Deck 7: Stock Price Behavior and Market Efficiency

Question 1

The day-of-the-week effect is defined as the tendency for which day of the week to have a negative average rate of return?

A) Monday
B) Tuesday
C) Wednesday
D) Thursday
E) Friday

Answer 1

A

Question 2

Which one of the following terms is used to describe a sudden and significant collapse in market prices?

A) dive
B) recession
C) crash
D) adjustment
E) rebound

Answer 2

C

Question 3

Stocks A,B,and C have identical risks.Stock A earns an annual return of 9.9 percent as compared to 9.6 percent returns on stocks B and C.Given this,you can correctly assume that:

A) Stock A is overpriced.
B) the market return is 9.75 percent.
C) Stock A represents the smallest-sized firm.
D) Stock A has a positive excess return.
E) Stocks B and C represent firms that are in the process of merging.

Answer 3

D

Question 4

Which one of the following returns is computed as the observed return minus the expected return?

A) visible
B) distinct
C) abnormal
D) subjective
E) efficient

Question 5

Which one of the following correctly identifies the phenomenon that states that one month has the greatest tendency for small stocks to earn large returns?

A) January effect
B) March effect
C) September effect
D) October effect
E) December effect

Question 6

Independent deviations from rationality:

A) only exist when the overall market is overvalued.
B) prevent the markets from ever being efficient.
C) can create an efficient market.
D) are the actions taken by rational arbitrage traders.
E) do not exist in an efficient market.

Question 7

Which one of the following terms best describes the information you know about a company that will have a significant effect on the price of the company's stock once that information is released?

A) material public information
B) public information
C) abnormal information
D) private, non-material information
E) material non-public information

Question 8

Efficient markets tend to exist:

A) only when all investors are rational.
B) anytime market volume exceeds the average trading volume.
C) only when market volatility is low.
D) when rational arbitrage traders dominate irrational traders.
E) when arbitrage trading is prohibited.

Question 9

Security A and Security B have similar risks.However,Security A has a higher rate of return than Security B.The return on Security A minus the return on Security B is referred to as which one of the following?

A) market return
B) abnormal return
C) deviated return
D) excess return
E) real return

Question 10

Which one of the following states that investors cannot consistently earn positive excess returns?

A) market return hypothesis
B) current market hypothesis
C) efficient market hypothesis
D) risk-return theory
E) excess theory

Question 11

Which one of the following is required for a trader to earn excess profits?

A) excessive trading
B) excessive research
C) market inefficiency
D) highly volatile market state
E) relatively stable market state

Question 12

Which type of trader is defined as one who decides to trade securities based on publicly available information and analysis?

A) public
B) informed
C) normal
D) inside
E) block

Question 13

In an efficient market,stocks with similar risks will:

A) have the same market price.
B) pay similar dividends.
C) yield the market rate of return.
D) produce abnormal returns.
E) have similar rates of return.

Question 14

The term "independent deviations from rationality" implies that:

A) irrational investors are absent from an efficient market.
B) arbitrage traders act independent of each other.
C) markets must be inefficient.
D) irrational investors behave differently from one another.
E) arbitrage traders act together to offset the actions of rational investors.

Question 15

Arbitrage traders:

A) tend to be well-capitalized.
B) tend to be irrational investors.
C) are dominated by irrational investors in an efficient market.
D) lower the efficiency level of a market.
E) sell only relatively inexpensive stocks.

Question 16

Which one of the following terms is used to identify the NYSE rules which slow or stop trading when the DJIA declines by more than a specified amount during a trading session?

A) order flows
B) market timers
C) crash helmets
D) circuit breakers
E) trade barriers

Question 17

Which one of the following terms is used to describe a stock price that moves over time creating no discernible pattern?

A) deviated pattern
B) dispersed flow
C) efficient movement
D) overreaction and correction
E) random walk

Question 18

Which one of the following will automatically occur if all investors are rational?

A) All stock prices will be equal.
B) Equivalent risk assets will have equal expected rates of return.
C) All investors will earn the market rate of return.
D) All investors will earn the same rate of return.
E) The riskier an asset, the higher its market price will be.

Question 19

Which one of the following is a research method used to study the effects news has on stock prices?

A) polarization
B) market analysis
C) event study
D) news theory
E) reaction hypothesis

Question 20

Which one of the following terms is used to describe a market situation where prices are much higher than either fundamental or rational analysis would tend to support?

