Deck 10: Market Efficiency

Question 1

Prices of securities trading on The Grenadines Exchange react rapidly to information; however, firms listed on the exchange cannot completely hedge their risks.The Grenadines Exchange is likely to have:

A)informational efficiency and allocational efficiency.
B)informational inefficiency and allocational efficiency.
C)informational efficiency and allocational inefficiency.
D)informational inefficiency and allocational inefficiency.

Answer 1

informational efficiency and allocational inefficiency.

Question 2

If markets were weak form efficient, which of the following situations would NOT yield abnormal returns?

A)Analyzing a company's earnings report
B)Identifying a pattern in a company's stock price
C)Obtaining insider information
D)All of the above would yield abnormal returns

Answer 2

Identifying a pattern in a company's stock price

Question 3

A senior manager can consistently earn excess profits by trading the company's stock.Which form of efficiency is contradicted?

A)Weak form
B)Semi-strong form
C)Strong form
D)No form of efficiency is contradicted.

Answer 3

Strong form

Question 4

Which of the following is an underlying assumption of the existence of an efficient market?

A)A small number of rational, profit-maximizing investors exist.
B)Information is costly and not widely available to market participants.
C)Investors don't react quickly and fully to new information.
D)None of the above

Question 5

How are abnormal returns defined?

A)Returns in excess of the market return
B)Returns in excess of the risk-free rate
C)Returns in excess of the risk-adjusted expected return
D)Positive return

Question 6

The price of a certain stock rises every Monday and falls every Thursday.Which form of efficiency is contradicted?

A)Weak form
B)Semi-strong form
C)Strong form
D)No form of efficiency is contradicted.

Question 7

Which of the following refers to the market condition where there are enough securities to efficiently allocate risk?

A)Operational efficiency
B)Allocational efficiency
C)Informational efficiency
D)Liquidity efficiency

Question 8

Which of the following is classified as market efficiency?

A)Weak form
B)Semi-strong form
C)Strong form
D)All of the above

Question 9

What does informational efficiency refer to?

A)Cheap information costs
B)Prices that quickly reflect important information
C)Low number of transactions
D)Both A and B are correct.

Question 10

If markets were strong form efficient, which of the following situations would yield abnormal returns?

A)Analyzing a company's earnings report.
B)Identifying a pattern in a company's stock price
C)Obtaining insider information.
D)None of the above would yield abnormal returns.

Question 11

An investor can consistently make excess profits by following the advice provided on the Financial Guru public website.Which form of efficiency is contradicted?

A)Weak form
B)Semi-strong form
C)Strong form
D)No form of efficiency is contradicted.

Question 12

What does operational efficiency refer to?

A)Prices that quickly reflect important information
B)Low transaction costs
C)Sufficient securities to efficiently allocate risk
D)Both A and B are correct.

Question 13

Which of the following is NOT an underlying assumption of the existence of an efficient market?

A)A large number of rational, profit-maximizing investors exist.
B)Information is costless and widely available to market participants.
C)Information arrives at predetermined times.
D)Investors react quickly and fully to new information.

Question 14

Which of the following is NOT an assumption on the existence of efficient markets?

A)investors will react quickly to new information
B)information arrives randomly and independent of any other information
C)there are a small number of rational, well-informed and profit motivated investors
D)information is widely available to the market, with no cost

Question 15

What does the concept of an efficient market imply?

A)All shares of stock have the same market beta.
B)Selecting stocks by throwing darts at a page of stocks will yield the same return as a carefully selected portfolio.
C)Prices reflect all available information.
D)Stock prices do not fluctuate.

Question 16

According to John Keynes, what do small investors' reactions in the financial market increase?

A)Allocational inefficiency
B)Liquidity constraints
C)Market inefficiency
D)Excessive volatility

Question 17

If markets were semi-strong form efficient, which of the following situations would yield abnormal returns?

A)Analyzing a company's earnings report.
B)Identifying a pattern in a company's stock price.
C)Obtaining insider information.
D)None of the above would yield abnormal returns.

Question 18

Which one of the following is NOT an example of market efficiency?

A)Stock price changes after earning announcements.
B)Stock price decreases every third day by 0.5% from the opening price.
C)Stock price has a beta of 1.
D)Stock price decreases when the market goes up.

Question 19

A stock's price rises by 10% two days before the announcement of a large long-term project is made.Which form of efficiency is contradicted?

