Question 1

Explain why it is that in an efficient market, investments have an expected NPV of zero.

Accepted Answer

In an efficient market, prices are "fair

Question 2

The market price of a stock moves or fluctuates daily.This fluctuation is:

Accepted Answer

A) inconsistent with the semistrong efficient market hypothesis because prices should be stable. 
B) inconsistent with the weak form efficient market hypothesis because all past information should be priced in. 
C) consistent with the semistrong form of the efficient market hypothesis because as new information arrives daily prices will adjust to it. 
D) consistent with the strong form because prices are controlled by insiders. 
E) None of the above. 
A) inconsistent with the semistrong efficient market hypothesis because prices should be stable. 
B) inconsistent with the weak form efficient market hypothesis because all past information should be priced in. 
C) consistent with the semistrong form of the efficient market hypothesis because as new information arrives daily prices will adjust to it. 
D) consistent with the strong form because prices are controlled by insiders. 
E) None of the above.

Question 3

Under the concept of an efficient market, a random walk in stock prices means that:

Accepted Answer

A) there is no driving force behind price changes. 
B) technical analysts can predict future price movements to earn excess returns. 
C) the unexplained portion of price change in one period is unrelated to the unexplained portion of price change in any other period. 
D) the unexplained portion of price change in one period that can not be explained by expected return can only be explained by the unexplained portion of price change in a prior period. 
E) None of the above. 
A) there is no driving force behind price changes. 
B) technical analysts can predict future price movements to earn excess returns. 
C) the unexplained portion of price change in one period is unrelated to the unexplained portion of price change in any other period. 
D) the unexplained portion of price change in one period that can not be explained by expected return can only be explained by the unexplained portion of price change in a prior period. 
E) None of the above.

Question 4

Which of the following statements is true?

Accepted Answer

A) In efficient markets, a stock's price should change with the arrival of new information. 
B) Average stock returns are higher in January than other months. 
C) Studies by Fama and French and others find that returns of high book to market stocks are much higher than low book to market value stocks to be consistent with the efficient market hypothesis. 
D) All of the above. 
E) None of the above. 
A) In efficient markets, a stock's price should change with the arrival of new information. 
B) Average stock returns are higher in January than other months. 
C) Studies by Fama and French and others find that returns of high book to market stocks are much higher than low book to market value stocks to be consistent with the efficient market hypothesis. 
D) All of the above. 
E) None of the above.

Question 5

In the five years after the offering, ___ underperform matched control groups.

Accepted Answer

A) initial public offerings 
B) seasoned equity offerings 
C) bond offerings 
D) A and B 
E) A, B, and C 
A) initial public offerings 
B) seasoned equity offerings 
C) bond offerings 
D) A and B 
E) A, B, and C

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) Both A and B. 
E) Both A and C. 
A) Overreaction and reversion 
B) Delayed response 
C) Immediate and accurate response 
D) Both A and B. 
E) Both A and C.

Question 7

Suppose that firms with unexpectedly high earnings earn abnormally high returns for several months after the 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 8

An investor who picks a portfolio by throwing darts at the financial pages:

Accepted Answer

A) believes that efficient markets will protect the portfolio from harm as all information is priced. 
B) believes that riskier portfolios earn the same as less risky portfolios. 
C) does so because stock prices do not matter; only cash flow generated matters. 
D) Both A and C. 
E) Both B and C. 
A) believes that efficient markets will protect the portfolio from harm as all information is priced. 
B) believes that riskier portfolios earn the same as less risky portfolios. 
C) does so because stock prices do not matter; only cash flow generated matters. 
D) Both A and C. 
E) Both B and C.

Question 9

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 10

A lawyer works for a firm that advises corporate firms planning to sue other corporations for antitrust damages.He finds that he can "beat the market" by short-selling the stock of the firm that will be sued.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

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 12

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 13

Evidence on stock prices finds that the sudden death of a chief executive officer causes stock prices to fall and the sudden death of an active founding chief executive officer causes stock price to rise.This contrary evidence happens because:

Accepted Answer

A) markets are inefficient and unsure of the real value of the events. 
B) death is inevitable and market prices are random. 
C) things simply happen. 
D) the value of the founding executive was a negative to the firm. 
E) None of the above. 
A) markets are inefficient and unsure of the real value of the events. 
B) death is inevitable and market prices are random. 
C) things simply happen. 
D) the value of the founding executive was a negative to the firm. 
E) None of the above.

