Question 1

How expectations are formed is important because expectations influence

Accepted Answer

A)  the demand for assets. 
B)  bond prices. 
C)  the risk structure of interest rates. 
D)  the term structure of interest rates. 
E)  all of the above. 
A)  the demand for assets. 
B)  bond prices. 
C)  the risk structure of interest rates. 
D)  the term structure of interest rates. 
E)  all of the above. E

Question 2

What is the optimal investment strategy according to the efficient market hypothesis? Why?

Accepted Answer

The semi-strong form of EMH is prevalent in the market and the optimal investment strategy is investment along with diversification. Please elaborate further on question

Question 3

Raj Rajaratnam,a successful investor in the 2000s who consistently beat the market,was able to outperform the market on a consistent basis,indicating that

Accepted Answer

A)  securities markets are not efficient. 
B)  unexploited profit opportunities were abundant. 
C)  investors can outperform the market with inside information. 
D)  only B and C of the above. 
A)  securities markets are not efficient. 
B)  unexploited profit opportunities were abundant. 
C)  investors can outperform the market with inside information. 
D)  only B and C of the above. C

Question 4

Which of the following is an insight from behavioral finance?

Accepted Answer

A)  The price of securities fully reflects all available information. 
B)  Investor overconfidence leads to high trading volumes. 
C)  The optimal forecast of a security's return equals the security's equilibrium return. 
D)  Investment advisers cannot consistently beat the market. 
A)  The price of securities fully reflects all available information. 
B)  Investor overconfidence leads to high trading volumes. 
C)  The optimal forecast of a security's return equals the security's equilibrium return. 
D)  Investment advisers cannot consistently beat the market.

Question 5

The efficient market hypothesis suggests that allocating your funds in the financial markets on the advice of a financial analyst

Accepted Answer

A)  will certainly mean higher returns than if you had made selections by throwing darts at the financial page. 
B)  will always mean lower returns than if you had made selections by throwing darts at the financial page. 
C)  is not likely to prove superior to a strategy of making selections by throwing darts at the financial page. 
D)  is good for the economy. 
A)  will certainly mean higher returns than if you had made selections by throwing darts at the financial page. 
B)  will always mean lower returns than if you had made selections by throwing darts at the financial page. 
C)  is not likely to prove superior to a strategy of making selections by throwing darts at the financial page. 
D)  is good for the economy.

Question 6

According to the efficient market hypothesis,the current price of a financial security

Accepted Answer

A)  is the discounted net present value of future interest payments. 
B)  is determined by the highest successful bidder. 
C)  fully reflects all available relevant information. 
D)  is a result of none of the above. 
A)  is the discounted net present value of future interest payments. 
B)  is determined by the highest successful bidder. 
C)  fully reflects all available relevant information. 
D)  is a result of none of the above.

Question 7

The small-firm effect refers to the observation that small firms' stocks

Accepted Answer

A)  follow a random walk but large firms' stocks do not. 
B)  have earned abnormally low returns given their greater risk. 
C)  have earned abnormally high returns even taking into account their greater risk. 
D)  sell for lower prices than do large firms' stocks. 
A)  follow a random walk but large firms' stocks do not. 
B)  have earned abnormally low returns given their greater risk. 
C)  have earned abnormally high returns even taking into account their greater risk. 
D)  sell for lower prices than do large firms' stocks.

Question 8

What is a rational bubble?

Accepted Answer

A rational bubble exists when investors

Question 9

Give evidence both for and against market efficiency.

Accepted Answer

Market efficiency suggests that at any g

Question 10

The efficient market hypothesis

Accepted Answer

A)  is based on the assumption that prices of securities fully reflect all available information. 
B)  holds that the expected return on a security equals the equilibrium return. 
C)  both A and B. 
D)  neither A nor B. 
A)  is based on the assumption that prices of securities fully reflect all available information. 
B)  holds that the expected return on a security equals the equilibrium return. 
C)  both A and B. 
D)  neither A nor B.

Question 11

"Short selling" refers to the practice of buying a stock and holding it for only a short time before selling it.

Accepted Answer

A) True 
 B)False

Question 12

A situation in which the price of an asset differs from its fundamental market value is called

Accepted Answer

A)  an unexploited profit opportunity. 
B)  a bubble. 
C)  a correction. 
D)  a mean reversion. 
A)  an unexploited profit opportunity. 
B)  a bubble. 
C)  a correction. 
D)  a mean reversion.

Question 13

An investor gains from short selling by ________ and then later ________.

Accepted Answer

A)  buying a stock; selling it at a higher price 
B)  selling a stock; buying it back at a lower price 
C)  buying a stock; selling it at a lower price 
D)  selling a stock; buying it back at a higher price 
A)  buying a stock; selling it at a higher price 
B)  selling a stock; buying it back at a lower price 
C)  buying a stock; selling it at a lower price 
D)  selling a stock; buying it back at a higher price

Question 14

Does the efficient market hypothesis imply that financial markets are efficient? Explain.