A) bear market
B) cloud
C) inversion
D) bubble
E) crash aversion

Question 21

Dover Lumber announced last week that its unpopular CEO had resigned.In response to this announcement,the firm's stock price increased from $17 a share to $23 a share.The following day the price declined to $21 a share and has remained constant at that level.This is an example of a(n):

A) over-reaction and correction.
B) underpricing.
C) delayed reaction.
D) pre-activity action.
E) efficient market reaction.

Question 22

Last week,Newtown Plastics announced that it had developed a new plastic container that is stronger and more durable,yet easier to recycle.In response to this announcement,the firm's stock price rose from $21 a share to a high of $27 a share and has remained at that level.This is an example of a(n):

A) over-reaction and correction.
B) post-activity reaction.
C) delayed reaction.
D) pre-activity action.
E) efficient market reaction.

Question 23

Which one of the following best describes the type(s)of information included in a strong-form efficient market?

A) historical
B) historical and public
C) private and public
D) current and public
E) historical and private

Question 24

You are the chief financial officer of Davidson Industries.On multiple occasions,you have engaged in insider trading but have never been able to earn any abnormal returns.Which form of market efficiency most likely exists given your situation?

A) mild-form
B) weak-form
C) historical-form
D) semi-strong form
E) strong-form

Question 25

In an efficient market,daily abnormal returns:

A) are very volatile.
B) reflect news within the past week.
C) reflect news since the prior trading day.
D) remain constant.
E) do not exist.

Question 26

Which one of the following statements is correct?

A) Company insiders are not permitted to trade their employer's securities.
B) Only tippers can be accused of illegal insider trading.
C) Tippees are permitted to trade securities based on information they know is private.
D) Trading on private information which you just happen to overhear is legal.
E) Any trading based on information known to be private is illegal.

Question 27

If the financial markets were regulated such that the markets maintained strong-form efficiency,then:

A) insider trading laws would be unnecessary.
B) all investors would earn equivalent rates of return.
C) risk premiums would vanish.
D) all investors would become arbitrage traders.
E) securities would tend to be continually underpriced.

Question 28

You analyze a firm's financial statements and invest based upon the results of this analysis.Which form of market efficiency must exist if you are able to earn excess profits on these investments?

A) weak-form
B) historical-form
C) semi-strong form
D) full-form
E) mild-form

Question 29

How should cumulative abnormal returns react in an efficient market?

A) relatively constant, sharp break, relatively constant
B) relatively constant with no breaks
C) steadily increasing
D) steadily decreasing
E) remain constant at zero

Question 30

Which of the following are ineffective strategies for producing excess returns if the market is semistrong-form efficient?
I)graphing past prices searching for patterns
II)watching the daily market movements
III)studying the latest analyst's reports
IV)analyzing a firm's financial statements

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

Question 31

Which of the following sources of information are used by informed traders?
I)financial statements
II)inside information
III)internet reports
IV)analysts reports

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

Question 32

Which of the following will lead to excess profits in a semistrong-form efficient market?
I)private financial information
II)historical price trends
III)financial analysts reports
IV)unreleased merger plans

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

Question 33

Which form of market efficiency exists if the market is efficient only in regard to historical information?

A) mild-form
B) weak-form
C) historical-form
D) semistrong-form
E) strong-form

Question 34

Ann uses two approaches to trading stocks.First,she trades on what she believes is a repetitive pattern as seen in Dotson Co's historical prices.Secondly,she analyzes the financial statements of The Allen Co.to compute changes in the return on equity as a predictor of future stock prices for that firm.She trades based on both strategies.Ann earns excess profits on her return on equity strategy but not on her historical prices strategy.This suggests that the market is at least ________ efficient but less than ________ efficient.

A) weak-form; mild-form
B) mild-form; semistrong-form
C) weak-form; semistrong-form
D) semistrong-form; full-form
E) semistrong-form; strong-form

Question 35

Which one of the following involves the study of a firm's stock price for the few days surrounding a news announcement?

A) web survey
B) market analysis
C) event study
D) auditing review
E) trend study

Question 36

Two weeks ago Acme Electronics announced that it had developed a new chip design which was being considered by major companies for use in future smart phone development.At the close of trading the day before the announcement,Acme common stock closed at $20.On the day following the announcement,Acme closed at $21.Two days after the announcement the stock closed at $22.50.Four days after the announcement the stock traded at $23.Last week,Acme stock traded at $26,a level it has maintained since then.This is an example of a(n):

A) over-reaction and correction.
B) underpricing.
C) delayed reaction.
D) pre-activity action.
E) efficient market reaction.

Question 37

If the market is semistrong-form efficient,then which one of the following statements is true?

