Question 1

Psychologists generally agree that irrational traits such as those related to behavioral finance are generally:

Accepted Answer

A) temporary and limited to a small sector of the population. 
B) pervasive across individuals. 
C) offset within the overall population. 
D) cyclical in nature. 
E) unique to a few individuals. 
A) temporary and limited to a small sector of the population. 
B) pervasive across individuals. 
C) offset within the overall population. 
D) cyclical in nature. 
E) unique to a few individuals. B

Question 2

Define the three forms of market efficiency.

Accepted Answer

The weak form of market efficiency states that all past prices are reflected in the current market price.The semistrong form includes the weak form plus all public information.The strong form states that all information,public and private,is reflected in current market prices.

Question 3

Studies of the performance of professionally managed mutual funds find that these funds:

Accepted Answer

A) all have a tendency to consistently outperform the overall market. 
B) perform in a manner consistent with semistrong form efficiency. 
C) all have a tendency to underperform the market consistently year after year. 
D) perform in a manner that definitely refutes both strong and semistrong form efficiency. 
E) indicate that stock prices consistently adhere to a daily continuation pattern. 
A) all have a tendency to consistently outperform the overall market. 
B) perform in a manner consistent with semistrong form efficiency. 
C) all have a tendency to underperform the market consistently year after year. 
D) perform in a manner that definitely refutes both strong and semistrong form efficiency. 
E) indicate that stock prices consistently adhere to a daily continuation pattern. B

Question 4

Your best friend works in the finance office of the Delta Corporation.You are aware this friend trades Delta stock based on information he overhears in the office but which is not known to the general public.Your friend continually brags to you about the profits he earns trading Delta stock.Based on this information,you would tend to argue that the financial markets are at best ________ form efficient.

Accepted Answer

A) weak 
B) semiweak 
C) semistrong 
D) strong 
E) perfect 
A) weak 
B) semiweak 
C) semistrong 
D) strong 
E) perfect

Question 5

Suppose firms with unexpectedly high earnings earn abnormally high returns for several months after the earnings announcement.This would be evidence of:

Accepted Answer

A) efficient markets in the weak form. 
B) inefficient markets in the weak form. 
C) efficient markets in the semistrong form. 
D) inefficient markets in the semistrong form. 
E) inefficient markets in the strong form. 
A) efficient markets in the weak form. 
B) inefficient markets in the weak form. 
C) efficient markets in the semistrong form. 
D) inefficient markets in the semistrong form. 
E) inefficient markets in the strong form.

Question 6

Insider trading does not offer any advantages if the financial markets are:

Accepted Answer

A) weak form efficient. 
B) semiweak form efficient. 
C) semistrong form efficient. 
D) strong form efficient. 
E) inefficient. 
A) weak form efficient. 
B) semiweak form efficient. 
C) semistrong form efficient. 
D) strong form efficient. 
E) inefficient.

Question 7

Financial markets fluctuate daily because they:

Accepted Answer

A) are inefficient. 
B) are slowly reacting to new information. 
C) are continually reacting to new information. 
D) offer tremendous arbitrage opportunities. 
E) only reflect historical information. 
A) are inefficient. 
B) are slowly reacting to new information. 
C) are continually reacting to new information. 
D) offer tremendous arbitrage opportunities. 
E) only reflect historical information.

Question 8

An investor discovers that predictions about weather patterns published years in advance and found in the Farmer's Almanac are amazingly accurate.In fact,these predictions enable the investor to predict the health of the farm economy and therefore certain security prices.This finding is a violation of the:

Accepted Answer

A) moderate form of the efficient market hypothesis. 
B) semistrong form of the efficient market hypothesis. 
C) strong form of the efficient market hypothesis. 
D) weak form of the efficient market hypothesis. 
E) efficient market hypothesis at all levels. 
A) moderate form of the efficient market hypothesis. 
B) semistrong form of the efficient market hypothesis. 
C) strong form of the efficient market hypothesis. 
D) weak form of the efficient market hypothesis. 
E) efficient market hypothesis at all levels.

