Question 1

Serial correlation:

Accepted Answer

A) measures the relationship between the current return on a security with that of a second security. 
B) involves multiple securities within the same industry. 
C) indicates a tendency for continuation when the correlation is positive. 
D) indicates a tendency toward reversal when the correlation coefficient is zero. 
E) supports weak form efficiency when the correlation coefficient is near zero. 
A) measures the relationship between the current return on a security with that of a second security. 
B) involves multiple securities within the same industry. 
C) indicates a tendency for continuation when the correlation is positive. 
D) indicates a tendency toward reversal when the correlation coefficient is zero. 
E) supports weak form efficiency when the correlation coefficient is near zero.

Question 2

The U.S.Securities and Exchange Commission periodically charges individuals with insider trading and claims those individuals have made unfair profits.Based on this fact,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 3

Explain why in an efficient market all investments have an expected NPV of zero.

Accepted Answer

In an efficient market,prices are 'fair'

Question 4

Which one of the following statements is correct concerning market efficiency?

Accepted Answer

A) Markets tend to be more efficient when the frequency of price changes diminishes. 
B) If a market is efficient,arbitrage opportunities should be common. 
C) In an efficient market,some market participants will have an advantage over others. 
D) A firm will generally receive a fair price when it sells newly issued shares of stock. 
E) New information will gradually be reflected in a stock's price to avoid spooking investors. 
A) Markets tend to be more efficient when the frequency of price changes diminishes. 
B) If a market is efficient,arbitrage opportunities should be common. 
C) In an efficient market,some market participants will have an advantage over others. 
D) A firm will generally receive a fair price when it sells newly issued shares of stock. 
E) New information will gradually be reflected in a stock's price to avoid spooking investors.

Question 5

The abnormal return in an event study is described as the:

Accepted Answer

A) total return earned on a security on the day of an announcement. 
B) daily return on a security minus the daily return on the overall market. 
C) average return on a security for the 7-day period surrounding an announcement. 
D) average return on a security for the 7-day period surrounding an announcement minus the average return on the security for the past year. 
E) daily return on a security on the announcement date minus the risk-free rate of return. 
A) total return earned on a security on the day of an announcement. 
B) daily return on a security minus the daily return on the overall market. 
C) average return on a security for the 7-day period surrounding an announcement. 
D) average return on a security for the 7-day period surrounding an announcement minus the average return on the security for the past year. 
E) daily return on a security on the announcement date minus the risk-free rate of return.

Question 6

The Kolasinski and Li study of earnings surprises showed that:

Accepted Answer

A) prices tend to overreact and then properly adjust the following day. 
B) prices tend to be unaffected by these types of announcements. 
C) prices tend to adjust rapidly and efficiently to these announcements. 
D) prices adjust slowly to earnings announcements. 
E) earnings surprises tend to be predicted such that prices adjust prior to the announcement. 
A) prices tend to overreact and then properly adjust the following day. 
B) prices tend to be unaffected by these types of announcements. 
C) prices tend to adjust rapidly and efficiently to these announcements. 
D) prices adjust slowly to earnings announcements. 
E) earnings surprises tend to be predicted such that prices adjust prior to the announcement.

Question 7

Which of the following are conditions that Andrei Shleifer presents as the conditions that create market efficiency?

Accepted Answer

A) Arbitrage,independent deviations from rationality,rationality 
B) Competition,arbitrage,and rational investors 
C) Rational investors,dependent deviations from rationality,and competition 
D) Wide public access to information,rational investors,and arbitrage 
E) Professional investors,easy access to information,rational independent investors 
A) Arbitrage,independent deviations from rationality,rationality 
B) Competition,arbitrage,and rational investors 
C) Rational investors,dependent deviations from rationality,and competition 
D) Wide public access to information,rational investors,and arbitrage 
E) Professional investors,easy access to information,rational independent investors

Question 8

The hypothesis that market prices reflect all publicly available information 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 9

Empirical evidence suggests that:

Accepted Answer

A) prices may not reflect their true underlying value. 
B) financial managers lack any ability to correctly time stock repurchases. 
C) managers may profitably speculate in foreign currency. 
D) managers cannot boost stock prices by changing their accounting methods. 
E) wise accounting choices can impact a firm's stock price. 
A) prices may not reflect their true underlying value. 
B) financial managers lack any ability to correctly time stock repurchases. 
C) managers may profitably speculate in foreign currency. 
D) managers cannot boost stock prices by changing their accounting methods. 
E) wise accounting choices can impact a firm's stock price.

Question 10

If you excel in analyzing the future outlook of firms based on past performance,you would prefer that the financial markets be less than ________ form efficient so that you can have an advantage in the marketplace.

Accepted Answer

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

Question 11

Drawing conclusions from too small of a sampling describes the behavioral characteristic of:

Accepted Answer

A) conservatism. 
B) familiarity. 
C) representativeness. 
D) overconfidence. 
E) underreaction. 
A) conservatism. 
B) familiarity. 
C) representativeness. 
D) overconfidence. 
E) underreaction.

Question 12

If financial markets are efficient,then attempting to accurately predict interest rates is:

Accepted Answer

A) an endeavor best left to corporate executives. 
B) a relatively easy and accurate exercise. 
C) a waste of good time. 
D) relatively easy to do if you have a general understanding of finance and economics. 
E) a little tricky but wise managers tend to succeed at it on an ongoing basis. 
A) an endeavor best left to corporate executives. 
B) a relatively easy and accurate exercise. 
C) a waste of good time. 
D) relatively easy to do if you have a general understanding of finance and economics. 
E) a little tricky but wise managers tend to succeed at it on an ongoing basis.

