMH states that !ust be reflecte in the current stock price. #. all security price an olu!e ata $. all publicly aailable infor!ation C. all infor!ation incluing insie infor!ation %. all costless infor!ation
2. 3ano! price !oe!ents inicate . #. irrational !arkets $. that prices cannot e4ual funa!ental alues C. that technical analysis to uncoer trens can be 4uite useful %. that !arkets are functioning efficiently
5. When the !arket risk pre!iu! rises, stock prices will . #. rise $. fall C. recoer %. hae e/cess olatility
8. The s!all fir! in 6anuary effect is strongest . #. early in the !onth $. in the !ile of the !onth C. late in the !onth %. in een nu!bere years
). Eience suggests that there !ay be !o!entu! an reersal patterns in stock price behaior. #. short-run, short-run $. long-run, long-run C. long-run, short-run %. short-run, long run
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Chapter 08 - The Efficient Market Hypothesis
10. 7roponents of the EMH typically aocate . #. a conseratie inest!ent strategy $. a liberal inest!ent strategy C. a passie inest!ent strategy %. an aggressie inest!ent strategy
11. &tock prices that are stable oer ti!e . #. inicate that prices are useful inicators of true econo!ic alue $. inicate that the !arket is not incorporating new infor!ation into current stock prices C. ensure that an econo!y allocates its resources efficiently %. inicates that returns follow a rano! walk process
1'. The tenency when the perfor!ing stocks in one perio are the best perfor!ers in the ne/t an the current cu rrent perfor!ers are lagging the !arket later is calle the reersal effect. #. worst, best $. worst, worst C. best, worst %. best, best
1+. Which of the following is not a !etho e!ploye by followers of technical analysis" #. Charting $. 3elatie strength analysis C. Earnings forecasting %. Traing aroun support an resistance leels
1. Which of the following is not a !etho e!ploye by funa!ental analysts" an alysts" #. #nalying the 9e:s ne/t interest rate !oe $. 3elatie strength analysis C. Earnings forecasting %. Esti!ating the econo!ic growth rate
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Chapter 08 - The Efficient Market Hypothesis
1*. The pri!ary ob;ectie of funa!ental analysis is to ientify . #. well run fir!s $. poorly run fir!s C. !is-price stocks %. high 7
12. (f you beliee in the for! of the EMH, you beliee that stock prices reflect all publicly aailable infor!ation but not infor!ation that is aailable only to insiers. #. se!i-strong $. strong C. weak %. perfect
15. (f you beliee in the for! of the EMH, you beliee that stock prices reflect all releant infor!ation incluing infor!ation that is aailable only to insiers. #. se!i-strong $. strong C. weak %. perfect
18. Most of the stock price response to a corporate earnings or iien announce!ent occurs within . #. about +0 secons $. about 10 !inutes C. 2 !onths %. ' years
1). is the return on a stock beyon what woul be preicte fro! !arket !oe!ents alone. #. # nor!al return $. # subli!inal return C. #n abnor!al return %. #n e/cess return
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Chapter 08 - The Efficient Market Hypothesis
'0. =ou beliee that stock prices reflect all infor!ation that can be erie by e/a!ining !arket traing ata such as the history of past stock prices, traing olu!e or short interest but you o not beliee stock prices reflect all publicly aailable or insie infor!ation. =ou are a proponent of . #. se!i-strong $. strong C. weak %. perfect
'1. =ou are an inest!ent !anager who is currently !anaging assets worth >2 billion. =ou beliee that actie !anage!ent of your fun coul generate between an aitional one tenth of 1? return on the portfolio. (f you want to !ake sure your actie strategy as alue, how !uch can you spen on security analysis" #. >1',000,000 $. >2,000,000 C. >+,000,000 %. >0
''. # !utual fun which atte!pts to hol 4uantities of shares in proportion to their representation in the !arket is calle a fun. #. stock $. ine/ C. hege %. !oney !arket
'+. Choosing stocks by searching for preictable p reictable patterns in stock prices is calle . #. funa!ental analysis $. technical analysis C. ine/ !anage!ent %. rano! walk inesting
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Chapter 08 - The Efficient Market Hypothesis
'. Which of the following is not an a n issue that is central to the ebate regaring !arket efficiency" #. The !agnitue issue $. The ta/ loss selling issue C. The lucky eent issue %. The selection bias issue
'*. Most people woul reaily agree that the stock !arket is not . #. weak for! efficient $. se!i-strong for! efficient C. strong for! efficient %. efficient at all
'2. &!all fir!s hae tene to earn abnor!al returns pri!arily in . #. the !onth of 6anuary $. the !onth 6uly C. the trough of the business cycle %. the peak of the business cycle
'5. 9a!a an 9rench hae suggeste that !any !arket ano!alies can be e/plaine as !anifestations of . #. regulatory effects $. high traing costs C. infor!ation asy!!etry %. arying risk pre!iu!s
'8. 7roponents of the EMH think technical analysts . #. shoul focus on relatie strength $. shoul focus on resistance leels C. shoul focus on support leels %. are wasting their ti!e
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Chapter 08 - The Efficient Market Hypothesis
'). Eience supporting se!i-strong for! !arket efficiency suggests that inestors shoul . #. rely on technical analysis to select securities $. rely on funa!ental analysis to select securities C. use a passie traing strategy such as purchasing an ine/ fun or an ET9 %. select securities by throwing arts at the financial pages of the newspaper
+0. @$uy a stock if its price !oes up by '? !ore than the %ow #erage,@ is an e/a!ple of a . #. filter rule $. !arket ano!aly C. funa!ental approach %. passie traing strategy
+1. 6affee foun that stock prices after insiers intensiely bought shares an after insiers intensiely sol shares. #. ecrease, ecrease $. ecrease, increase C. increase, ecrease %. increase, increase
