Exam 11: The Efficient Market Hypothesis

At freshman orientation, 1,500 students are asked to flip a coin 20 times. One student is crowned the winner (tossed 20 heads). This is most closely associated with

The weak form of the efficient-market hypothesis contradicts

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

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

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.

The weak form of the efficient-market hypothesis asserts that

If you believe in the reversal effect, you should

The likelihood of an investment newsletter's successfully predicting the direction of the market for three consecutive years by chance should be

Sehun (1986) finds that the practice of monitoring insider trade disclosures, and trading on that information, would be

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

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

___________ the return on a stock beyond what would be predicted from market movements alone.

Studies of mutual-fund performance

Cumulative abnormal returns (CAR)

The difference between a random walk and a submartingale is the expected price change in a random walk is ______, and the expected price change for a submartingale is ______.

The Food and Drug Administration (FDA) just announced yesterday that they would approve a new cancer-fighting drug from King. You observe that King had an abnormal return of 0% yesterday. This suggests that

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

The debate over whether markets are efficient will probably never be resolved because of

Jaffe (1974) found that stock prices _________ after insiders intensively sold shares.

Google has a beta of 1.0. The annualized market return yesterday was 11%, and the risk-free rate is currently 5%. You observe that Google had an annualized return yesterday of 14%. Assuming that markets are efficient, this suggests that