A)Weak form
B)Semi-strong form
C)Strong form
D)No form of efficiency is contradicted.

Question 20

Use the following statements to answer the question:
I.Increasing disclosure of information about the firm enhances transparency in the market.
II.Disclosure enhances the understanding of a firm's actions, hence it increases the efficiency of the market.

A)I is incorrect, II is correct.
B)I is correct, II is incorrect.
C)I and II are incorrect.
D)I and II are correct.

Question 21

Which of the following statements is a violation of semi-strong form market efficiency?
I.Executives trade their stock holdings before major announcements.
II.Day traders base their trading decisions on daily, weekly, and monthly trends.

A)I only
B)II only
C)Both I and II
D)Neither of these statements

Question 22

Melanie has observed that stocks that have earned high returns over the past year tend to earn low returns over the next year.She has also observed that stocks that earned low returns over the past year tended to earn high returns over the next year.This is an example of:

A)the January effect.
B)long-term reversal pattern.
C)stock price momentum.
D)size effect.

Question 23

Jane Wong has developed a technical trading rule that has consistently made a risk-adjusted return of 15% per month for the past 10 years.This is evidence of:

A)semi-strong form efficiency.
B)semi-strong form inefficiency.
C)weak form efficiency.
D)weak form inefficiency.

Question 24

The Andrews Sisters Music Corp has just released its financial statements showing an unexpectedly high earnings number.The stock price of the company does not respond to this information.This observation is consistent with:

A)semi-strong form market efficiency.
B)semi-strong form market inefficiency.
C)strong form market efficiency.
D)strong form market inefficiency.

Question 25

Empirical support for market efficiency is strongest for:

A)weak form.
B)semi-strong form.
C)strong form.
D)no form of market efficiency is supported by the data.

Question 26

Which of the following is FALSE? Market efficiency implies:

A)new information disseminates quickly.
B)investors can take advantage of temporary time lags in information dissemination.
C)new information is instantly reflected in share prices.
D)the prices of securities are considered "right" at any time given their risk profile.

Question 27

Which one of the following is NOT a market anomaly?

A)Monday effect
B)January effect
C)Internet bubble
D)Unexpected earning spikes

Question 28

Jimmy Khan has developed a trading rule where he buys firms with relatively high dividend yields.This trading rule has consistently earned a risk-adjusted return of 15% per month for the past 10 years.This is evidence of:

A)semi-strong form efficiency
B)semi-strong form inefficiency
C)weak-form efficiency
D)weak-form inefficiency

Question 29

You purchased shares of a company in the automotive industry a year ago.Over the course of the past year, the economy began to slow down and the company faced declining sales.As a result, the stock price declined over your holding period.Which of the following is true?

A)This is a violation of strong form market efficiency.
B)This is a violation of semi-strong form market efficiency.
C)This is a violation of weak form market efficiency.
D)This is not a violation of the efficient market hypothesis.

Question 30

The announcement of the sudden accidental death of the CEO and principal scientist of a corporation is associated with a 12% decrease in the company's stock price.Which form of market efficiency is contradicted?

A)Weak form
B)Semi-strong form
C)Strong form
D)No form of efficiency is contradicted.

Question 31

Technical analysis, which is defined as the analysis of historical trends of prices, is an important field in finance.Which form of efficiency is this field based on?

A)Weak form inefficiency
B)Semi-strong form inefficiency
C)Strong form inefficiency
D)It has nothing to do with efficiency.

Question 32

Semi-strong form efficiency suggests:

A)stock prices will adjust instantaneously to public information.
B)stock prices reflect all private information.
C)stock prices reflect all information
D)all of the above.

Question 33

Michel has developed a trading strategy for the Abitibi-Témiscamingue Market.He has observed that his strategy earns returns that are statistically significantly greater than the market.Should Michel start applying his trading strategy?

A)Yes, the tests show that its returns are statistically significantly greater than the market.
B)Not necessarily; the tests show that its returns are statistically significantly greater than the market.
C)Yes, the tests show that its returns are economically significantly greater than the market.
D)Not necessarily; the tests do not show whether the returns are economically significantly greater than the market.

Question 34

You have observed that every time Toronto Skaters' Corp.stock falls by 2% in one week, it rises by 8% the next week.What is this observation consistent with?

