Question 1

Event studies of dividend omissions indicate that:

Accepted Answer

A) this type of announcement generally has no effect on abnormal returns. 
B) the cumulative abnormal return remains constant when this type of announcement is made. 
C) stock returns are positively,and efficiently,impacted when dividend omission announcements are made. 
D) this type of an event is incorporated into stock prices slowly over a 10-day period. 
E) the cumulative abnormal return declines on the day prior to and the day of the announcement. 
A) this type of announcement generally has no effect on abnormal returns. 
B) the cumulative abnormal return remains constant when this type of announcement is made. 
C) stock returns are positively,and efficiently,impacted when dividend omission announcements are made. 
D) this type of an event is incorporated into stock prices slowly over a 10-day period. 
E) the cumulative abnormal return declines on the day prior to and the day of the announcement.

Question 2

In the three years prior to a forced departure of a top manager,stock prices,adjusted for market performance,on average:

Accepted Answer

A) decline about 20 percent. 
B) decline about 40 percent. 
C) decline about 60 percent. 
D) remain stable. 
E) increase about 20 percent. 
A) decline about 20 percent. 
B) decline about 40 percent. 
C) decline about 60 percent. 
D) remain stable. 
E) increase about 20 percent.

Question 3

Suppose your cousin invests in the stock market and doubles her money in a single year while the market,on average,earned a return of only 15 percent.Is your cousin's performance a violation of market efficiency?

Accepted Answer

No,market efficiency does not preclude i

Question 4

Ritter's study of SEO's suggests that:

Accepted Answer

A) managers appear to be able to successfully time SEO issues when the stock is overpriced. 
B) managers can only successfully time SEO issuance by pure chance. 
C) managers tend to be incorrect in their market assessment of the market movement of their firm's stock price. 
D) returns on SEO-issuing firms are statistically the same as those of style-matched non-issuers for the five years following issuance. 
E) firms are better at timing IPOs than they are at timing SEOs. 
A) managers appear to be able to successfully time SEO issues when the stock is overpriced. 
B) managers can only successfully time SEO issuance by pure chance. 
C) managers tend to be incorrect in their market assessment of the market movement of their firm's stock price. 
D) returns on SEO-issuing firms are statistically the same as those of style-matched non-issuers for the five years following issuance. 
E) firms are better at timing IPOs than they are at timing SEOs.

Question 5

Critics of behavioral finance use which one of these as an argument for market efficiency?

Accepted Answer

A) Research papers supporting market efficiency tend to end up "in file drawers" 
B) Underreactions fail to exist in actual studies 
C) The overall community of financial economists firmly decided the markets are efficient 
D) Overreactions offset underreactions in almost every market study conducted to date 
E) Conservatism has been found to be absent in studies under actual market conditions 
A) Research papers supporting market efficiency tend to end up "in file drawers" 
B) Underreactions fail to exist in actual studies 
C) The overall community of financial economists firmly decided the markets are efficient 
D) Overreactions offset underreactions in almost every market study conducted to date 
E) Conservatism has been found to be absent in studies under actual market conditions

Question 6

Which of the following would be indicative of inefficient markets?

Accepted Answer

A) Overreaction and reversion 
B) Delayed response 
C) Immediate and accurate response 
D) Overreaction with reversion and delayed response 
E) Immediate and accurate response with a zero NPV 
A) Overreaction and reversion 
B) Delayed response 
C) Immediate and accurate response 
D) Overreaction with reversion and delayed response 
E) Immediate and accurate response with a zero NPV

Question 7

Market efficiency requires:

Accepted Answer

A) arbitrage conducted by irrational investors. 
B) the absence of arbitrage. 
C) speculation by amateur investors. 
D) all investors to be rational. 
E) countervailing irrationalities. 
A) arbitrage conducted by irrational investors. 
B) the absence of arbitrage. 
C) speculation by amateur investors. 
D) all investors to be rational. 
E) countervailing irrationalities.

