Question 1

When Maurice Kendall first examined stock price patterns in 1953, he found that

Accepted Answer

A)  certain patterns tended to repeat within the business cycle. 
B)  there were no predictable patterns in stock prices. 
C)  stocks whose prices had increased consistently for one week tended to have a net decrease the following week. 
D)  stocks whose prices had increased consistently for one week tended to have a net increase the following week. 
E)  the direction of change in stock prices was unpredictable, but the amount of change followed a distinct pattern. 
A)  certain patterns tended to repeat within the business cycle. 
B)  there were no predictable patterns in stock prices. 
C)  stocks whose prices had increased consistently for one week tended to have a net decrease the following week. 
D)  stocks whose prices had increased consistently for one week tended to have a net increase the following week. 
E)  the direction of change in stock prices was unpredictable, but the amount of change followed a distinct pattern.

Question 2

The main difference between the three forms of market efficiency is that

Accepted Answer

A)  the definition of efficiency differs. 
B)  the definition of excess return differs. 
C)  the definition of prices differs. 
D)  the definition of information differs. 
E)  they were discovered by different people. 
A)  the definition of efficiency differs. 
B)  the definition of excess return differs. 
C)  the definition of prices differs. 
D)  the definition of information differs. 
E)  they were discovered by different people.

Question 3

Matthews Corporation has a beta of 1.2. The annualized market return yesterday was 13%, and the risk-free rate is currently 5%. You observe that Matthews had an annualized return yesterday of 17%. Assuming that markets are efficient, this suggests that

Accepted Answer

A)  bad news about Matthews was announced yesterday. 
B)  good news about Matthews was announced yesterday. 
C)  no news about Matthews was announced yesterday. 
D)  interest rates rose yesterday. 
E)  interest rates fell yesterday. 
A)  bad news about Matthews was announced yesterday. 
B)  good news about Matthews was announced yesterday. 
C)  no news about Matthews was announced yesterday. 
D)  interest rates rose yesterday. 
E)  interest rates fell yesterday.

Question 4

The weather report says that a devastating and unexpected freeze is expected to hit Florida tonight during the peak of the citrus harvest. In an efficient market, one would expect the price of Florida Orange's stock to

Accepted Answer

A)  drop immediately. 
B)  unable to determine. 
C)  increase immediately. 
D)  gradually decline for the next several weeks. 
E)  gradually increase for the next several weeks. 
A)  drop immediately. 
B)  unable to determine. 
C)  increase immediately. 
D)  gradually decline for the next several weeks. 
E)  gradually increase for the next several weeks.

Question 5

Fama and French (1992) found that the stocks of firms within the highest decile of book-to-market ratios had an average annual return of _______, while the stocks of firms within the lowest decile of book-to-market ratios had an average annual return of ________.

Accepted Answer

A)  15.6%; 13.1% 
B)  17.2%; 11.1% 
C)  13.2%; 16.4% 
D)  11.1%; 17.2% 
A)  15.6%; 13.1% 
B)  17.2%; 11.1% 
C)  13.2%; 16.4% 
D)  11.1%; 17.2%

Question 6

On November 22, the stock price of Coca Cola was $69.50, and the retailer stock index was 600.30. On November 25, the stock price of Coca Cola was $70.25, and the retailer stock index was 605.20. Consider the ratio of Coca Cola to the retailer index on November 22 and November 25. Coca Cola is _______ the retail industry, and technical analysts who follow relative strength would advise _______ the stock.

Accepted Answer

A)  outperforming; buying 
B)  outperforming; selling 
C)  underperforming; buying 
D)  underperforming; selling 
E)  equally performing; neither buying nor selling 
A)  outperforming; buying 
B)  outperforming; selling 
C)  underperforming; buying 
D)  underperforming; selling 
E)  equally performing; neither buying nor selling

Question 7

_________ below which it is difficult for the market to fall.

Accepted Answer

A)  An intrinsic value is a value 
B)  A resistance level is a value 
C)  A support level is a value 
D)  An intrinsic value and a resistance level are values 
E)  A resistance level and a support level are values 
A)  An intrinsic value is a value 
B)  A resistance level is a value 
C)  A support level is a value 
D)  An intrinsic value and a resistance level are values 
E)  A resistance level and a support level are values

Question 8

Proponents of the EMH typically advocate

Accepted Answer

A)  buying individual stocks on margin and trading frequently. 
B)  investing in hedge funds. 
C)  a passive investment strategy. 
D)  buying individual stocks on margin, trading frequently, and investing in hedge funds. 
E)  investing in hedge funds and a passive investment strategy. 
A)  buying individual stocks on margin and trading frequently. 
B)  investing in hedge funds. 
C)  a passive investment strategy. 
D)  buying individual stocks on margin, trading frequently, and investing in hedge funds. 
E)  investing in hedge funds and a passive investment strategy.

Question 9

If you believe in the _______ form of the EMH, you believe that stock prices only 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.