+'. (n a recent stuy, 9a!a an 9rench foun that the return on the aggregate stock !arket was when the iien yiel was higher. #. higher $. lower C. unaffecte %. !ore skewe
++. 9a!a an 9rench A1))1B an 3einganu! A1)88B foun that fir!s with !arket
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Chapter 08 - The Efficient Market Hypothesis
+. 6oe bought a stock at >*5 per share. The price pro!ptly fell to >**. 6oe hel on to the stock until it again reache >*5 an then he sol once he ha eli!inate his loss. (f other inestors o the sa!e to establish a traing pattern this woul contraict . #. the strong-for! EMH $. the weak-for! EMH C. technical analysis %. the se!istrong-for! EMH
+*. #ccoring to recent research securities !arkets fully a;ust to earnings announce!ents . #. instantly $. in 1 ay C. in 1 week %. graually oer ti!e
+2. When stock returns e/hibit positie serial correlation, this !eans that returns ten to follow returns. #. positie positie $. positie negatie C. negatie positie %. positie ero
+5. $asu foun that fir!s with high 7
+8. 9una!ental analysis is likely to yiel best results for . #. D=&E stocks $. neglecte stocks C. stocks that are fre4uently in the news %. fast growing co!panies
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Chapter 08 - The Efficient Market Hypothesis
+). =ou are looking to inest in one of three stocks. &tock # has high e/pecte earnings growth, &tock $ has only !oest e/pecte earnings growth an &tock C is e/pecte to generate poor earnings growth. Which stock is likely to generate the greatest alpha for you" #. &tock # $. &tock $ C. &tock C %. =ou cannot tell fro! the infor!ation gien
0. =ou beliee that you can earn '? !ore on your portfolio if you engage in full ti!e stock research. Howeer, the aitional traing costs an ta/ liability fro! actie !anage!ent will cost you about 0.*?. =ou hae a >800,000 stock portfolio. What is the !ost you can affor to spen on your research" #. >,000 $. >8,000 C. >1',000 %. >12,000
1. Een if the !arkets are efficient, professional portfolio !anage!ent is still i!portant because it proies inestors with . (. low cost iersification ((. proies a portfolio with a specifie risk leel (((. proies better risk a;uste returns than an ine/ #. ( only $. ( an (( only C. (( an ((( only %. (, (( an (((
'. $an foun that, on aerage, the risk-a;uste returns of s!all fir!s . #. was higher than the risk-a;uste returns of large fir!s $. was the sa!e as the risk-a;uste returns of large fir!s C. was lower than the risk-a;uste returns of large fir!s %. was negatie
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Chapter 08 - The Efficient Market Hypothesis
+. (f the .&. capital !arkets are not n ot infor!ationally efficient . #. the !arkets cannot be allocationally efficient $. then syste!atic risk oes not !atter C. then no type of analysis can be use to generate abnor!al returns %. then returns !ust follow a rano! walk
. @#ctie inest!ent !anage!ent !ay generate g enerate aitional returns at ti!es of about 0.1?. Howeer, the stanar eiation of the typical well iersifie portfolio is about '0?, so it is ery ifficult to statistically ientify any increase in perfor!ance.@ Een if true, this state!ent is an e/a!ple of the proble! in eciing how efficient the !arkets are. #. !agnitue $. selection bias C. lucky eent %. allocation
*. %e$ont an Thaler A1)8*B foun that the poorest perfor!ing stocks in one ti!e perio e/perience perfor!ance in the following perio an the best perfor!ing stocks in one ti!e perio e/perience perfor!ance in the following ti!e perio. #. goo, goo $. goo, poor C. poor, goo %. poor, poor
2. 6.M. eyes put all his !oney in one stock an the stock ouble in alue in a !atter of !onths. He i this three ti!es in a row with three ifferent stocks. 6.M. got his picture on the front page of the Wall &treet 6ournal. Howeer the paper neer !entione the thousans of inestors who !ae si!ilar bets on other stocks an lost !ost of their !oney. This is an e/a!ple of the proble! in eciing how efficient the !arkets are. #. !agnitue $. selection bias C. lucky eent %. s!all fir!
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Chapter 08 - The Efficient Market Hypothesis
5. Most tests of se!i-strong efficiency are . #. esigne to test whether insie infor!ation can be b e use to generate abnor!al returns $. base on technical traing rules C. unable to generate any eience of !arket ano!alies %. ;oint tests of !arket efficiency an the risk a;ust!ent !easure
8. The effect !ay e/plain !uch of the s!all fir! ano!aly. (. 6anuary effect ((. neglecte effect (((. li4uiity effect #. ( only $. (( only C. (( an ((( only %. (, (( an (((
). &tuies show that the bi-ask sprea for the least li4ui stocks !ay be as high as . #. +? $. *? C. )? %. 1'?
*0. The broaest infor!ation set is inclue in the #. weak for! efficiency argu!ent $. se!i-strong for! efficiency argu!ent C. strong for! efficiency argu!ent %. technical analysis traing !etho
*1. The 9a!a an 9rench eience that high book to !arket fir!s outperfor! low book to !arket fir!s een after a;usting for beta !eans . #. high book to !arket fir!s are unerprice $. low book to !arket fir!s are unerprice C. either high book to !arket fir!s are unerprice or the book to !arket ratio is a pro/y for a syste!atic risk factor %. high book to !arket fir!s hae !ore post earnings rift
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Chapter 08 - The Efficient Market Hypothesis
*'. #ccoring to results by &eyhun . #. inestors cannot usually earn abnor!al returns by following insie traes after knowlege of the traes are !ae public $. inestors can usually earn abnor!al returns by following insie traes after knowlege of the traes are !ae public C. inestors cannot earn abnor!al returns by following insie traes before knowlege of the traes are !ae public %. inestors cannot earn abnor!al returns by traing before insiers
*+. (f the aily returns on the stock !arket are nor!ally istribute with a !ean of 0.0*? 0.0* ? an a stanar eiation of 1.00?, the probability that the stock !arket woul hae ha e a return of -'+.00? or worse on one particular ay Aas it i on $lack MonayB is appro/i!ately . #. 0.0? $. 0.1? C. 1.0? %. 10.0?
