Question 1

If the efficient market hypothesis holds, investors should expect:

Accepted Answer

A) to earn only a normal return. 
B) to receive a fair price for their securities. 
C) to always be able to pick stocks that will outperform the market averages. 
D) Both A and B. 
E) Both B and C. 
A) to earn only a normal return. 
B) to receive a fair price for their securities. 
C) to always be able to pick stocks that will outperform the market averages. 
D) Both A and B. 
E) Both B and C.

Question 2

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 increases stock prices. 
D) accounting changes can affect stock prices if the company were either to withhold information or provide incorrect information. 
E) All of the above. 
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 increases stock prices. 
D) accounting changes can affect stock prices if the company were either to withhold information or provide incorrect information. 
E) All of the above.

Question 3

When the 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 to the actual return due to:

Accepted Answer

A) a predictable amount based on the past prices. 
B) a component based on new information unrelated to past prices. 
C) the security's risk. 
D) the risk free rate. 
E) None of the above. 
A) a predictable amount based on the past prices. 
B) a component based on new information unrelated to past prices. 
C) the security's risk. 
D) the risk free rate. 
E) None of the above.

Question 4

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

Accepted Answer

A) Efficient Markets Hypothesis (EMH). 
B) Law of One Price. 
C) Open Markets Theorem. 
D) Laissez-Faire Axiom. 
E) Monopoly Pricing Theorem. 
A) Efficient Markets Hypothesis (EMH). 
B) Law of One Price. 
C) Open Markets Theorem. 
D) Laissez-Faire Axiom. 
E) Monopoly Pricing Theorem.

Question 5

The abnormal return in an event study is described as:

Accepted Answer

A) the return earned on the day of announcement for the stock. 
B) the excess return earned on the day of announcement for the stock. 
C) the total return earned for the investment holding period. 
D) All of the above. 
E) None of the above. 
A) the return earned on the day of announcement for the stock. 
B) the excess return earned on the day of announcement for the stock. 
C) the total return earned for the investment holding period. 
D) All of the above. 
E) None of the above.

Question 6

Your best friend works in the finance office of the Delta Corporation.You are aware that this friend trades Delta stock based on information he overhears in the office.You know that this information 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 7

Ritter's study of Initial Public Offerings (IPOs) showed that the post offering stock performance was:

Accepted Answer

A) less than the control group by about 2% in the five years following the IPO. 
B) incorrectly priced at issuance because over the next five years the abnormal returns were greater than zero on average. 
C) immaterial to the pricing of the IPO because future market performance is unknown at issuance. 
D) equal across IPOs, irrespective of risk or which year they were issued. 
E) All of the above. 
A) less than the control group by about 2% in the five years following the IPO. 
B) incorrectly priced at issuance because over the next five years the abnormal returns were greater than zero on average. 
C) immaterial to the pricing of the IPO because future market performance is unknown at issuance. 
D) equal across IPOs, irrespective of risk or which year they were issued. 
E) All of the above.

Question 8

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 rate of return to investors. 
D) security prices are guaranteed by the U.S.Securities and Exchange Commission to be fair. 
E) security prices reflect available information. 
A) brokerage commissions are zero. 
B) taxes are irrelevant. 
C) securities always offer a positive rate of return to investors. 
D) security prices are guaranteed by the U.S.Securities and Exchange Commission to be fair. 
E) security prices reflect available information.

Question 9

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

Accepted Answer

A) do not outperform a market index.Assuming mutual fund managers rely primarily on public information, this finding refutes the semistrong form of the efficient market hypothesis. 
B) do not outperform a market index.Assuming mutual fund managers rely primarily on public information, this finding supports the semistrong form of the efficient market hypothesis. 
C) outperform a market index.Assuming mutual fund managers rely primarily on public information, this finding refutes the semistrong form of the efficient market hypothesis. 
D) outperform a market index.Assuming mutual fund managers rely primarily on public information, this finding supports the semistrong form of the efficient market hypothesis. 
E) Both C and D. 
A) do not outperform a market index.Assuming mutual fund managers rely primarily on public information, this finding refutes the semistrong form of the efficient market hypothesis. 
B) do not outperform a market index.Assuming mutual fund managers rely primarily on public information, this finding supports the semistrong form of the efficient market hypothesis. 
C) outperform a market index.Assuming mutual fund managers rely primarily on public information, this finding refutes the semistrong form of the efficient market hypothesis. 
D) outperform a market index.Assuming mutual fund managers rely primarily on public information, this finding supports the semistrong form of the efficient market hypothesis. 
E) Both C and D.