Question 8

According to theory,studying historical prices in order to identify mispriced stocks will:

Accepted Answer

A) only work if the market is at least weak form efficient. 
B) work as long as the market is less than strong form efficient. 
C) work only in a strong form efficient market. 
D) not work in any market regardless of the level of efficiency. 
E) not work if the market is at least weak form efficient. 
A) only work if the market is at least weak form efficient. 
B) work as long as the market is less than strong form efficient. 
C) work only in a strong form efficient market. 
D) not work in any market regardless of the level of efficiency. 
E) not work if the market is at least weak form efficient.

Question 9

In an efficient market,the price of a security will:

Accepted Answer

A) always rise immediately upon the release of new information with no further price adjustments related to that information. 
B) react to new information over a two-day period after which time no further price adjustments related to that information will occur. 
C) rise sharply when new information is first released and then decline to a new stable level by the following day. 
D) react immediately to any new information that affects the value of the issuing firm. 
E) be slow to react for the first few hours after new information is released allowing time for that information to be reviewed and analyzed. 
A) always rise immediately upon the release of new information with no further price adjustments related to that information. 
B) react to new information over a two-day period after which time no further price adjustments related to that information will occur. 
C) rise sharply when new information is first released and then decline to a new stable level by the following day. 
D) react immediately to any new information that affects the value of the issuing firm. 
E) be slow to react for the first few hours after new information is released allowing time for that information to be reviewed and analyzed.

Question 10

An efficient capital market is one in which:

Accepted Answer

A) brokerage commissions are zero. 
B) taxes are irrelevant. 
C) securities always offer a positive NPV. 
D) all investments earn the market rate of return. 
E) security prices reflect all available information. 
A) brokerage commissions are zero. 
B) taxes are irrelevant. 
C) securities always offer a positive NPV. 
D) all investments earn the market rate of return. 
E) security prices reflect all available information.

Question 11

Which one of these is the best means of creating a valuable financing opportunity?

Accepted Answer

A) Reduce a tax subsidy 
B) Fool investors in an efficient market 
C) Create a new security to meet the needs of an unsatisfied clientele 
D) Issue new securities in a market niche of satisfied clientele 
E) Create new securities to minimize tax benefits 
A) Reduce a tax subsidy 
B) Fool investors in an efficient market 
C) Create a new security to meet the needs of an unsatisfied clientele 
D) Issue new securities in a market niche of satisfied clientele 
E) Create new securities to minimize tax benefits

Question 12

Stock market events in 1929,1987,and 2008 are most apt to be used as examples in support of which one of these theories?

Accepted Answer

A) Blanket theory 
B) Advanced markets theory 
C) Value theory 
D) Bubble theory 
E) Behavioral theory 
A) Blanket theory 
B) Advanced markets theory 
C) Value theory 
D) Bubble theory 
E) Behavioral theory

Question 13

Assume the price of a stock rises upon the announcement that the firm's chief executive officer (CEO)was killed in a freak accident.This market reaction is most indicative of the:

Accepted Answer

A) uncertainty of the firm's future existence. 
B) random nature of stock price movements. 
C) expected management turmoil that is anticipated. 
D) underperformance of that CEO. 
E) sadness of hearing the news. 
A) uncertainty of the firm's future existence. 
B) random nature of stock price movements. 
C) expected management turmoil that is anticipated. 
D) underperformance of that CEO. 
E) sadness of hearing the news.

Question 14

Assume today is an earnings announcement day for a firm.For the day,the firm's return was .8 percent,while the risk-free daily rate was .01 percent and the market rate of return was 1.1 percent.The firm's industrial class returned 1.2 percent on average for the day.What was the firm's abnormal return for the day?

Accepted Answer

A) .8 percent 
B) .79 percent 
C) −.3 percent 
D) −.4 percent 
E) −.39 percent 
A) .8 percent 
B) .79 percent 
C) −.3 percent 
D) −.4 percent 
E) −.39 percent

Question 15

The form of market efficiency that only relates to whether past market returns are useful in predicting future market returns is ________ 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 16

The market price of a stock tends to fluctuate throughout every trading day.This fluctuation is:

Accepted Answer

A) inconsistent with the semistrong form of the efficient market hypothesis because prices should be stable. 
B) inconsistent with the weak form of the efficient market hypothesis because all past information should already be included in the price. 
C) consistent with the semistrong form of the efficient market hypothesis because daily prices should adjust as new information becomes available. 
D) consistent with the strong form of market efficiency because prices are controlled by insiders. 
E) a strong indicator that abnormal profits can be realized. 
A) inconsistent with the semistrong form of the efficient market hypothesis because prices should be stable. 
B) inconsistent with the weak form of the efficient market hypothesis because all past information should already be included in the price. 
C) consistent with the semistrong form of the efficient market hypothesis because daily prices should adjust as new information becomes available. 
D) consistent with the strong form of market efficiency because prices are controlled by insiders. 
E) a strong indicator that abnormal profits can be realized.