Question 14

Valuable financing opportunities can be created by:

Accepted Answer

A) fooling investors. 
B) reducing costs or increasing subsidies. 
C) the creation of a new security. 
D) A and B. 
E) A, B, and C. 
A) fooling investors. 
B) reducing costs or increasing subsidies. 
C) the creation of a new security. 
D) A and B. 
E) A, B, and C.

Question 15

Event studies have been used to examine:

Accepted Answer

A) IPOs, SEOs, and other equity issuances. 
B) changes in earnings. 
C) mergers and acquisitions. 
D) most financial events. 
E) All of the above. 
A) IPOs, SEOs, and other equity issuances. 
B) changes in earnings. 
C) mergers and acquisitions. 
D) most financial events. 
E) All of the above.

Question 16

Financial managers must be cognizant of market efficiency because:

Accepted Answer

A) manipulating earnings by accounting changes does not fool the market. 
B) timing security sales is futile because without private information the current price reflects all known information. 
C) there is limited price pressure from any large sale of stock depressing prices only momentarily before recovering to prior levels. 
D) All of the above. 
E) None of the above. 
A) manipulating earnings by accounting changes does not fool the market. 
B) timing security sales is futile because without private information the current price reflects all known information. 
C) there is limited price pressure from any large sale of stock depressing prices only momentarily before recovering to prior levels. 
D) All of the above. 
E) None of the above.

Question 17

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 about 15%.Is your cousin's performance a violation of market efficiency?

Accepted Answer

No, market efficiency does not preclude

Question 18

Which form of the efficient market hypothesis implies that security prices reflect only information contained in past prices?

Accepted Answer

A) Weak form 
B) Semistrong form 
C) Strong form 
D) Hard form 
E) Past form 
A) Weak form 
B) Semistrong form 
C) Strong form 
D) Hard form 
E) Past form

Question 19

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 new information with no further price adjustments related to that information. 
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 new information with no further price adjustments related to that information. 
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 20

In order to create value from capital budgeting decisions, the firm is likely to:

Accepted Answer

A) locate an unsatisfied demand for a particular product or service. 
B) create a barrier to make it more difficult for other firms to compete. 
C) produce products or services at a lower cost than the competition. 
D) A and C. 
E) A, B, and C. 
A) locate an unsatisfied demand for a particular product or service. 
B) create a barrier to make it more difficult for other firms to compete. 
C) produce products or services at a lower cost than the competition. 
D) A and C. 
E) A, B, and C.

Exam 14: Efficient Capital Markets and Behavioral Challenges

Explain why it is that in an efficient market, investments have an expected NPV of zero.

The market price of a stock moves or fluctuates daily.This fluctuation is:

Under the concept of an efficient market, a random walk in stock prices means that:

Which of the following statements is true?

In the five years after the offering, ___ underperform matched control groups.

Which of the following would be indicative of inefficient markets?

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

An investor who picks a portfolio by throwing darts at the financial pages:

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

A lawyer works for a firm that advises corporate firms planning to sue other corporations for antitrust damages.He finds that he can "beat the market" by short-selling the stock of the firm that will be sued.This finding is a violation of the:

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

Individuals that continually monitor the financial markets seeking mispriced securities:

Evidence on stock prices finds that the sudden death of a chief executive officer causes stock prices to fall and the sudden death of an active founding chief executive officer causes stock price to rise.This contrary evidence happens because:

Valuable financing opportunities can be created by:

Event studies have been used to examine:

Financial managers must be cognizant of market efficiency because:

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 about 15%.Is your cousin's performance a violation of market efficiency?

Which form of the efficient market hypothesis implies that security prices reflect only information contained in past prices?

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

In order to create value from capital budgeting decisions, the firm is likely to:

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

Filters