Accepted Answer

A)  semistrong 
B)  strong 
C)  weak 
D)  All of the options are correct. 
E)  None of the options are correct. 
A)  semistrong 
B)  strong 
C)  weak 
D)  All of the options are correct. 
E)  None of the options are correct.

Question 10

Del Guerico and Reuter (2014) report that the average underperformance of actively-managed mutual funds is driven largely by

Accepted Answer

A)  sector mutual funds. 
B)  index funds. 
C)  direct-sold funds. 
D)  broker-sold funds. 
E)  bank-sold mutual funds. 
A)  sector mutual funds. 
B)  index funds. 
C)  direct-sold funds. 
D)  broker-sold funds. 
E)  bank-sold mutual funds.

Question 11

KWM Corporation just announced yesterday that it would undertake an international joint venture. You observe that KWM had an abnormal return of 3% yesterday. This suggests that

Accepted Answer

A)  the market is not efficient. 
B)  KWM stock will probably rise in value again tomorrow. 
C)  investors view the international joint venture as bad news. 
D)  investors view the international joint venture as good news. 
E)  earnings are expected to decrease next quarter. 
A)  the market is not efficient. 
B)  KWM stock will probably rise in value again tomorrow. 
C)  investors view the international joint venture as bad news. 
D)  investors view the international joint venture as good news. 
E)  earnings are expected to decrease next quarter.

Question 12

Studies of negative earnings surprises have shown that there is

Accepted Answer

A)  a negative abnormal return on the day that negative earnings surprises are announced. 
B)  a positive drift in the stock price on the days following the earnings surprise announcement. 
C)  a negative drift in the stock price on the days following the earnings surprise announcement. 
D)  a negative abnormal return on the day that negative earnings surprises are announced and a positive drift in the stock price on the days following the earnings surprise announcement. 
E)  a negative abnormal return on the day that negative earnings surprises are announced and a negative drift in the stock price on the days following the earnings surprise announcement. 
A)  a negative abnormal return on the day that negative earnings surprises are announced. 
B)  a positive drift in the stock price on the days following the earnings surprise announcement. 
C)  a negative drift in the stock price on the days following the earnings surprise announcement. 
D)  a negative abnormal return on the day that negative earnings surprises are announced and a positive drift in the stock price on the days following the earnings surprise announcement. 
E)  a negative abnormal return on the day that negative earnings surprises are announced and a negative drift in the stock price on the days following the earnings surprise announcement.

Question 13

Basu (1977, 1983) found that firms with high P/E ratios

Accepted Answer

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. 
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.

Question 14

The weak form of the efficient-market hypothesis contradicts

Accepted Answer

A)  technical analysis but supports fundamental analysis as valid. 
B)  fundamental analysis but supports technical analysis as valid. 
C)  both fundamental analysis and technical analysis. 
D)  technical analysis but is silent on the possibility of successful fundamental analysis. 
A)  technical analysis but supports fundamental analysis as valid. 
B)  fundamental analysis but supports technical analysis as valid. 
C)  both fundamental analysis and technical analysis. 
D)  technical analysis but is silent on the possibility of successful fundamental analysis.

Question 15

In an efficient market,

Accepted Answer

A)  security prices react quickly to new information. 
B)  security prices are seldom far above or below their justified levels. 
C)  security analysis will not enable investors to realize superior returns consistently. 
D)  one cannot make money. 
E)  security prices react quickly to new information, security prices are seldom far above or below their justified levels, and security analysis will not enable investors to realize superior returns consistently. 
A)  security prices react quickly to new information. 
B)  security prices are seldom far above or below their justified levels. 
C)  security analysis will not enable investors to realize superior returns consistently. 
D)  one cannot make money. 
E)  security prices react quickly to new information, security prices are seldom far above or below their justified levels, and security analysis will not enable investors to realize superior returns consistently.

Question 16

Expert firms must maintain detailed records of conversations in the event authorities decide to investigate ____________.

Accepted Answer

A)  tax evasion. 
B)  insider trading. 
C)  excess profits. 
D)  FDA violations. 
E)  SEC violations. 
A)  tax evasion. 
B)  insider trading. 
C)  excess profits. 
D)  FDA violations. 
E)  SEC violations.

Question 17

Nicholas Manufacturing just announced yesterday that its fourth quarter earnings will be 10% higher than last year's fourth quarter. Nicholas had an abnormal return of −1.2% yesterday. This suggests that

Accepted Answer

A)  the market is not efficient. 
B)  Nicholas' stock will probably rise in value tomorrow. 
C)  investors expected the earnings increase to be larger than what was actually announced. 
D)  investors expected the earnings increase to be smaller than what was actually announced. 
E)  earnings are expected to decrease next quarter. 
A)  the market is not efficient. 
B)  Nicholas' stock will probably rise in value tomorrow. 
C)  investors expected the earnings increase to be larger than what was actually announced. 
D)  investors expected the earnings increase to be smaller than what was actually announced. 
E)  earnings are expected to decrease next quarter.