A) Neither technical nor fundamental analysis leads to abnormal profits.
B) Technical analysts have the ability to earn excess profits but fundamental analysts cannot.
C) Fundamental analysts can earn excess profits but technical analysts cannot.
D) Both technical and fundamental analysts earn excess profits based on their research.
E) No answer can be determined as the form of market efficiency is unrelated to abnormal, or excess returns.

Question 38

Which one of the following would best reveal how stock prices react when competitive firms merge?

A) financial analysis
B) field testing
C) risk analysis
D) event study
E) market survey

Question 39

Research on semistrong-form efficient markets indicates which one of the following is correct?

A) Identifying a stock with repetitive price movements is generally the best method of active investing.
B) Future returns on large company stocks tend to closely follow past pricing patterns.
C) Buying and holding a broad market index is one of the best investment strategies.
D) Predicting future stock prices is relatively easy for academic researchers.
E) Trading costs have little, if any, impact on investment returns.

Question 40

If you believe that stock market prices follow a random walk,then:

A) historical price information provides no benefit in predicting future prices.
B) there is no financial benefit from investing in the stock market.
C) having inside information will not lead to excess profits.
D) studying past price movements will lead to excess profits.
E) you also believe the market is strong-form efficient.

Question 41

The January effect:

A) does not occur in the domestic market every year.
B) occurs every year but only for large-company stocks.
C) occurs every year but only for small-company stocks.
D) is unaffected by institutional investors.
E) is unique to the United States.

Question 42

If the financial markets are highly efficient,then:

A) investing based on technical analysis is highly recommended.
B) holding a diversified, low-cost, passively-managed portfolio is probably your best investment strategy.
C) you should adopt an investment strategy based on market timing.
D) having a professional manager who actively trades your portfolio is most likely your best investment strategy.
E) it doesn't matter which securities you invest in as all securities will provide relatively equal returns.

Question 43

Which of the following are offered as possible causes of the January effect?
I)new professional money managers who assume the role at the beginning of the year
II)tax loss selling in December
III)bonus lock-in effect
IV)window dressing

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

Question 44

Which one of the following items is most apt to be considered material non-public information? Assume that none of this information is known publicly.

A) Barbara knows that Sue, an accounting clerk, is planning on resigning on Friday.
B) Linda knows a new receptionist has just been hired.
C) Wendy knows that her firm's net income is continuing to increase at a steady rate.
D) Tracy knows her employer just received patent approval on a key new product.
E) Maria is the chief financial officer and knows the firm intends to maintain its current dividend policy.

Question 45

Studies indicate that the Vanguard 500 Index fund tends to:

A) underperform most professional money managers.
B) produce a return equal to that of professional managers.
C) outperform the average professional money manager, but only over the short-term.
D) outperform most professional money managers especially over longer-periods of time.
E) support the argument that the stock market is inefficient.

Question 46

Market timing tends to lead to:

A) fairly consistent abnormal returns.
B) increasing profits as experience is gained.
C) superior returns but only if you are a professional money manager.
D) a rate of return roughly equal to that of the overall market.
E) underperforming the overall market.

Question 47

Moving money in and out of the market based on your market expectations is called ________ and tends to lead to returns that are ________ than the overall market return,assuming that the market is relatively efficient.

A) asset allocation; higher
B) asset allocation; lower
C) market timing; higher
D) market timing; lower
E) security selection; higher

Question 48

Over the past 65 years,which day of the week,on average,has the lowest average rate of return?

A) Monday
B) Tuesday
C) Wednesday
D) Thursday
E) Friday

Question 49

Which one of the following statements describes an investment strategy that may lead to profitable results based on current research findings?

A) selling stocks as soon as positive earnings surprises are announced
B) selling stocks on Mondays only
C) selling small-company stocks in December and repurchasing them in February
D) selling stocks on the 25^th of the month and repurchasing them on the 5^th of the following month
E) buying stocks with relatively low P/E ratios

Question 50

Which one of the following statements is correct?

A) Professional money managers outperformed the Vanguard 500 Index Fund on an annual basis more than half the time for the period 1986-2014.
B) Purchasing and holding a broad-based index fund is a highly recommended means of investing.
C) The number of general equity mutual funds has decreased over the past 20 years due to their underperformance as compared to index funds.
D) The survivorship bias lowers the returns earned by professional money managers as a group.
E) In an efficient market, there is no need for professional money managers.

Question 51

Which one of the following statements related to insider trading is correct?

A) Licensed stockbrokers are exempt from insider trading laws.
B) Individuals, such as Martha Stewart, who have been convicted of crimes, can be barred from being executive officers of publicly-traded companies.
C) Because of the increased speed of information flows and the improved efficiency of the markets, insider trading laws were abolished in 2006.
D) Martha Stewart was convicted of insider trading and subjected both to a fine and a jail sentence.
E) An investor who receives advice from an investment advisor is automatically charged with insider trading when the advisor bases his recommendations on private information.