*. #ccoring to the se!i-strong for! of the efficient !arkets hypothesis . #. stock prices o not rapily a;ust to new infor!ation $. future changes in stock prices cannot canno t be preicte fro! any infor!ation that is publicly pu blicly aailable C. corporate insiers shoul hae no better inest!ent perfor!ance than other inestors een if allowe to trae freely %. arbitrage between futures an cash !arkets shoul not prouce e/traorinary profits
**. The ter! rano! walk is use in inest!ents to refer to . #. stock price changes that are rano! but preictable $. stock prices that respon slowly to both ol an new infor!ation C. stock price changes that are rano! an unpreictable %. stock prices changes that follow the pattern of past price changes
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Chapter 08 - The Efficient Market Hypothesis
*2. (!portant characteristicAsB of !arket efficiency is that . (. there are no arbitrage opportunities ((. security prices react 4uickly to new infor!ation (((. actie traing strategies will not consistently outperfor! passie strategies #. ( only $. (( only C. ( an ((( only %. (, (( an (((
*5. &tock !arket analysts hae tene to be in their reco!!enations to inestors. #. slightly oerly opti!istic $. oerwhel!ingly opti!istic C. slightly oerly pessi!istic %. oerwhel!ingly pessi!istic p essi!istic
*8. #ssu!e that a co!pany announces une/pectely high earnings in a particular 4uarter. (n an efficient !arket one !ight e/pect . #. an abnor!al price change i!!eiately following the announce!ent $. an abnor!al price increase before the announce!ent C. an abnor!al price ecrease after the announce!ent %. no abnor!al price change before or after the announce!ent
*). # !arket ano!aly refers to . #. an e/ogenous shock to the !arket that is sharp but not persistent $. a price or olu!e eent ee nt that is inconsistent with historical price or olu!e trens C. a traing or pricing structure that interferes with efficient buying an selling of securities %. price behaior that iffers fro! the behaior preicte by the efficient !arket hypothesis
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Chapter 08 - The Efficient Market Hypothesis
20. Which of the following contraicts the proposition that the stock !arket is weakly efficient" #. Fer '*? of !utual funs outperfor! the !arket on aerage. $. (nsiers earn abnor!al traing profits. C. Eery 6anuary, the stock !arket earns aboe nor!al returns. %. #pplications of technical traing rules fail to earn a bnor!al returns.
21. Which of the following woul iolate the efficient !arket hypothesis" #. (ntel has consistently generate large profits for years. $. 7rices for stocks before stock splits show on aerage consistently positie abnor!al returns. C. Earning abnor!al returns after a fir! announces surprise earnings. %. High earnings growth stocks fail to generate higher returns for inestors than low earnings growth stocks.
2'. Which of the following stock price obserations o bserations woul appear to contraict the weak for! of the efficient !arket hypothesis" #. The aerage rate of return is significantly greater than ero. $. The correlation between the !arket return one week an the return the following week is ero. C. =ou coul hae consistently !ae superior returns by buying stock after a 10? rise in price an selling after a 10? fall. %. =ou coul hae consistently !ae superior returns by forecasting future earnings perfor!ance with your new Crystal $all forecast !ethoology. !ethoology.
2+. The se!i-strong for! of the efficient !arket hypothesis i!plies that generate abnor!al returns an generate abnor!al returns. #. Technical analysis cannot funa!ental analysis can $. Technical analysis can funa!ental analysis can C. Technical analysis can funa!ental analysis cannot %. Technical analysis cannot funa!ental analysis cannot
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Chapter 08 - The Efficient Market Hypothesis
2. #n i!plication of the efficient !arket hypothesis is that . #. high beta stocks are consistently oerprice $. low beta stocks are consistently oerprice C. nonero alphas will 4uickly isappear %. growth stocks are better buys than alue stocks
2*. 9una!ental ine/ing refers to . #. inesting in ine/ stocks in proportion to the stock:s funa!ental alue $. inesting in ine/ stocks in proportion to the stock:s !arket alue C. inesting an e4ual ollar a!ount in ine/ stocks %. inesting in an e4ual a!ount shares in each of the ine/ stocks
22. Tests of !utual fun perfor!ance inicate that funs with ten to hae poorer perfor!ance. #. !ore funs in the fa!ily $. higher e/pense an turnoer ratios C. lower !anage!ent fees %. larger asset sie
25. Galue stocks !ay proie inestors with better returns than growth stocks if . (. alue stocks are out of faor with inestors ((. prices of growth stocks inclue pre!iu!s for oerly opti!istic growth leels (((. alue stocks are likely to generate positie earnings surprises. #. ( only $. (( only C. ( an ((( only %. (, (( an (((
28. Galue stocks usually e/hibit price-to-book ratios an price-to-earnings ratios. #. low, low $. low, high C. high, low %. high, high
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Chapter 08 - The Efficient Market Hypothesis
2). rowth stocks usually e/hibit price-to-book ratios an price-to-earnings ratios. #. low, low $. low, high C. high, low %. high, high
50. # ay trae with an aerage stock holing perio of uner 8 !inutes !ight be !ost closely associate with which traing philosophy" #. EMH $. 9una!ental analysis C. &trong for! !arket efficiency %. Technical analysis
51. # technical analyst is !ost likely to be affiliate with which inest!ent philosophy" #. #ctie !anage!ent $. $uy an hol C. 7assie inest!ent %. (ne/ funs
5'. &o!eone who inests in the Ganguar (ne/ *00 !utual fun coul !ost accurately be escribe as using what approach" #. #ctie !anage!ent $. #rbitrage C. 9una!ental analysis %. 7assie inest!ent
