Deck 10: Market Efficiency

Question 1

To understand the efficient market hypothesis, one must know that there are both _____ and _____ of efficiency.

A) types, methods
B) methods, degrees
C) types, degrees
D) systems, methods

Answer 1

types, degrees

Question 2

_____ efficiency is a measure of how things function in terms of speed of execution and accuracy.

A) Operational
B) Informational
C) Type
D) Systematic

Answer 2

Operational

Question 3

_____ efficiency is a measure of how quickly and accurately the market reacts to new information.

A) Operational
B) Informational
C) Type
D) Systematic

Answer 3

Informational

Question 4

The efficient market hypothesis deals with _____ efficiency.

A) operational
B) informational
C) type
D) systematic

Question 5

_____ form efficiency states that you cannot predict future prices by analyzing past prices.

A) Strong
B) Semi-strong
C) Weak
D) Technical

Question 6

The three forms of the efficient market hypothesis include all of the following except

A) weak.
B) moderately weak.
C) semi-strong.
D) strong.

Question 7

To test the likelihood that a series of price movements occurred by chance you can use a

A) chance test.
B) Fisher-Weil test.
C) runs test.
D) Chi-square test.

Question 8

The _____ form of the efficient market hypothesis states that security prices reflect all relevant publicly available information.

A) strong
B) semi-strong
C) weak
D) technical

Question 9

The Insider Trading Sanctions Act of 1984 permits the courts to impose fines of _____ the profit gained or loss avoided because of the use of non-public information.

A) 100%
B) 3 times
C) 5 times
D) 50%

Question 10

The _____ efficient market hypothesis states that some stocks are priced more efficiently than others.

A) semi-efficient
B) semi-strong form
C) strong form
D) weak form

Question 11

The random walk idea states that _____ occurs randomly.

A) stock price movements
B) news
C) investor activity
D) analyst error

Question 12

A(n) _____ is an unexplained result that deviates from that expected under financial theory.

A) postulate
B) hypothesis
C) anomaly
D) deviation

Question 13

There is some evidence showing that stocks with _____ PE ratios provide higher returns than stocks with _____ PE ratios.

A) low, higher
B) high, lower
C) rising, declining
D) declining, rising

Question 14

As early as 1936 there was evidence in academic literature that _____ common stock tended to earn higher returns that stock with a _____ .

A) blue chip, high PE
B) low-priced, high price
C) low-risk, high yield to maturity
D) small firm, high dividend yield

Question 15

_____ tend to provide higher risk-adjusted stock returns.

A) High price stocks
B) Zero-coupon bonds
C) Small firms
D) Utility stocks

Question 16

There has been an observed tendency for the market to _____ to news, causing, for instance, a stock to fall dramatically, then _____ .

A) under react, fall further
B) overreact, fall further
C) overreact, climb
D) overreact, stay steady

Question 17

Stock returns are inexplicably high during _____ .

A) Christmas season
B) Spring
C) tax season
D) January

Question 18

The arbitrage pricing theory basically states that the market return is determined by a number of distinct, unidentifiable _____ factors.

A) macroeconomic
B) microeconomic
C) political
D) well-known

Question 19

Fama and French found evidence that long-term returns depend on _____ , price to book ratio, and _____ .

A) stock price, delta
B) net income, gamma
C) income from operations, theta
D) company size, beta

Question 20

In efficient markets a stock that is priced to earn a lower rate of return per amount of risk will

A) likely fall in price.
B) likely increase in price.
C) the rest of the market will adjust to the return/risk ratio of this stock.
D) begin paying dividends.

Question 21

The level of transaction costs and bid/ask spreads is associated with

A) informational efficiency.
B) operational efficiency.
C) both informational and operational efficiency.
D) weak form efficiency.

Question 22

Which of the following reflects support of weak form stock market efficiency?

A) point and figure charts
B) short interest ratio
C) Fibonacci numbers
D) none of the above

Question 23

An autocorrelation test that results in supporting weak form stock market efficiency should indicate:

A) a definite, repetitive pattern of price historical price movements.
B) no historical pattern of consistent price movements.
C) considerable evidence of a congestion area before breakout on a consistent basis.
D) consistent patterns of stock price movements before release of insider information.

Question 24

Filter rules stock trading may outperform the market, but adjustment of the returns for _____ tends to show no consistent superior performance, indicating the presence of _____ stock market efficiency.

A) insider trading information; semi-strong
B) inflation; weak form
C) transaction costs; weak form
D) the extent of professional experience; strong form

Question 25

Under the assumption of semi-strong stock market efficiency a day trader, trading scores of times during day based on newsletters and proprietary public information sources,

A) should make a comfortable living.
B) should earn average returns, depending on the risk level assumed.
C) will continue to work as a day trader as long as his/her capital and/or credit sources last.
D) will depend upon technical indicators to trigger stock trading.

Question 26

Which of the following is not a documented stock market anomaly?

A) The low-PE effect
B) The neglected firm effect
C) The small firm effect
D) The Tuesday effect

Question 27

The idea that some stocks are priced more efficiently than others refers to the

A) strong form market efficiency
B) semi-efficient market hypothesis
C) semi-strong form market efficiency
D) weak form market efficiency

Question 28

The efficient market hypothesis is concerned with informational efficiency rather than operational efficiency.

Question 29

It is well established that the market is informationally very efficient.

Question 30

The weak form of market efficiency states that current stock prices include all publicly available information.

Question 31

If the markets are weak form efficient charting techniques should be especially valuable.

Question 32

A runs test is often used to test the semi-strong form of market efficiency.

Question 33

Strong form efficiency holds that security prices include the effects of all information, public and private.

Question 34

A successful filter rule would violate the weak form of market efficiency but not the semi-strong form.

Question 35

Autocorrelation tests can be used to test the weak form of market efficiency.

Question 36

Eugene Fama conducted many of the classic tests of market efficiency.

Question 37

When companies split their shares, they tend to raise the cash dividend at the same time.

Question 38

Buying stock the day before a stock split has traditionally yield abnormal profits.

Question 39

Insider trading and strong form efficiency are closely related topics.

Question 40

The Insider Trading Sanctions Act of 1984 makes all insider trading a felony.

Question 41

The semi-efficient market hypothesis states that some stocks are priced more efficiently than others.

Question 42

The random walk theory states that security prices move randomly without any particular cause and effect.

Question 43

An anomaly is a result that deviates from that expected by finance theory.

Question 44

Higher priced stocks tend to outperform those with lower prices.

Question 45

Small firms tend to outperform those with larger capitalization.

Question 46

Stock returns are inexplicably high in February.

Question 47

Many studies have found evidence of market inefficiency that is statistically, but not economically, significant.

Question 48

Event study methodology is often used to test semistrong form market efficiency.

Question 49

A state of strong form stock market efficiency assumes that there is no insider information.

Question 50

To take advantage of the weekend effect anomaly, buy on Friday, sell on Mondays.

Question 51

An autocorrelation statistical test is frequently used to test weak form efficiency.

Question 52

Repetitive stock price cycles, found by autocorrelation test, tend to support weak form stock market efficiency.

Question 53

Information is believed to arrive more likely on Mondays and Fridays, thus creating what is called the weekend effect.