Question 1

Which of the following activities would be most useful in an efficient market?

Accepted Answer

A)  buying and holding a diversified portfolio 
B)  searching for patterns in charts based on stock price movements 
C)  analyzing financial ratios based on accounting data 
D)  buying only securities that have performed well in the recent past

Question 2

In an efficient market, the only way to earn higher returns is to invest in riskier securities.

Accepted Answer

A) True 
 B)False

Question 3

Which of the following would invalidate the weak form of the efficient market hypothesis.

Accepted Answer

A)  Patterns in price behavior that consistently predict future price movements. 
B)  Market analysis proves useful in discovering investment opportunities. 
C)  Stocks of smaller firms consistently outperform larger firms. 
D)  Shortly before she is arrested, a pharmaceutical company researcher makes a large profit on her company's stock by buying just before a new drug is approved by the Food and Drug Administration.

Question 4

In a semi-strong efficient market, traders with non-public information would have no advantage over those who had only public information.

Accepted Answer

A) True 
 B)False

Question 5

A technical measure based on bond yields is

Accepted Answer

A)  the mutual fund cash ratio. 
B)  the short interest indicator. 
C)  the advance-decline line. 
D)  the confidence index.

Question 6

Security markets have been described as random walks and efficient markets. What does each of these terms mean and how do they relate to the stock market? What makes a market efficient and what are the consequences of efficiency for fundamental and technical analysis?

Accepted Answer

The answer of Security markets have been described as random...

Question 7

Which of the following characteristics are referred to as representativeness?
I. hesitating to sell stocks at a loss
II. basing conclusions on small samples
III. underestimating the effects of random chance
IV. underestimating the level of risk in an investment

Accepted Answer

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

Question 8

Price and volume of shares traded of Salem Industries on four consecutive days are shown below. $$\begin{array} { | l | l | l | l | } 
\hline\text { Monday } & \text { Tuesday } & \text { Wedriesday } & \text { Thursday } \
\hline \$ 27 & \$ 26 & \$ 28 & \$ 30 \
\hline 100,000 & 80,000 & 70,000 & 110,000 \
\hline
\end{array}$$ Compute Salem's on balance volume at the end of Thursday's trading. Assume last Friday's closing price was $26.50. Start with a base of zero for on balance volume leading into Monday's trading day.

Accepted Answer

A)  200,000 
B)  -40,000 
C)  180,000 
D)  360,000

Question 9

The most important lesson investors can learn from behavioral finance is

Accepted Answer

A)  to understand psychological factors influencing long-term price movement. 
B)  to have the humility to let professionals manage their investments. 
C)  how to avoid letting their emotions and biases affect their investment decisions. 
D)  to have confidence in their instincts and first impressions.

Question 10

Self-attribution bias causes investors to take responsibility for their unsuccessful investment choices.

Accepted Answer

A) True 
 B)False

Question 11

Technical analysts believe that some of the key elements of market behavior-called technical indicators-can provide valuable insights about the condition of the market. Briefly discuss each of the following indicators.
∙ Market volume
∙ Breadth of the market
∙ Short-interest
∙ Odd-lot trading

Accepted Answer

The answer of Technical analysts believe that some of the...

Question 12

Investors should never combine fundamental analysis and technical analysis.

Accepted Answer

A) True 
 B)False

Question 13

Believers in efficient markets tend to explain away market anomalies as
I. random occurrences that create an illusion of causality.
II. errors resulting from inaccurate measures of risk.
III. the result of illegal price manipulation by corporate insiders.
IV. the effect of normal human emotions such as fear and greed.

Accepted Answer

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

Question 14

Which of the following are included in technical analysis?
I. charting price movements
II. tracking trading volume
III. determining the investor's risk tolerance
IV. monitoring odd-lot trading

Accepted Answer

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

Question 15

Which one of the following statements is correct concerning moving averages?

Accepted Answer

A)  The longer the time period under consideration, the more sensitive the moving average is to daily price fluctuations. 
B)  A simple moving average is computed as the arithmetic mode. 
C)  The shorter the time period under consideration, the easier it is to spot long-term price trends. 
D)  A moving average helps remove short-term fluctuations from the analysis.

Question 16

The strong form of the efficient market hypothesis contends that

Accepted Answer

A)  a select few institutional investors can earn abnormal profits. 
B)  no one can ever outperform the market. 
C)  no one can consistently earn a profit. 
D)  no one can consistently earn abnormal profits.

Question 17

The efficient market hypothesis means that trades can be executed quickly, easily, and inexpensively.

Accepted Answer

A) True 
 B)False

Question 18

If stock prices move randomly, charting and technical analysis are useful investment tools.

Accepted Answer

A) True 
 B)False

Question 19

The process of buying an underpriced security and selling an equivalent overpriced security until the prices converge is known as arbitrage.

Accepted Answer

A) True 
 B)False

Question 20

Market volume is a function of market demand for and supply of stocks.

Accepted Answer

A) True 
 B)False

Exam 9: Market Efficiency and Behavioral Finance

Which of the following activities would be most useful in an efficient market?

In an efficient market, the only way to earn higher returns is to invest in riskier securities.

Which of the following would invalidate the weak form of the efficient market hypothesis.

In a semi-strong efficient market, traders with non-public information would have no advantage over those who had only public information.

A technical measure based on bond yields is

Security markets have been described as random walks and efficient markets. What does each of these terms mean and how do they relate to the stock market? What makes a market efficient and what are the consequences of efficiency for fundamental and technical analysis?

Which of the following characteristics are referred to as representativeness? I. hesitating to sell stocks at a loss II. basing conclusions on small samples III. underestimating the effects of random chance IV. underestimating the level of risk in an investment

The most important lesson investors can learn from behavioral finance is

Self-attribution bias causes investors to take responsibility for their unsuccessful investment choices.

Investors should never combine fundamental analysis and technical analysis.

Which of the following are included in technical analysis? I. charting price movements II. tracking trading volume III. determining the investor's risk tolerance IV. monitoring odd-lot trading

Which one of the following statements is correct concerning moving averages?

The strong form of the efficient market hypothesis contends that

The efficient market hypothesis means that trades can be executed quickly, easily, and inexpensively.

If stock prices move randomly, charting and technical analysis are useful investment tools.

The process of buying an underpriced security and selling an equivalent overpriced security until the prices converge is known as arbitrage.

Market volume is a function of market demand for and supply of stocks.