5+. Eience by $lake, Elton an ruber inicates that on aerage actiely !anage bon funs #. outperfor! passie fi/e-inco!e ine/es . $. uner perfor! passie fi/e-inco!e ine/es by a wie !argin C. perfor! as well as passie fi/e-inco!e ine/es %. uner perfor! passie fi/e-inco!e ine/es by an a!ount e4ual to fun e/penses
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Chapter 08 - The Efficient Market Hypothesis
5. (nsiers are able to profitably trae an earn abnor!al returns prior to the announce!ent announce !ent of positie news. This is a iolation of which for! of efficiency" #. Weak for! efficiency $. &e!i-strong for! efficiency C. &trong for! efficiency %. Technical analysis
5*. (n an efficient !arket an for an inestor that beliees in a passie approach ap proach to inesting, what is the pri!ary uty of a portfolio !anager" #. #ccounting for results $. %iersification C. (entifying uneralue stocks %. Do nee for a portfolio !anager
52. Which of the following is not a topic relate to the ebate oer !arket efficiency" #. (7F results $. Iucky eent issue C. Magnitue issue %. &election bias
55. Which 9ielity Magellan portfolio !anager is often reference as an e/ception to the general conclusion of efficient !arkets" #. 6eff Ginik $. 7eter Iynch C. 3obert &tansky %. Willia! Hayes
58. The tenency of poorly perfor!ing stocks an well perfor!ing stocks in one perio p erio to continue their perfor!ance into the ne/t perio is calle the . #. fa effect $. !artingale effect C. !o!entu! effect %. reersal effect
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Chapter 08 - The Efficient Market Hypothesis
5). Which of the following is not a concept relate to e/plaining abnor!al e/cess stock returns" #. 6anuary effect $. Deglecte fir! effect C. 7
80. The lack of ae4uate traing olu!e in stock that !ay ulti!ately lea to its ability to prouce e/cess returns is referre to as the . #. 6anuary effect $. li4uiity effect C. neglecte fir! effect %. 7
81. 9una!ental analysis eter!ines that the price of a fir!:s stock is too low, gien its intrinsic alue. The infor!ation use in the analysis is aailable to all !arket participants, yet the price oes not see! to react. The stock oes not trae on a !a;or e/change. What concept !ight e/plain the ability to prouce e/cess e/ce ss returns on this stock" #. 6anuary effect $. Deglecte fir! effect C. 7
8'. When testing !utual fun perfor!ance oer ti!e one !ust be careful of , which !eans that a certain percentage of poorer perfor!ing funs fail oer ti!e which !akes the perfor!ance of re!aining funs see! !ore consistent oer ti!e. #. suriorship bias $. lucky eent bias C. !agnitue bias %. !ean reersion bias
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Chapter 08 - The Efficient Market Hypothesis
8+. Most eience inicates that .&. stock !arkets are . #. reasonably weak for! an se!i-strong for! efficient $. strong for! efficient C. reasonably weak for! but not se!i- or strong for! efficient %. neither weak for!, se!i- or strong for! efficient
8. Which of the following state!ents is
8*. #ccoring to Markowit an other proponents of !oern portfolio theory which of the following actiities woul not be e/pecte to prouce any benefits" #. %iersification $. (nesting in Treasury bills C. (nesting in stocks of utility co!panies %. Engaging in actie portfolio !anage!ent to enhance returns
82. #ccoring to results by &eyhun the !ain reason why inestors cannot earn ea rn e/cess returns by following insie traes after they beco!e public is . #. risk pre!iu! $. transaction costs C. the &EC late isclosure rule %. the stock reersal effect
Chapter 08 The Efficient Market Hypothesis #nswer ey
Multiple Choice Questions
8-1)
Chapter 08 - The Efficient Market Hypothesis
1. Which of the following beliefs woul not preclue charting as a !etho of portfolio !anage!ent" #. The #. The !arket is strong for! efficient. $. The $. The !arket is se!i-strong for! efficient. C. The C. The !arket is weak for! efficient. D. &tock prices follow recurring patterns.
Difficulty: Medium
'. (n a 1)*+ stuy of stock prices, Maurice enall foun that . pa tterns in stock prices A. there were no preictable patterns $. stock $. stock prices e/hibite strong serial autocorrelation C. ay C. ay to ay stock prices followe consistent trens %. funa!ental %. funa!ental analysis coul be use to generate abnor!al returns
Difficulty: Easy
+. The weak for! of the EMH states that !ust be reflecte in the current stock price. A. all past infor!ation incluing security price an olu!e ata $. all $. all publicly aailable infor!ation C. all C. all infor!ation incluing insie infor!ation %. all %. all costless infor!ation
Difficulty: Easy
. The se!i-strong for! of the EMH states that !ust be reflecte in the current stock price. #. all #. all security price an olu!e ata B. all publicly aailable infor!ation C. all C. all infor!ation incluing insie infor!ation %. all %. all costless infor!ation
Difficulty: Easy
8-'0
Chapter 08 - The Efficient Market Hypothesis
*. The strong for! of the EMH states that !ust be reflecte in the current stock price. #. all #. all security price an olu!e ata $. all $. all publicly aailable infor!ation C. all infor!ation incluing insie infor!ation %. all %. all costless infor!ation
Difficulty: Easy
2. 3ano! price !oe!ents inicate . #. irrational #. irrational !arkets $. that $. that prices cannot e4ual funa!ental alues C. that C. that technical analysis to uncoer trens can be 4uite useful D. that !arkets are functioning efficiently
Difficulty: Medium
5. When the !arket risk pre!iu! rises, stock prices will . #. rise #. rise B. fall C. recoer C. recoer %. hae %. hae e/cess olatility
Difficulty: Medium
8. The s!all fir! in 6anuary effect is strongest . A. early in the !onth $. in $. in the !ile of the !onth C. late C. late in the !onth %. in %. in een nu!bere years
Difficulty: Medium
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Chapter 08 - The Efficient Market Hypothesis