Question 52

Which one of the following is most apt to be considered insider trading?

A) Amy overhears Mary say she is being promoted to accounts payables manager and then she purchases shares in Mary's employer.
B) Jennifer compiles the financial statements and knows that net income for the latest quarter is significantly below analyst's forecasts but continues to hold shares of her employer's stock.
C) Kathy is an outside auditor and has found what she believes are significant accounting irregularities in a company's financial reports but owns no shares in the firm.
D) Lee buys stock in Winter's Wear after he overhears a conversation between the firm's president and vice-president concerning a proposed acquisition.
E) Jeff buys shares of stock in his employer's firm through the company retirement plan on a regular monthly basis.

Question 53

Which one of the following best describes the current understanding of market efficiency?

A) The market tends to overreact to new information in a manner which can be used to earn abnormal returns.
B) Markets under-react to unanticipated events in a manner which can be used to earn excess returns.
C) The market appears to be highly inefficient.
D) Short-term market movements are difficult, if not impossible, to predict accurately.
E) Markets tend to react slowly to unanticipated announcements.

Question 54

The day-of-the-week effect refers to which trading day?

A) Monday
B) Tuesday
C) Wednesday
D) Thursday
E) Friday

Question 55

Which one of the following relates to the risk-adjustment problem encountered when testing market efficiency?

A) ascertaining how historical prices relate to current stock prices
B) determining whether a market reaction was appropriate or overstated
C) correctly determining the correct risk-adjustment procedure
D) determining what undocumented information existed on any particular trading day
E) identifying patterns that occur over time in the pricing of a particular security

Question 56

Which one of the following statements concerning the stock market is correct?

A) Leverage was one of the contributing factors of the Crash of 1929.
B) "Black Monday" refers to October 29, 1929.
C) Program trading is cited as the sole cause of the Crash of 1987.
D) Generally speaking, market crashes tend to last longer than market bubbles.
E) It took the market 10 years to recover from the Crash of 1987.

Question 57

Market prices tend to ________ earnings "surprises".

A) adjust quickly and efficiently to
B) overreact and then correct in response to
C) overreact and never correct in response to
D) ignore
E) adjust slowly to

Question 58

Tom is an engineer for Talbot Tech and has just discovered a revolutionary method for strengthening metals.He knows this knowledge will add value to Talbot Tech's stock.Tom happens to mention this discovery and its value to his neighbor,Fred.Fred can be charged with insider trading if he:

A) continues to hold the Talbot Tech shares of stock he already owns.
B) shares this information with another neighbor.
C) sells his shares in Talbot Tech immediately after the news of the discovery is announced.
D) provides this information to a friend who will trade the stock and split the profits with him.
E) buys shares in Talbot Tech immediately after the news is announced and then shortly thereafter sells the shares at a profit.

Question 59

Helen is the chief executive officer of Baker Holdings (BEH).She owns 1.2 million shares of BEH stock and wishes to sell 10 percent of those shares to diversify her holdings.She follows the SEC requirements,along with those of her firm,and proceeds with the sale on Monday,June 9.On Tuesday,June 10,BEH stock declines by 25 percent.Helena's stock trade is:

A) legal but any future trading in BEH will be prohibited as long as she remains employed by the firm.
B) illegal and could subject her to both fines and jail time.
C) legal.
D) subject to reversal by the SEC.
E) subject to a forfeiture of her profits to the SEC.

Question 60

If the markets are efficient,then why is asset allocation still considered important?

A) because the risk-return relationship must still be considered
B) because market timing is critical in efficient markets
C) because individual security selection is the key to the markets being efficient
D) because asset allocation combines market timing with individual security selection
E) because the majority of market gains tend to occur only over long periods of time

Question 61

If the S&P 500 falls by 20 percent,the NYSE will:

A) do nothing if the drop occurs after 2:30 p.m.
B) halt trading for one hour.
C) halt trading for one hour if the decline occurs before 3 p.m.
D) halt trading for one-half hour if the decline occurs after noon.
E) cease trading for the day.

Question 62

Which of the following are offered as factors contributing to the Crash of October 1987?
I)bubble bursting
II)market volatility
III)negative economic signals
IV)activities in Congress

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

Question 63

The value of the Amex Internet Index increased by about ________ percent from October 1998 to March 2000 and subsequently declined by about ________ percent by October 2002.