A)Semi-strong form market efficiency
B)Semi-strong form market inefficiency
C)Weak form market efficiency
D)Weak form market inefficiency

Question 35

If security markets are efficient, then:

A)the net present value of all securities should be positive.
B)the net present value of all securities should be zero.
C)the net present value of all securities should be negative.
D)there are no implications on the net present value of securities.

Question 36

The random walk theory suggests that

A)all stocks have an expected return of zero.
B)stock price changes are random.
C)stock prices are random.
D)diversification is pointless.

Question 37

A university professor is researching the impact of non-public information on the marketplace.She finds that investors who do have access to material, non-public information are consistently earning above-average risk-adjusted returns, and that the market price of the targeted securities are partially reflecting the new information.This is a violation of:
I.Strong form market efficiency
II.Semi-strong market efficiency
III.Weak form market efficiency

A)I only
B)I and II
C)I and III
D)II and III

Question 38

If information does not arrive randomly and the market rapidly and accurately adjusts to any new information, stock prices will

A)follow a random walk.
B)not follow a random walk.
C)behave in a deterministic manner.
D)behave in a completely random manner.

Question 39

Which of the following is NOT true about the efficient market hypothesis?

A)Market prices reflect all available information at any given time.
B)Market prices do not fluctuate dramatically.
C)Market prices are considered fair.
D)Investors cannot continuously earn an excess return over and above the risk-adjusted return.

Question 40

Which of the following observations would provide evidence against the weak form of market efficiency?

A)Mutual fund managers earn superior returns over the past 3 years.
B)Most pension funds outperformed the market last year.
C)Investors who trade on inside information make superior returns.
D)None of the above.

Question 41

If the capital markets are efficient, then the sale or purchase of any security at the market price is:

A)a negative NPV transaction.
B)a positive NPV transaction.
C)sometimes a zero NPV transaction.
D)None of the above.

Question 42

If the capital markets are efficient, then the sale or purchase of any security at the market price is:

A)a negative NPV transaction.
B)a positive NPV transaction.
C)sometimes a zero NPV transaction.
D)None of the above.

Question 43

Boris, the business reporter on XOP radio, says that market efficiency doesn't matter.Provide two reasons why it does matter to investors.

Question 44

Liam, the manager of The Snoring Gryphon, your local Irish pub, is very confused.He has observed that the stock of Gryphon earns higher returns in January than in March.He expected the stock to do better around St.Patrick's Day when the pub's sales are the highest.Explain these two observations to Liam.

Question 45

Use the following statements to answer this question:
I.Strong form efficiency is practically impossible to prove.
II.On average, investors can beat the market using technical analysis.
III.Market efficiency is a myth that does not exist in any of its forms.

A)I, II, and III are correct.
B)I, II, and III are incorrect.
C)I and II are correct and III is incorrect.
D)I is correct, II and III are incorrect.

Question 46

Explain the implications of having an inefficient market.

Question 47

Which of the following is NOT an implication of the efficient market hypothesis for corporate financial officers?

A)They should ignore dramatic changes in their company's stock price.
B)There is no point in timing the issue of new securities.
C)It does not make sense to "play" interest rates by rolling over short-term debt until long-term rates fall.
D)There is no point in timing stock repurchases in an efficient market.

Question 48

During January and February, the stock of Pigeon Couriers was trading at about $25.On March 1, the stock price began to rise until it hit $35 on March 14.On March 15, the company disclosed that earnings were up an unanticipated 15% compared to last year, and the stock price did not change.Explain how, in an efficient market, this is possible.

Question 49

If the weak form of market efficiency holds then:

A)fundamental analysis is useless.
B)stock prices reflect insider trading.
C)stock price changes follow a random walk.
D)all of the above.

Question 50

Describe the semi-strong form of market efficiency and its implications.

Question 51

Loss aversion can be described by which of the following?

A)the tendency to selling profitable investments too early.
B)the tendency to place more emphasis on losses than on gains.
C)the tendency to hold on to investments that are losing money for too long.
D)all of the above.

Question 52

Which of the following best describes behavioural finance?

A)investor behaviour is not always rational but is influenced by psychological biases.
B)investor behaviour is always rational and influenced by psychological biases.
C)only professional investors will behave rationally and logically while inexperienced investors are influenced by psychological biases.
D)investors will consider all available information when making their investment decisions and will ignore all personal biases and opinions.