). Eience suggests that there !ay be !o!entu! an reersal patterns in stock price behaior. #. short-run, #. short-run, short-run $. long-run, $. long-run, long-run C. long-run, C. long-run, short-run D. short-run, long run
Difficulty: Medium
10. 7roponents of the EMH typically aocate . #. a #. a conseratie inest!ent strategy $. a $. a liberal inest!ent strategy C. a passie inest!ent strategy %. an %. an aggressie inest!ent strategy
Difficulty: Easy
11. &tock prices that are stable oer ti!e . #. inicate #. inicate that prices are useful inicators of true econo!ic alue B. inicate that the !arket is not incorporating new infor!ation into current stock prices C. ensure C. ensure that an econo!y allocates its resources efficiently %. inicates %. inicates that returns follow a rano! walk process
Difficulty: Hard
1'. The tenency when the perfor!ing stocks in one perio are the best perfor!ers in the ne/t an the current cu rrent perfor!ers are lagging the !arket later is calle the reersal effect. A. worst, best $. worst, $. worst, worst C. best, C. best, worst %. best, %. best, best
Difficulty: Medium
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Chapter 08 - The Efficient Market Hypothesis
1+. Which of the following is not a !etho e!ploye by followers of technical analysis" #. Charting #. Charting $. 3elatie $. 3elatie strength analysis C. Earnings forecasting %. Traing %. Traing aroun support an resistance leels
Difficulty: Easy
1. Which of the following is not a !etho e!ploye by funa!ental analysts" an alysts" #. #nalying #. #nalying the 9e:s ne/t interest rate !oe B. 3elatie strength analysis C. Earnings C. Earnings forecasting %. Esti!ating %. Esti!ating the econo!ic growth rate
Difficulty: Easy
1*. The pri!ary ob;ectie of funa!ental analysis is to ientify . #. well #. well run fir!s $. poorly $. poorly run fir!s C. !is-price stocks %. high %. high 7
Difficulty: Easy
12. (f you beliee in the for! of the EMH, you beliee that stock prices reflect all publicly aailable infor!ation but not infor!ation that is aailable only to insiers. A. se!i-strong $. strong $. strong C. weak C. weak %. perfect %. perfect
Difficulty: Easy
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Chapter 08 - The Efficient Market Hypothesis
15. (f you beliee in the for! of the EMH, you beliee that stock prices reflect all releant infor!ation incluing infor!ation that is aailable only to insiers. #. se!i-strong #. se!i-strong B. strong C. weak C. weak %. perfect %. perfect
Difficulty: Easy
18. Most of the stock price response to a corporate earnings or iien announce!ent occurs within . #. about #. about +0 secons B. about 10 !inutes C. 2 C. 2 !onths %. ' %. ' years
Difficulty: Medium
1). is the return on a stock beyon what woul be preicte fro! !arket !oe!ents alone. #. # #. # nor!al return $. # $. # subli!inal return C. #n abnor!al return %. #n %. #n e/cess return
Difficulty: Easy
8-'
Chapter 08 - The Efficient Market Hypothesis
'0. =ou beliee that stock prices reflect all infor!ation that can be erie by e/a!ining !arket traing ata such as the history of past stock prices, traing olu!e or short interest but you o not beliee stock prices reflect all publicly aailable or insie infor!ation. =ou are a proponent of . #. se!i-strong #. se!i-strong $. strong $. strong C. weak %. perfect %. perfect
Difficulty: Easy
'1. =ou are an inest!ent !anager who is currently !anaging assets worth >2 billion. =ou beliee that actie !anage!ent of your fun coul generate between an aitional one tenth of 1? return on the portfolio. (f you want to !ake sure your actie strategy as alue, how !uch can you spen on security analysis" #. >1',000,000 #. >1',000,000 B. >2,000,000 C. >+,000,000 C. >+,000,000 %. >0 %. >0 A0.001BA>2 billionB J >2,000,000
Difficulty: Easy
''. # !utual fun which atte!pts to hol 4uantities of shares in proportion to their representation in the !arket is calle a fun. #. stock #. stock B. ine/ C. hege C. hege %. !oney %. !oney !arket
Difficulty: Easy
8-'*
Chapter 08 - The Efficient Market Hypothesis
'+. Choosing stocks by searching for preictable p reictable patterns in stock prices is calle . #. funa!ental #. funa!ental analysis B. technical analysis C. ine/ C. ine/ !anage!ent %. rano! %. rano! walk inesting
Difficulty: Easy
'. Which of the following is not an a n issue that is central to the ebate regaring !arket efficiency" #. The #. The !agnitue issue B. The ta/ loss selling issue C. The C. The lucky eent issue %. The %. The selection bias issue
Difficulty: Easy
'*. Most people woul reaily agree that the stock !arket is not . #. weak #. weak for! efficient $. se!i-strong $. se!i-strong for! efficient C. strong for! efficient %. efficient %. efficient at all
Difficulty: Easy
'2. &!all fir!s hae tene to earn abnor!al returns pri!arily in . A. the !onth of 6anuary $. the $. the !onth 6uly C. the C. the trough of the business cycle %. the %. the peak of the business cycle
Difficulty: Easy
8-'2
Chapter 08 - The Efficient Market Hypothesis
'5. 9a!a an 9rench hae suggeste that !any !arket ano!alies can be e/plaine as !anifestations of . #. regulatory #. regulatory effects $. high $. high traing costs C. infor!ation C. infor!ation asy!!etry D. arying risk pre!iu!s
Difficulty: Medium
'8. 7roponents of the EMH think technical analysts . #. shoul #. shoul focus on relatie strength $. shoul $. shoul focus on resistance leels C. shoul C. shoul focus on support leels D. are wasting their ti!e
Difficulty: Easy
'). Eience supporting se!i-strong for! !arket efficiency suggests that inestors shoul . #. rely #. rely on technical analysis to select securities $. rely $. rely on funa!ental analysis to select securities C. use a passie traing strategy such as purchasing an ine/ fun or an ET9 %. select %. select securities by throwing arts at the financial pages of the newspaper
Difficulty: Easy
