Deck 1: Anomaly, Arbitrage, and Asset

Question 1

There is evidence for a stock market that rates of return on shares tend to be lower Monday compared with other days of the week. Which of the following is true?

A)If conventional wisdom is that rates of return should be approximately the same each day, this is evidence of an anomaly.
B)If conventional wisdom is that rates of return should be affected by events on Saturdays and Sundays, this is evidence that the market is weak-form inefficient.
C)The evidence shows that asset markets are semi-strong-form inefficient but may be weak-form efficient.
D)The evidence shows that noise-traders dominate the market.

Answer 1

If conventional wisdom is that rates of return should be approximately the same each day, this is evidence of an anomaly.

Question 2

Under which of the following conditions can price discrepancies remain, once arbitrage opportunities have been exhausted?

A)There must be market friction and institutional constraints on trading activities.
B)Assets are divisible.
C)Market is in equilibrium.
D)The market is frictionless.

Answer 2

There must be market friction and institutional constraints on trading activities.

Question 3

Tom wants to hold an asset. What determines his demand to do so?

A)His preferences.
B)The price of other assets.
C)His budget (wealth) constraint.
D)All of the above.

Answer 3

All of the above.

Question 4

Current assets...

A)Are important to company's creditors.
B)Are insignificant since investors only interested in long term assets.
C)Are a source of fund for a company's day-to-day operations.
D)Can be converted into cash in less than a year.

Question 5

Tom wants to sell his house, but it will take at least two months before the transaction occurs. This asset is

A)Unattractive.
B)Risky.
C)Unsellable.
D)Illiquid.