Question 9

If a stock price follows a random walk,the price today is said to be equal to the prior period price plus the expected return for the period with any remaining difference from the actual return considered to be:

Accepted Answer

A) a predictable amount based on the past prices. 
B) due to new information related to the stock. 
C) related to the security's risk. 
D) related to the risk-free rate. 
E) an overall market abnormality. 
A) a predictable amount based on the past prices. 
B) due to new information related to the stock. 
C) related to the security's risk. 
D) related to the risk-free rate. 
E) an overall market abnormality.

Question 10

A fully efficient market will eliminate which one of the following?

Accepted Answer

A) Cyclical patterns 
B) Daily price fluctuations 
C) Unexpected price declines 
D) All abnormal profits except those related to insider trading 
E) Price increases over any period of time in excess of six months 
A) Cyclical patterns 
B) Daily price fluctuations 
C) Unexpected price declines 
D) All abnormal profits except those related to insider trading 
E) Price increases over any period of time in excess of six months

Question 11

If a market is strong form efficient then:

Accepted Answer

A) company insiders are the only investors capable of earning an abnormal profit. 
B) abnormal profits are obtainable by any and all investors. 
C) technical analysts who study past market performance have a market advantage. 
D) all investments should have positive NPVs. 
E) company insiders have no advantage over John Q.Public investor. 
A) company insiders are the only investors capable of earning an abnormal profit. 
B) abnormal profits are obtainable by any and all investors. 
C) technical analysts who study past market performance have a market advantage. 
D) all investments should have positive NPVs. 
E) company insiders have no advantage over John Q.Public investor.

Question 12

Which one of the following statements is true?

Accepted Answer

A) Highly positive serial correlations are indicators of market efficiency. 
B) Abnormal returns limited to the announcement date are indicators of market inefficiency. 
C) Market studies indicate that stock markets are only weak form efficient. 
D) Studies seem to indicate stock markets are semistrong but not strong form efficient. 
E) Mutual funds provide little,if any,benefit to investors. 
A) Highly positive serial correlations are indicators of market efficiency. 
B) Abnormal returns limited to the announcement date are indicators of market inefficiency. 
C) Market studies indicate that stock markets are only weak form efficient. 
D) Studies seem to indicate stock markets are semistrong but not strong form efficient. 
E) Mutual funds provide little,if any,benefit to investors.

Question 13

Explain the risk that often accompanies the behavioral concept of familiarity.

Accepted Answer

Investors who display the behavioral cha

Question 14

One reason why the efficient capital market hypothesis may not hold in reality is that:

Accepted Answer

A) risk has been eliminated from the process of arbitrage. 
B) most investors appear in studies to be rational. 
C) arbitrage appears to be fully effective. 
D) irrationality may be related across individuals. 
E) irrationalities cancel out across investors. 
A) risk has been eliminated from the process of arbitrage. 
B) most investors appear in studies to be rational. 
C) arbitrage appears to be fully effective. 
D) irrationality may be related across individuals. 
E) irrationalities cancel out across investors.

Question 15

Why should a financial decision maker such as a corporate treasurer or CFO be concerned with market efficiency?

Accepted Answer

Good answers to this question might indi

Question 16

In examining the issue of whether the choice of accounting methods affects stock prices,studies have found that:

Accepted Answer

A) accounting depreciation methods can significantly affect stock prices. 
B) switching depreciation methods can significantly affect stock prices. 
C) accounting changes that increase accounting earnings also increase stock prices. 
D) accounting changes can affect stock prices if the company were either to withhold information or provide incorrect information. 
E) accounting reporting has little,if any effect,ever on stock prices. 
A) accounting depreciation methods can significantly affect stock prices. 
B) switching depreciation methods can significantly affect stock prices. 
C) accounting changes that increase accounting earnings also increase stock prices. 
D) accounting changes can affect stock prices if the company were either to withhold information or provide incorrect information. 
E) accounting reporting has little,if any effect,ever on stock prices.