Question 10

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:

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) None of the above. 
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) None of the above.

Question 11

Define the three forms of market efficiency.

Accepted Answer

The student should present a straightfor

Question 12

Which of the following is true?

Accepted Answer

A) Most empirical evidence is consistent with strong form efficiency. 
B) Most empirical evidence is inconsistent with weak form efficiency. 
C) Strong form market efficiency is not supported by the empirical evidence. 
D) Both A and C. 
E) Both B and C. 
A) Most empirical evidence is consistent with strong form efficiency. 
B) Most empirical evidence is inconsistent with weak form efficiency. 
C) Strong form market efficiency is not supported by the empirical evidence. 
D) Both A and C. 
E) Both B and C.

Question 13

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 14

Which of the following tend to reinforce the argument that the financial markets are efficient?
I.Information spreads rapidly in today's world.
II.There is tremendous competition in the financial markets.
III.Market prices continually fluctuate.
IV.Market prices react suddenly to unexpected news announcements.

Accepted Answer

A) I and III only 
B) II and IV only 
C) I, II, and III only 
D) II, III, and IV only 
E) I, II, III, and IV 
A) I and III only 
B) II and IV only 
C) I, II, and III only 
D) II, III, and IV only 
E) I, II, III, and IV

Question 15

If the market is weak form efficient:

Accepted Answer

A) semistrong form efficiency holds. 
B) strong form efficiency must hold. 
C) semistrong form efficiency may hold. 
D) markets are not weak form efficient. 
E) None of the above. 
A) semistrong form efficiency holds. 
B) strong form efficiency must hold. 
C) semistrong form efficiency may hold. 
D) markets are not weak form efficient. 
E) None of the above.

Question 16

Event studies attempt to measure:

Accepted Answer

A) the influence of information released to the market on returns in days surrounding its announcement. 
B) if the market is at least semistrong form efficient. 
C) whether there is a significant reaction to public announcements. 
D) All of the above. 
E) None of the above. 
A) the influence of information released to the market on returns in days surrounding its announcement. 
B) if the market is at least semistrong form efficient. 
C) whether there is a significant reaction to public announcements. 
D) All of the above. 
E) None of the above.

Question 17

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) None of the above. 
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) None of the above.

Question 18

An example of financially irrational behavior is:

Accepted Answer

A) gambling in Las Vegas. 
B) when a firm announces an increase in earnings and the stock price enjoys three days of large abnormal returns. 
C) when a firm announces an increase in earnings and the stock price enjoys an immediate surge in value which is captured in one day. 
D) Both A and B. 
E) Both A and C. 
A) gambling in Las Vegas. 
B) when a firm announces an increase in earnings and the stock price enjoys three days of large abnormal returns. 
C) when a firm announces an increase in earnings and the stock price enjoys an immediate surge in value which is captured in one day. 
D) Both A and B. 
E) Both A and C.

Question 19

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 20

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.

Exam 14: Efficient Capital Markets and Behavioral Challenges

If the efficient market hypothesis holds, investors should expect:

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

When the 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 to the actual return due to:

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

The abnormal return in an event study is described as:

Ritter's study of Initial Public Offerings (IPOs) showed that the post offering stock performance was:

An efficient capital market is one in which:

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

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:

Define the three forms of market efficiency.

Which of the following is true?

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

If the market is weak form efficient:

Event studies attempt to measure:

An example of financially irrational behavior is:

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

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

Introduction to Corporate Finance

Financial Statements and Cash Flow

Financial Statements Analysis and Long-Term Planning

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

Risk and Return: Lessons From Market History

Return and Risk: the Capital Asset Pricing Model

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

Risk, Cost of Capital, and Capital Budgeting

Long-Term Financing: an Introduction

Capital Structure: Basic Concepts

Capital Structure: Limits to the Use of Debt

Valuation and Capital Budgeting for the Levered Firm

Dividends and Other Payouts

Issuing Securities to the Public

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 and Acquisitions

Financial Distress

International Corporate Finance

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