+0. @$uy a stock if its price !oes up by '? !ore than the %ow #erage,@ is an e/a!ple of a . A. filter rule $. !arket $. !arket ano!aly C. funa!ental C. funa!ental approach %. passie %. passie traing strategy
Difficulty: Easy
8-'5
Chapter 08 - The Efficient Market Hypothesis
+1. 6affee foun that stock prices after insiers intensiely bought shares an after insiers intensiely sol shares. #. ecrease, #. ecrease, ecrease $. ecrease, $. ecrease, increase C. increase, ecrease %. increase, %. increase, increase
Difficulty: Medium
+'. (n a recent stuy, 9a!a an 9rench foun that the return on the aggregate stock !arket was when the iien yiel was higher. A. higher $. lower $. lower C. unaffecte C. unaffecte %. !ore %. !ore skewe
Difficulty: Medium
++. 9a!a an 9rench A1))1B an 3einganu! A1)88B foun that fir!s with !arket
Difficulty: Medium
+. 6oe bought a stock at >*5 per share. The price pro!ptly fell to >**. 6oe hel on to the stock until it again reache >*5 an then he sol once he ha eli!inate his loss. (f other inestors o the sa!e to establish a traing pattern this woul contraict . #. the #. the strong-for! EMH B. the weak-for! EMH C. technical C. technical analysis %. the %. the se!istrong-for! EMH
Difficulty: Medium
8-'8
Chapter 08 - The Efficient Market Hypothesis
+*. #ccoring to recent research securities !arkets fully a;ust to earnings announce!ents . #. instantly #. instantly $. in $. in 1 ay C. in C. in 1 week D. graually oer ti!e
Difficulty: Medium
+2. When stock returns e/hibit positie serial correlation, this !eans that returns ten to follow returns. A. positie positie $. positie $. positie negatie C. negatie C. negatie positie %. positie %. positie ero
Difficulty: Easy
+5. $asu foun that fir!s with high 7
Difficulty: Medium
+8. 9una!ental analysis is likely to yiel best results for . #. D=&E #. D=&E stocks B. neglecte stocks C. stocks C. stocks that are fre4uently in the news %. fast %. fast growing co!panies
Difficulty: Medium
8-')
Chapter 08 - The Efficient Market Hypothesis
+). =ou are looking to inest in one of three stocks. &tock # has high e/pecte earnings growth, &tock $ has only !oest e/pecte earnings growth an &tock C is e/pecte to generate poor earnings growth. Which stock is likely to generate the greatest alpha for you" #. &tock #. &tock # $. &tock $. &tock $ C. &tock C. &tock C D. =ou cannot tell fro! the infor!ation gien
Difficulty: Medium
0. =ou beliee that you can earn '? !ore on your portfolio if you engage in full ti!e stock research. Howeer, the aitional traing costs an ta/ liability fro! actie !anage!ent will cost you about 0.*?. =ou hae a >800,000 stock portfolio. What is the !ost you can affor to spen on your research" #. >,000 #. >,000 $. >8,000 $. >8,000 C. >1',000 %. >12,000 %. >12,000 A0.0' - 0.00*BA>800,000B J >1',000
Difficulty: Medium
1. Een if the !arkets are efficient, professional portfolio !anage!ent is still i!portant because it proies inestors with . (. low cost iersification ((. proies a portfolio with a specifie risk leel (((. proies better risk a;uste returns than an ine/ #. ( #. ( only B. ( an (( only C. (( C. (( an ((( only %. (, %. (, (( an (((
Difficulty: Medium
8-+0
Chapter 08 - The Efficient Market Hypothesis
'. $an foun that, on aerage, the risk-a;uste returns of s!all fir!s . A. was higher than the risk-a;uste returns of large fir!s $. was $. was the sa!e as the risk-a;uste returns of large fir!s C. was C. was lower than the risk-a;uste returns of large fir!s %. was %. was negatie
Difficulty: Medium
+. (f the .&. capital !arkets are not n ot infor!ationally efficient . A. the !arkets cannot be allocationally efficient $. then $. then syste!atic risk oes not !atter C. then C. then no type of analysis can be use to generate abnor!al returns %. then %. then returns !ust follow a rano! walk
Difficulty: Medium
. @#ctie inest!ent !anage!ent !ay generate g enerate aitional returns at ti!es of about 0.1?. Howeer, the stanar eiation of the typical well iersifie portfolio is about '0?, so it is ery ifficult to statistically ientify any increase in perfor!ance.@ Een if true, this state!ent is an e/a!ple of the proble! in eciing how efficient the !arkets are. A. !agnitue $. selection $. selection bias C. lucky C. lucky eent %. allocation %. allocation
Difficulty: Medium
*. %e$ont an Thaler A1)8*B foun that the poorest perfor!ing stocks in one ti!e perio e/perience perfor!ance in the following perio an the best perfor!ing stocks in one ti!e perio e/perience perfor!ance in the following ti!e perio. #. goo, #. goo, goo B. goo, poor C. poor, C. poor, goo %. poor, %. poor, poor
Difficulty: Medium
8-+1
Chapter 08 - The Efficient Market Hypothesis
2. 6.M. eyes put all his !oney in one stock an the stock ouble in alue in a !atter of !onths. He i this three ti!es in a row with three ifferent stocks. 6.M. got his picture on the front page of the Wall &treet 6ournal. Howeer the paper neer !entione the thousans of inestors who !ae si!ilar bets on other stocks an lost !ost of their !oney. This is an e/a!ple of the proble! in eciing how efficient the !arkets are. #. !agnitue #. !agnitue $. selection $. selection bias C. lucky eent %. s!all %. s!all fir!
Difficulty: Medium
5. Most tests of se!i-strong efficiency are . #. esigne #. esigne to test whether insie infor!ation can be b e use to generate abnor!al returns $. base $. base on technical traing rules C. unable C. unable to generate any eience of !arket ano!alies D. ;oint tests of !arket efficiency an the risk a;ust!ent !easure
Difficulty: Medium
8. The effect !ay e/plain !uch of the s!all fir! ano!aly. (. 6anuary effect ((. neglecte effect (((. li4uiity effect #. ( #. ( only $. (( $. (( only C. (( C. (( an ((( only D. (, (( an (((
Difficulty: Medium
8-+'
Chapter 08 - The Efficient Market Hypothesis
). &tuies show that the bi-ask sprea for the least li4ui stocks !ay be as high as . #. +? #. +? B. *? C. )? C. )? %. 1'? %. 1'?