Question 17

If the financial markets are efficient,then investors should expect their investments in those markets to:

Accepted Answer

A) earn extraordinary returns on a routine basis. 
B) generally have positive net present values. 
C) generally have zero net present values. 
D) produce arbitrage opportunities on a routine basis. 
E) produce negative returns on a routine basis. 
A) earn extraordinary returns on a routine basis. 
B) generally have positive net present values. 
C) generally have zero net present values. 
D) produce arbitrage opportunities on a routine basis. 
E) produce negative returns on a routine basis.

Question 18

The notion that actual capital markets,such as the NYSE,are fairly priced is called the:

Accepted Answer

A) efficient market Hypothesis (EMH). 
B) law of one price (LOP). 
C) open markets theorem (OMT). 
D) laissez-faire axiom. 
E) monopoly pricing theorem (MPT). 
A) efficient market Hypothesis (EMH). 
B) law of one price (LOP). 
C) open markets theorem (OMT). 
D) laissez-faire axiom. 
E) monopoly pricing theorem (MPT).

Question 19

The hypothesis that market prices reflect all available information of every kind is called ________ form efficiency.

Accepted Answer

A) open 
B) strong 
C) semistrong 
D) weak 
E) stable 
A) open 
B) strong 
C) semistrong 
D) weak 
E) stable

Question 20

Arbitrage involves the simultaneous purchase:

Accepted Answer

A) of one security and the corporate repurchase of another similar security. 
B) of two substitute securities with their sales following within the hour. 
C) of two or more similar securities. 
D) and sale of the same security. 
E) and sale of different,but substitute,securities. 
A) of one security and the corporate repurchase of another similar security. 
B) of two substitute securities with their sales following within the hour. 
C) of two or more similar securities. 
D) and sale of the same security. 
E) and sale of different,but substitute,securities.

Exam 14: Efficient Capital Markets and Behavioral Challenges

Psychologists generally agree that irrational traits such as those related to behavioral finance are generally:

Define the three forms of market efficiency.

Studies of the performance of professionally managed mutual funds find that these funds:

Suppose firms with unexpectedly high earnings earn abnormally high returns for several months after the earnings announcement.This would be evidence of:

Insider trading does not offer any advantages if the financial markets are:

Financial markets fluctuate daily because they:

If a stock price follows a random walk,the price today is said to be equal to the prior period price plus the expected return for the period with any remaining difference from the actual return considered to be:

A fully efficient market will eliminate which one of the following?

If a market is strong form efficient then:

Which one of the following statements is true?

Explain the risk that often accompanies the behavioral concept of familiarity.

One reason why the efficient capital market hypothesis may not hold in reality is that:

Why should a financial decision maker such as a corporate treasurer or CFO be concerned with market efficiency?

In examining the issue of whether the choice of accounting methods affects stock prices,studies have found that:

If the financial markets are efficient,then investors should expect their investments in those markets to:

The notion that actual capital markets,such as the NYSE,are fairly priced is called the:

The hypothesis that market prices reflect all available information of every kind is called ________ form efficiency.

Arbitrage involves the simultaneous purchase:

Introduction to Corporate Finance

Financial Statements and Cash Flow

Financial Statements and Cash Flow

Discounted Cash Flow Valuation

Net Present Value and Other Investment Rules

Making Capital Investment Decisions

Risk Analysis, real Options, and Capital Budgeting

Interest Rates and Bond Valuation

Stock Valuation

Lessons From Market History

Return, risk, and the Capital Asset Pricing Model Capm

An Alternative View of Risk and Return: the Arbitrage Pricing Theory

Risk, cost of Capital, and Valuation

Long-Term Financing

Capital Structure: Basic Concepts

Capital Structure: Limits to the Use of Debt

Valuation and Capital Budgeting for the Levered Firm

Dividends and Other Payouts

Raising Capital

Leasing

Options and Corporate Finance

Options and Corporate Finance: Extensions and Applications

Warrants and Convertibles

Derivatives and Hedging Risk

Short-Term Finance and Planning

Cash Management

Credit and Inventory Management

Mergers,acquisitions,and Divestitures

Financial Distress

International Corporate Finance

Filters