Question 18

A finding that _________ would provide evidence against the semistrong form of the efficient-market theory.

Accepted Answer

A)  low P/E stocks tend to have positive abnormal returns 
B)  trend analysis is worthless in determining stock prices 
C)  one can consistently outperform the market by adopting the contrarian approach exemplified by the reversals phenomenon 
D)  low P/E stocks tend to have positive abnormal returns and trend analysis is worthless in determining stock prices 
E)  low P/E stocks tend to have positive abnormal returns and one can consistently outperform the market by adopting the contrarian approach exemplified by the reversals phenomenon 
A)  low P/E stocks tend to have positive abnormal returns 
B)  trend analysis is worthless in determining stock prices 
C)  one can consistently outperform the market by adopting the contrarian approach exemplified by the reversals phenomenon 
D)  low P/E stocks tend to have positive abnormal returns and trend analysis is worthless in determining stock prices 
E)  low P/E stocks tend to have positive abnormal returns and one can consistently outperform the market by adopting the contrarian approach exemplified by the reversals phenomenon

Question 19

According to proponents of the efficient-market hypothesis, the best strategy for a small investor with a portfolio worth $40,000 is probably to

Accepted Answer

A)  perform fundamental analysis. 
B)  exploit market anomalies. 
C)  invest in Treasury securities. 
D)  invest in derivative securities. 
E)  invest in mutual funds. 
A)  perform fundamental analysis. 
B)  exploit market anomalies. 
C)  invest in Treasury securities. 
D)  invest in derivative securities. 
E)  invest in mutual funds.

Question 20

Studies of stock price reactions to news are called

Accepted Answer

A)  reaction studies. 
B)  event studies. 
C)  drift studies. 
D)  reaction studies and event studies. 
E)  event studies and drift studies. 
A)  reaction studies. 
B)  event studies. 
C)  drift studies. 
D)  reaction studies and event studies. 
E)  event studies and drift studies.

Exam 11: The Efficient Market Hypothesis

When Maurice Kendall first examined stock price patterns in 1953, he found that

The main difference between the three forms of market efficiency is that

Matthews Corporation has a beta of 1.2. The annualized market return yesterday was 13%, and the risk-free rate is currently 5%. You observe that Matthews had an annualized return yesterday of 17%. Assuming that markets are efficient, this suggests that

The weather report says that a devastating and unexpected freeze is expected to hit Florida tonight during the peak of the citrus harvest. In an efficient market, one would expect the price of Florida Orange's stock to

Fama and French (1992) found that the stocks of firms within the highest decile of book-to-market ratios had an average annual return of _______, while the stocks of firms within the lowest decile of book-to-market ratios had an average annual return of ________.

_________ below which it is difficult for the market to fall.

Proponents of the EMH typically advocate

If you believe in the _______ form of the EMH, you believe that stock prices only 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.

Del Guerico and Reuter (2014) report that the average underperformance of actively-managed mutual funds is driven largely by

KWM Corporation just announced yesterday that it would undertake an international joint venture. You observe that KWM had an abnormal return of 3% yesterday. This suggests that

Studies of negative earnings surprises have shown that there is

Basu (1977, 1983) found that firms with high P/E ratios

The weak form of the efficient-market hypothesis contradicts

In an efficient market,

Expert firms must maintain detailed records of conversations in the event authorities decide to investigate ____________.

Nicholas Manufacturing just announced yesterday that its fourth quarter earnings will be 10% higher than last year's fourth quarter. Nicholas had an abnormal return of −1.2% yesterday. This suggests that

A finding that _________ would provide evidence against the semistrong form of the efficient-market theory.

According to proponents of the efficient-market hypothesis, the best strategy for a small investor with a portfolio worth $40,000 is probably to

Studies of stock price reactions to news are called

The Investment Environment

Asset Classes and Financial Instruments

How Securities Are Traded

Mutual Funds and Other Investment Companies

Risk, Return, and the Historical Record

Capital Allocation to Risky Assets

Efficient Diversification

Index Models

The Capital Asset Pricing Model

Arbitrage Pricing Theory and Multifactor Models of Risk and Return

Behavioral Finance and Technical Analysis

Empirical Evidence on Security Returns

Bond Prices and Yields

The Term Structure of Interest Rates

Managing Bond Portfolios

Macroeconomic and Industry Analysis

Equity Valuation Models

Financial Statement Analysis

Options Markets: Introduction

Option Valuation

Futures Markets

Futures, Swaps, and Risk Management

Portfolio Performance Evaluation

International Diversification

Hedge Funds

The Theory of Active Portfolio Management

Investment Policy and the Framework of the Cfa Institute

Filters

Fama and French (1992) found that the stocks of firms within the highest decile of book-to-market ratios had an average annual return of _, while the stocks of firms within the lowest decile of book-to-market ratios had an average annual return of __.