Difficulty: Hard
*0. The broaest infor!ation set is inclue in the #. weak #. weak for! efficiency argu!ent $. se!i-strong $. se!i-strong for! efficiency argu!ent C. strong for! efficiency argu!ent %. technical %. technical analysis traing !etho
Difficulty: Easy
*1. The 9a!a an 9rench eience that high book to !arket fir!s outperfor! low book to !arket fir!s een after a;usting for beta !eans . #. high #. high book to !arket fir!s are unerprice $. low $. low book to !arket fir!s are unerprice C. either high book to !arket fir!s are unerprice or the book to !arket ratio is a pro/y for a syste!atic risk factor %. high %. high book to !arket fir!s hae !ore post earnings rift
Difficulty: Medium
*'. #ccoring to results by &eyhun . A. inestors cannot usually earn abnor!al returns by following insie traes after knowlege of the traes are !ae public $. inestors $. inestors can usually earn abnor!al returns by following insie traes after knowlege of the traes are !ae public C. inestors C. inestors cannot earn abnor!al returns by following insie traes before knowlege of the traes are !ae public %. inestors %. inestors cannot earn abnor!al returns by traing before insiers
Difficulty: Hard
8-++
Chapter 08 - The Efficient Market Hypothesis
*+. (f the aily returns on the stock !arket are nor!ally istribute with a !ean of 0.0*? 0.0* ? an a stanar eiation of 1.00?, the probability that the stock !arket woul hae ha e a return of -'+.00? or worse on one particular ay Aas it i on $lack MonayB is appro/i!ately . A. 0.0? $. 0.1? $. 0.1? C. 1.0? C. 1.0? %. 10.0? %. 10.0? 7rob J 1 - DKA.'+00 - .000*B<.01L 0 ≈
Difficulty: Medium
*. #ccoring to the se!i-strong for! of the efficient !arkets hypothesis . #. stock #. stock prices o not rapily a;ust to new infor!ation canno t be preicte fro! any infor!ation that is publicly pu blicly B. future changes in stock prices cannot aailable C. corporate C. corporate insiers shoul hae no better inest!ent perfor!ance than other inestors een if allowe to trae freely %. arbitrage %. arbitrage between futures an cash !arkets shoul not prouce e/traorinary profits
Difficulty: Easy
**. The ter! rano! walk is use in inest!ents to refer to . #. stock #. stock price changes that are rano! but preictable $. stock $. stock prices that respon slowly to both ol an new infor!ation C. stock price changes that are rano! an unpreictable %. stock %. stock prices changes that follow the pattern of past price changes
Difficulty: Easy
8-+
Chapter 08 - The Efficient Market Hypothesis
*2. (!portant characteristicAsB of !arket efficiency is that . (. there are no arbitrage opportunities ((. security prices react 4uickly to new infor!ation (((. actie traing strategies will not consistently outperfor! passie strategies #. ( #. ( only $. (( $. (( only C. ( C. ( an ((( only D. (, (( an (((
Difficulty: Easy
*5. &tock !arket analysts hae tene to be in their reco!!enations to inestors. #. slightly #. slightly oerly opti!istic B. oerwhel!ingly opti!istic C. slightly C. slightly oerly pessi!istic %. oerwhel!ingly %. oerwhel!ingly pessi!istic p essi!istic
Difficulty: Medium
*8. #ssu!e that a co!pany announces une/pectely high earnings in a particular 4uarter. (n an efficient !arket one !ight e/pect . A. an abnor!al price change i!!eiately following the announce!ent $. an $. an abnor!al price increase before the announce!ent C. an C. an abnor!al price ecrease after the announce!ent %. no %. no abnor!al price change before or after the announce!ent
Difficulty: Easy
*). # !arket ano!aly refers to . #. an #. an e/ogenous shock to the !arket that is sharp but not persistent $. a $. a price or olu!e eent ee nt that is inconsistent with historical price or olu!e trens C. a C. a traing or pricing structure that interferes with efficient buying an selling of securities D. price behaior that iffers fro! the behaior preicte by the efficient !arket hypothesis
Difficulty: Medium
8-+*
Chapter 08 - The Efficient Market Hypothesis
20. Which of the following contraicts the proposition that the stock !arket is weakly efficient" #. Fer #. Fer '*? of !utual funs outperfor! the !arket on aerage. $. (nsiers $. (nsiers earn abnor!al traing profits. C. Eery 6anuary, the stock !arket earns aboe nor!al returns. %. #pplications %. #pplications of technical traing rules fail to earn abnor!al a bnor!al returns.
Difficulty: Medium
21. Which of the following woul iolate the efficient !arket hypothesis" #. (ntel #. (ntel has consistently generate large profits for years. $. 7rices $. 7rices for stocks before stock splits show on aerage consistently positie abnor!al returns. C. Earning abnor!al returns after a fir! announces surprise earnings. %. High %. High earnings growth stocks fail to generate higher returns for inestors than low earnings growth stocks.
Difficulty: Medium
2'. Which of the following stock price obserations o bserations woul appear to contraict the weak for! of the efficient !arket hypothesis" #. The #. The aerage rate of return is significantly greater than ero. $. The $. The correlation between the !arket return one week an the return the following week is ero. 10 ? rise in C. =ou coul hae consistently !ae superior returns by buying stock after a 10? price an selling after a 10? fall. %. =ou %. =ou coul hae consistently !ae superior returns by forecasting future earnings perfor!ance with your new Crystal $all forecast !ethoology. !ethoology.