A) 100; 50
B) 200; 75
C) 400; 80
D) 500; 90
E) 600; 80

Question 64

If the S&P 500 falls by 7 percent,the NYSE will:

A) halt trading for thirty minutes.
B) halt trading for two hours if the decline occurs before 3:25 p.m.
C) halt trading for one hour.
D) halt trading for one hour if the decline occurs after noon.
E) halt trading for 15 minutes if the decline occurs before 3:25 p.m.

Question 65

The Asian stock market crash of 1990 was followed by a:

A) long bull market.
B) rapid recovery.
C) prolonged flat market.
D) short-term decline.
E) long bear market.

Question 66

Immediately following the Crash of 1987,the stock market:

A) remained in a slump for five years.
B) remained flat for an extended period of time.
C) had one of the biggest short-term gains ever.
D) began a very slow and choppy recovery.
E) began a very slow and smooth recovery.

Question 67

Which of the following factors contributed to the Crash of 1987?
I)irrational investors
II)program trading
III)panic selling
IV)price uncertainty

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

Question 68

Over the past 5 days,the common stock of Taylor Mfg.had daily returns of 0.2,-0.1,-0.2,0.3,and 0.1 percent,respectively.For the same 5 days,the market had daily returns of 0.1,0.3,-0.4,0.4,and 0.2 percent,respectively.What is the cumulative abnormal return on Taylor Mfg.stock for this time period?

A) -0.3 percent
B) -0.1 percent
C) 0.0 percent
D) 0.1 percent
E) 0.3 percent

Question 69

The primary purpose of the NYSE circuit breakers is to:

A) halt short selling.
B) encourage program trading.
C) limit trading by specialists.
D) minimize institutional trading.
E) slow a market decline.

Question 70

Which one of the following occurred following the Crash of 1987?

A) Program trading was barred.
B) All market orders were changed to electronic orders.
C) Trading is now halted for the day anytime the market declines by 10 percent or more.
D) Trading now stops for one hour anytime the market declines by 10 percent.
E) Congress decided not to pass any anti-takeover legislation.

Question 71

By the end of 2002,the AMEX Internet Index was at a level approximately equal to _____ percent of the index high.

A) 75
B) 50
C) 25
D) 17
E) 9

Question 72

The following are the daily returns for both the overall market and for Omega Inc.What is the cumulative abnormal return on Omega,Inc.,stock for these 5 days?

A) -0.8 percent
B) -0.5 percent
C) -0.1 percent
D) 0.2 percent
E) 0.5 percent

Question 73

From the end of 1989 to the spring of 2003,the Nikkei Index declined in value approximately ________ percent.

A) 50
B) 60
C) 70
D) 80
E) 90

Question 74

The following are the daily returns for both the overall market and for Alpha Inc.What is the cumulative abnormal return on Alpha,Inc.,stock for these 5 days?

A) -0.8 percent
B) -0.4 percent
C) -0.1 percent
D) 0.2 percent
E) 0.5 percent

Question 75

Which of the following occurred during the Crash of 1987?
I)market prices were kept up-to-date which increased investors' anxiety
II)the market declined another 5 percent within the 2 days following the crash
III)trading volume exceeded the exchange's capacities
IV)NASDAQ went off-line

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

Question 76

The NYSE circuit breakers are recalculated:

A) every day
B) every week
C) monthly
D) every 6 months
E) annually

Question 77

A.C.Pharmaceutical announced FDA approval for a new drug on October 12^th.X.Y.Drug Co.announced approval for its new drug on October 14^th.No other information was released that would affect returns over the period.What is the combined cumulative abnormal return for the 5 day period commencing 2 days prior to the approval announcement date? Use the following data to answer this question.No trading occurred on October 15^th and 16^th.

A) 0.6 percent
B) 1.0 percent
C) 1.2 percent
D) 1.4 percent
E) 1.6 percent

Question 78

Approximately how many years did it take for the stock market to recover from the bear market of 1929 to 1932?

A) 5
B) 10
C) 15
D) 20
E) 25

Question 79

Samson Co.announced its merger plans on October 25 and had a daily return of 0.7 percent.Thompson Co.announced its merger plans on October 26 and had a daily return of 0.4 percent.The Whitewood Co.announced its merger plans on October 27 and had a daily return of -0.6 percent.The daily market returns for October 25 through October 27 were 0.2,-0.3,and 0.4,respectively.What is the combined cumulative abnormal return for the announcement date?

A) 0.0 percent
B) 0.2 percent
C) 0.6 percent
D) 0.8 percent
E) 1.0 percent

Question 80

Over the time period of 1929 to 1932,the stock market lost approximately ________ percent of its value.

A) 33
B) 40
C) 50
D) 75
E) 90