Question 17

Which term best applies to the situation where an investor cares less about losing $1 of his profits than he does about losing $1 of his original investment?

Accepted Answer

A) Get-evenitis 
B) Snakebite effect 
C) Familiarity 
D) Home bias 
E) House money effect 
A) Get-evenitis 
B) Snakebite effect 
C) Familiarity 
D) Home bias 
E) House money effect

Question 18

An investor discovers that for a certain group of stocks,large positive price changes are always followed by large negative price changes.This finding is a violation of the ________ form of the efficient market hypothesis.

Accepted Answer

A) moderate 
B) semistrong 
C) strong 
D) weak 
E) historical 
A) moderate 
B) semistrong 
C) strong 
D) weak 
E) historical

Question 19

An overconfident investor will tend to:

Accepted Answer

A) trade primarily in securities from their local area. 
B) trade less frequently than an average investor. 
C) underperform due to excess trading. 
D) suffer from the disposition effect. 
E) underestimate their ability to pick a winning stock. 
A) trade primarily in securities from their local area. 
B) trade less frequently than an average investor. 
C) underperform due to excess trading. 
D) suffer from the disposition effect. 
E) underestimate their ability to pick a winning stock.

Question 20

If the securities market is efficient,an investor need only throw darts at the stock pages to pick securities and be just as well off as they would be with a professionally-developed portfolio.This statement is:

Accepted Answer

A) true because there would be no significant difference in risk and return. 
B) true because in an efficient stock market all portfolios earn the market rate of return. 
C) false because professionals guarantee higher returns given the same level of risk. 
D) false because investors may not hold a desirable risk-return combination. 
E) false because the markets are controlled by the institutional investors. 
A) true because there would be no significant difference in risk and return. 
B) true because in an efficient stock market all portfolios earn the market rate of return. 
C) false because professionals guarantee higher returns given the same level of risk. 
D) false because investors may not hold a desirable risk-return combination. 
E) false because the markets are controlled by the institutional investors.

Exam 14: Efficient Capital Markets and Behavioral Challenges

Event studies of dividend omissions indicate that:

In the three years prior to a forced departure of a top manager,stock prices,adjusted for market performance,on average:

Suppose your cousin invests in the stock market and doubles her money in a single year while the market,on average,earned a return of only 15 percent.Is your cousin's performance a violation of market efficiency?

Ritter's study of SEO's suggests that:

Critics of behavioral finance use which one of these as an argument for market efficiency?

Which of the following would be indicative of inefficient markets?

Market efficiency requires:

According to theory,studying historical prices in order to identify mispriced stocks will:

In an efficient market,the price of a security will:

An efficient capital market is one in which:

Which one of these is the best means of creating a valuable financing opportunity?

Stock market events in 1929,1987,and 2008 are most apt to be used as examples in support of which one of these theories?

Assume the price of a stock rises upon the announcement that the firm's chief executive officer (CEO)was killed in a freak accident.This market reaction is most indicative of the:

The form of market efficiency that only relates to whether past market returns are useful in predicting future market returns is ________ form efficiency.

The market price of a stock tends to fluctuate throughout every trading day.This fluctuation is:

Which term best applies to the situation where an investor cares less about losing $1 of his profits than he does about losing $1 of his original investment?

An investor discovers that for a certain group of stocks,large positive price changes are always followed by large negative price changes.This finding is a violation of the ________ form of the efficient market hypothesis.

An overconfident investor will tend to:

If the securities market is efficient,an investor need only throw darts at the stock pages to pick securities and be just as well off as they would be with a professionally-developed portfolio.This statement is:

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