Difficulty: Medium
8-+2
Chapter 08 - The Efficient Market Hypothesis
2+. The se!i-strong for! of the efficient !arket hypothesis i!plies that generate abnor!al returns an generate abnor!al returns. #. Technical #. Technical analysis cannot funa!ental analysis can $. Technical $. Technical analysis can funa!ental analysis can C. Technical C. Technical analysis can funa!ental analysis cannot D. Technical analysis cannot funa!ental analysis cannot
Difficulty: Medium
2. #n i!plication of the efficient !arket hypothesis is that . #. high #. high beta stocks are consistently oerprice $. low $. low beta stocks are consistently oerprice C. nonero alphas will 4uickly isappear %. growth %. growth stocks are better buys than alue stocks
Difficulty: Medium
2*. 9una!ental ine/ing refers to . A. inesting in ine/ stocks in proportion to the stock:s funa!ental alue $. inesting $. inesting in ine/ stocks in proportion to the stock:s !arket alue C. inesting C. inesting an e4ual ollar a!ount in ine/ stocks %. inesting %. inesting in an e4ual a!ount shares in each of the ine/ stocks
Difficulty: Medium
22. Tests of !utual fun perfor!ance inicate that funs with ten to hae poorer perfor!ance. #. !ore #. !ore funs in the fa!ily B. higher e/pense an turnoer ratios C. lower C. lower !anage!ent fees %. larger %. larger asset sie
Difficulty: Easy
8-+5
Chapter 08 - The Efficient Market Hypothesis
25. Galue stocks !ay proie inestors with better returns than growth stocks if . (. alue stocks are out of faor with inestors ((. prices of growth stocks inclue pre!iu!s for oerly opti!istic growth leels (((. alue stocks are likely to generate positie earnings surprises. #. ( #. ( only $. (( $. (( only C. ( C. ( an ((( only D. (, (( an (((
Difficulty: Medium
28. Galue stocks usually e/hibit price-to-book ratios an price-to-earnings ratios. A. low, low $. low, $. low, high C. high, C. high, low %. high, %. high, high
Difficulty: Medium
2). rowth stocks usually e/hibit price-to-book ratios an price-to-earnings ratios. #. low, #. low, low $. low, $. low, high C. high, C. high, low D. high, high
Difficulty: Medium
50. # ay trae with an aerage stock holing perio of uner 8 !inutes !ight be !ost closely associate with which traing philosophy" #. EMH #. EMH $. 9una!ental $. 9una!ental analysis C. &trong C. &trong for! !arket efficiency D. Technical analysis
Difficulty: Easy
8-+8
Chapter 08 - The Efficient Market Hypothesis
51. # technical analyst is !ost likely to be affiliate with which inest!ent philosophy" A. #ctie !anage!ent $. $uy $. $uy an hol C. 7assie C. 7assie inest!ent %. (ne/ %. (ne/ funs
Difficulty: Easy
5'. &o!eone who inests in the Ganguar (ne/ *00 !utual fun coul !ost accurately be escribe as using what approach" #. #ctie #. #ctie !anage!ent $. #rbitrage $. #rbitrage C. 9una!ental C. 9una!ental analysis D. 7assie inest!ent
Difficulty: Easy
5+. Eience by $lake, Elton an ruber inicates that on aerage actiely !anage bon funs #. outperfor! #. outperfor! passie fi/e-inco!e ine/es . $. uner $. uner perfor! passie fi/e-inco!e ine/es by a wie !argin C. perfor! C. perfor! as well as passie fi/e-inco!e ine/es D. uner perfor! passie fi/e-inco!e ine/es by an a!ount e4ual to fun e/penses
Difficulty: Medium
5. (nsiers are able to profitably trae an earn abnor!al returns prior to the announce!ent announce !ent of positie news. This is a iolation of which for! of efficiency" #. Weak #. Weak for! efficiency $. &e!i-strong $. &e!i-strong for! efficiency C. &trong for! efficiency %. Technical %. Technical analysis
Difficulty: Medium
8-+)
Chapter 08 - The Efficient Market Hypothesis
5*. (n an efficient !arket an for an inestor that beliees in a passie approach ap proach to inesting, what is the pri!ary uty of a portfolio !anager" #. #ccounting #. #ccounting for results B. %iersification C. (entifying C. (entifying uneralue stocks %. Do %. Do nee for a portfolio !anager
Difficulty: Medium
52. Which of the following is not a topic relate to the ebate oer !arket efficiency" A. (7F results $. Iucky $. Iucky eent issue C. Magnitue C. Magnitue issue %. &election %. &election bias
Difficulty: Medium
55. Which 9ielity Magellan portfolio !anager is often reference as an e/ception to the general conclusion of efficient !arkets" #. 6eff #. 6eff Ginik B. 7eter Iynch C. 3obert C. 3obert &tansky %. Willia! %. Willia! Hayes
Difficulty: Medium
58. The tenency of poorly perfor!ing stocks an well perfor!ing stocks in one perio p erio to continue their perfor!ance into the ne/t perio is calle the . #. fa #. fa effect $. !artingale $. !artingale effect C. !o!entu! effect %. reersal %. reersal effect
Difficulty: Medium
8-0
Chapter 08 - The Efficient Market Hypothesis
5). Which of the following is not a concept relate to e/plaining abnor!al e/cess stock returns" #. 6anuary #. 6anuary effect $. Deglecte $. Deglecte fir! effect C. 7
Difficulty: Easy
80. The lack of ae4uate traing olu!e in stock that !ay ulti!ately lea to its ability to prouce e/cess returns is referre to as the . #. 6anuary #. 6anuary effect B. li4uiity effect C. neglecte C. neglecte fir! effect %. 7
Difficulty: Easy
81. 9una!ental analysis eter!ines that the price of a fir!:s stock is too low, gien its intrinsic alue. The infor!ation use in the analysis is aailable to all !arket participants, yet the price oes not see! to react. The stock oes not trae on a !a;or e/change. What concept !ight e/plain the ability to prouce e/cess e/ce ss returns on this stock" #. 6anuary #. 6anuary effect B. Deglecte fir! effect C. 7
Difficulty: Medium
8-1
Chapter 08 - The Efficient Market Hypothesis
8'. When testing !utual fun perfor!ance oer ti!e one !ust be careful of , which !eans that a certain percentage of poorer perfor!ing funs fail oer ti!e which !akes the perfor!ance of re!aining funs see! !ore consistent oer ti!e. A. suriorship bias $. lucky $. lucky eent bias C. !agnitue C. !agnitue bias %. !ean %. !ean reersion bias
Difficulty: Medium
8+. Most eience inicates that .&. stock !arkets are . A. reasonably weak for! an se!i-strong for! efficient $. strong $. strong for! efficient C. reasonably C. reasonably weak for! but not se!i- or strong for! efficient %. neither %. neither weak for!, se!i- or strong for! efficient
Difficulty: Medium
8. Which of the following state!ents is
Difficulty: Medium
8*. #ccoring to Markowit an other proponents of !oern portfolio theory which of the following actiities woul not be e/pecte to prouce any benefits" #. %iersification #. %iersification $. (nesting $. (nesting in Treasury bills C. (nesting C. (nesting in stocks of utility co!panies D. Engaging in actie portfolio !anage!ent to enhance returns
Difficulty: Easy
8-'
Chapter 08 - The Efficient Market Hypothesis
82. #ccoring to results by &eyhun the !ain reason why inestors cannot earn ea rn e/cess returns by following insie traes after they beco!e public is . A. risk pre!iu! $. transaction $. transaction costs C. the C. the &EC late isclosure rule %. the %. the stock reersal effect
Difficulty: Hard
8-+