Question 13

The studies conducted by Fama and French show that:

Accepted Answer

A) value stocks have higher average returns than growth stocks around the world. 
B) growth stocks have higher average returns than value stocks around the world. 
C) value stocks outperform in the U.S.while growth stocks outperform elsewhere. 
D) growth stocks outperform in the U.S.while value stocks outperform elsewhere. 
E) value and growth stocks perform relatively the same over longer periods of time. 
A) value stocks have higher average returns than growth stocks around the world. 
B) growth stocks have higher average returns than value stocks around the world. 
C) value stocks outperform in the U.S.while growth stocks outperform elsewhere. 
D) growth stocks outperform in the U.S.while value stocks outperform elsewhere. 
E) value and growth stocks perform relatively the same over longer periods of time.

Question 14

Which one of these is an example of financially irrational behavior?

Accepted Answer

A) An investor selling stock to realize a profit 
B) Increasing the amount you are willing to pay for a stock following a positive announcement 
C) Buying a mutual fund to benefit from diversification 
D) Casino gambling 
E) A firm issuing new shares when their managers feel the stock is overpriced 
A) An investor selling stock to realize a profit 
B) Increasing the amount you are willing to pay for a stock following a positive announcement 
C) Buying a mutual fund to benefit from diversification 
D) Casino gambling 
E) A firm issuing new shares when their managers feel the stock is overpriced

Question 15

Who is credited with saying "Markets can stay irrational longer than you can stay solvent"?

Accepted Answer

A) G.C.Biddle 
B) Warren Buffett 
C) R.S.Kaplan 
D) John Maynard Keynes 
E) Jay Ritter 
A) G.C.Biddle 
B) Warren Buffett 
C) R.S.Kaplan 
D) John Maynard Keynes 
E) Jay Ritter

Question 16

Event studies attempt to determine:

Accepted Answer

A) the influence of information released to the market on stock prices in days surrounding the information's release. 
B) if the market is at least weak form efficient. 
C) whether the market is semi strong or strong form efficient. 
D) the correlation between the returns on two diverse securities. 
E) the optimal time to release new information to the public. 
A) the influence of information released to the market on stock prices in days surrounding the information's release. 
B) if the market is at least weak form efficient. 
C) whether the market is semi strong or strong form efficient. 
D) the correlation between the returns on two diverse securities. 
E) the optimal time to release new information to the public.

Question 17

Individuals that continually monitor the financial markets seeking mispriced securities:

Accepted Answer

A) tend to make substantial profits on a daily basis. 
B) tend to make the markets more efficient. 
C) are never able to find a security that is temporarily mispriced. 
D) are always quite successful using only well-known public information as their basis of evaluation. 
E) are always quite successful using only historical price information as their basis of evaluation. 
A) tend to make substantial profits on a daily basis. 
B) tend to make the markets more efficient. 
C) are never able to find a security that is temporarily mispriced. 
D) are always quite successful using only well-known public information as their basis of evaluation. 
E) are always quite successful using only historical price information as their basis of evaluation.

Question 18

An investor discovers that stock prices change drastically as a result of certain events.This finding is a violation of:

Accepted Answer

A) the moderate form of the efficient market hypothesis. 
B) the semistrong form of the efficient market hypothesis. 
C) the strong form of the efficient market hypothesis. 
D) the weak form of the efficient market hypothesis. 
E) no form of market efficiency but rather an indication of an efficient market. 
A) the moderate form of the efficient market hypothesis. 
B) the semistrong form of the efficient market hypothesis. 
C) the strong form of the efficient market hypothesis. 
D) the weak form of the efficient market hypothesis. 
E) no form of market efficiency but rather an indication of an efficient market.

Question 19

The disposition effect refers to:

Accepted Answer

A) the underreaction of investors to bad news. 
B) selling any security that creates a tax liability. 
C) the hesitancy to sell a security of any firm with which you are affiliated. 
D) the urge to sell all your securities when market values decline. 
E) selling your winners while holding your losers. 
A) the underreaction of investors to bad news. 
B) selling any security that creates a tax liability. 
C) the hesitancy to sell a security of any firm with which you are affiliated. 
D) the urge to sell all your securities when market values decline. 
E) selling your winners while holding your losers.

Exam 14: Efficient Capital Markets and Behavioral Challenges

Serial correlation:

The U.S.Securities and Exchange Commission periodically charges individuals with insider trading and claims those individuals have made unfair profits.Based on this fact,you would tend to argue that the financial markets are at best ________ form efficient.

Explain why in an efficient market all investments have an expected NPV of zero.

Which one of the following statements is correct concerning market efficiency?

The abnormal return in an event study is described as the:

The Kolasinski and Li study of earnings surprises showed that:

Which of the following are conditions that Andrei Shleifer presents as the conditions that create market efficiency?

The hypothesis that market prices reflect all publicly available information is called ________ form efficiency.

Empirical evidence suggests that:

If you excel in analyzing the future outlook of firms based on past performance,you would prefer that the financial markets be less than ________ form efficient so that you can have an advantage in the marketplace.

Drawing conclusions from too small of a sampling describes the behavioral characteristic of:

If financial markets are efficient,then attempting to accurately predict interest rates is:

The studies conducted by Fama and French show that:

Which one of these is an example of financially irrational behavior?

Who is credited with saying "Markets can stay irrational longer than you can stay solvent"?

Event studies attempt to determine:

Individuals that continually monitor the financial markets seeking mispriced securities:

An investor discovers that stock prices change drastically as a result of certain events.This finding is a violation of:

The disposition effect refers to:

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

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