Accepted Answer

Yes. EMH does imply that financial marke

Question 15

Which of the following does not weaken the efficient markets hypothesis?

Accepted Answer

A)  Mean reversion 
B)  Success of buy-and-hold strategy 
C)  January effect 
D)  Excessive volatility 
A)  Mean reversion 
B)  Success of buy-and-hold strategy 
C)  January effect 
D)  Excessive volatility

Question 16

An important lesson from the Black Monday Crash of 1987 and the tech crash of 2000 is that

Accepted Answer

A)  factors other than market fundamentals affect stock prices. 
B)  the strong version of the efficient market hypothesis, that stock prices reflect the true fundamental value of securities, is correct. 
C)  market psychology has little if any effect on stock prices. 
D)  there is no such thing as a rational bubble. 
A)  factors other than market fundamentals affect stock prices. 
B)  the strong version of the efficient market hypothesis, that stock prices reflect the true fundamental value of securities, is correct. 
C)  market psychology has little if any effect on stock prices. 
D)  there is no such thing as a rational bubble.

Question 17

Technical analysis is a popular technique used to predict stock prices by studying past stock price data and searching for patterns such as trends and regular cycles.

Accepted Answer

A) True 
 B)False

Question 18

According to the January effect,stock prices

Accepted Answer

A)  experience an abnormal price rise from December to January. 
B)  experience an abnormal price decline from December to January. 
C)  follow a random walk during January. 
D)  set the pattern for the entire year in January. 
A)  experience an abnormal price rise from December to January. 
B)  experience an abnormal price decline from December to January. 
C)  follow a random walk during January. 
D)  set the pattern for the entire year in January.

Question 19

Technical analysts look at historical prices for information to project future prices.

Accepted Answer

A) True 
 B)False

Question 20

Another way to state the efficient market hypothesis is that in an efficient market,

Accepted Answer

A)  unexploited profit opportunities will never exist as market participants, such as arbitrageurs, ensure that they are instantaneously dissipated. 
B)  unexploited profit opportunities will not exist for long, as market participants will act quickly to eliminate them. 
C)  every financial market participant must be well informed about securities. 
D)  only A and C of the above. 
A)  unexploited profit opportunities will never exist as market participants, such as arbitrageurs, ensure that they are instantaneously dissipated. 
B)  unexploited profit opportunities will not exist for long, as market participants will act quickly to eliminate them. 
C)  every financial market participant must be well informed about securities. 
D)  only A and C of the above.

Exam 6: Are Financial Markets Efficient?

How expectations are formed is important because expectations influence

What is the optimal investment strategy according to the efficient market hypothesis? Why?

Raj Rajaratnam,a successful investor in the 2000s who consistently beat the market,was able to outperform the market on a consistent basis,indicating that

Which of the following is an insight from behavioral finance?

The efficient market hypothesis suggests that allocating your funds in the financial markets on the advice of a financial analyst

According to the efficient market hypothesis,the current price of a financial security

The small-firm effect refers to the observation that small firms' stocks

What is a rational bubble?

Give evidence both for and against market efficiency.

The efficient market hypothesis

"Short selling" refers to the practice of buying a stock and holding it for only a short time before selling it.

A situation in which the price of an asset differs from its fundamental market value is called

An investor gains from short selling by ________ and then later ________.

Does the efficient market hypothesis imply that financial markets are efficient? Explain.

Which of the following does not weaken the efficient markets hypothesis?

An important lesson from the Black Monday Crash of 1987 and the tech crash of 2000 is that

Technical analysis is a popular technique used to predict stock prices by studying past stock price data and searching for patterns such as trends and regular cycles.

According to the January effect,stock prices

Technical analysts look at historical prices for information to project future prices.

Another way to state the efficient market hypothesis is that in an efficient market,

Why Study Financial Markets and Institutions?

Overview of the Financial System

What Do Interest Rates Mean and What Is Their Role in Valuation?

Why Do Interest Rates Change?

How Do Risk and Term Structure Affect Interest Rates?

Why Do Financial Institutions Exist?

Why Do Financial Crises Occur and

Central Banks and the Federal Reserve System

Conduct of Monetary Policy: Tools, Goals, Strategy, and Tactics

The Money Markets

The Bond Market

The Stock Market

The Mortgage Markets

The Foreign Exchange Market

The International Financial System

Banking and the Management of Financial Institutions

Financial Regulation

Banking Industry: Structure and Competition

The Mutual Fund Industry

Insurance Companies and Pension Funds

Investment Banks, Security Brokers and Dealers, and Venture Capital Firms

Risk Management in Financial Institutions

Hedging with Financial Derivatives

Financial Crises In Emerging Market Economies

Savings Associations and Credit Unions

Finance Companies

Filters

An investor gains from short selling by and then later .