Question 1

Which of the following is true?

Accepted Answer

A) Markets are strong form efficient. 
B) Markets are semistrong efficient. 
C) Markets are weak form efficient. 
D) All of the above. 
E) We do not know for certain; different studies reflect support for different theories.

Question 2

If the efficient market hypothesis holds,investors should expect:

Accepted Answer

A) to always be able to pick stocks that will outperform the market averages. 
B) to receive a fair price for their securities. 
C) to earn only a normal return. 
D) Both A and B. 
E) Both B and C.

Question 3

Do you think the lessons from capital market history will hold for each year in the future?
 That is,as an example,if you buy small stocks will your investment always outperform U.S.Treasury bonds?

Accepted Answer

The answer of Do you think the lessons from capital...

Question 4

Individuals that continually monitor the financial markets seeking mispriced securities:

Accepted Answer

A) tend to make substantial profits on a daily basis. 
B) are never able to find a security that is temporarily mispriced. 
C) tend to make the markets more efficient. 
D) are always quite successful using only well-known public information as their basis of evaluation. 
E) are always quite successful using only historical price information as their basis of evaluation.

Question 5

In examining the issue of whether the choice of accounting methods affects stock prices,studies have found that:

Accepted Answer

A) accounting depreciation methods can significantly affect stock prices. 
B) accounting changes can affect stock prices if the company were either to withhold information or provide incorrect information. 
C) accounting changes that increase accounting earnings also increases stock prices. 
D) switching depreciation methods can significantly affect stock prices. 
E) All of the above.

Question 6

If the securities market is efficient,an investor need only throw darts at the stock pages to pick securities and be just as well off.

Accepted Answer

A) This is true because there are no differences in risk and return. 
B) This is true because in an efficient stock market prices do not fluctuate. 
C) This is false because professional portfolio managers prefer to generate commissions by active trading. 
D) This is false because investors may not hold a desirable risk-return combination in their portfolio. 
E) This is false because the markets are controlled by the institutional investors.

Question 7

Suppose your cousin invests in the stock market and doubles her money in a single year while the market,on average,earned a return of only about 15 percent.Is your cousin's performance a violation of market efficiency?

Accepted Answer

The answer of Suppose your cousin invests in the stock...

Question 8

The hypothesis that market prices reflect all available information of every kind is called _____ form efficiency.

Accepted Answer

A) stable 
B) weak 
C) semistrong 
D) strong 
E) open

Question 9

Financial managers can create value through financing decisions that:

Accepted Answer

A) reduce costs or increase subsidies. 
B) create a new security. 
C) increase the product prices. 
D) Both A and B. 
E) Both A and C.

Question 10

Efficient capital markets are financial markets

Accepted Answer

A) in which there is no excess profit from using available information. 
B) in which current market prices reflect the present value of securities. 
C) in which current market prices reflect available information. 
D) All of the above. 
E) None of the above.

Question 11

The semistrong form of the efficient market hypothesis states that:

Accepted Answer

A) security prices reflect all publicly available information. 
B) all information is reflected in the price of securities. 
C) future prices are predictable. 
D) Both A and C. 
E) None of the above

Question 12

An example of financially irrational behavior is:

Accepted Answer

A) gambling in Las Vegas. 
B) when a firm announces an increase in earnings and the stock price enjoys an immediate surge in value which is captured in one day. 
C) when a firm announces an increase in earnings and the stock price enjoys three days of large abnormal returns. 
D) Both A and B. 
E) Both A and C.

Question 13

The hypothesis that market prices reflect all publicly available information is called _____ form efficiency.

Accepted Answer

A) open 
B) strong 
C) semistrong 
D) weak 
E) stable

Question 14

One of the conditions of market efficiency,rationality:

Accepted Answer

A) always holds. 
B) might not hold in the realm of behaviorial finance. 
C) never holds. 
D) means investors will never visit a casino. 
E) None of the above.

Question 15

Suppose that firms with unexpectedly high earnings earn abnormally high returns for several months after the announcement.This would be evidence of:

Accepted Answer

A) efficient markets in the weak form. 
B) inefficient markets in the weak form. 
C) efficient markets in the semistrong form. 
D) inefficient markets in the semistrong form. 
E) inefficient markets in the all forms.

Question 16

The hypothesis that market prices reflect all historical information is called _____ form efficiency.

Accepted Answer

A) open 
B) strong 
C) semistrong 
D) weak 
E) stable

Question 17

Financial managers must be cognizant of market efficiency because:

Accepted Answer

A) manipulating earnings by accounting changes does not fool the market. 
B) timing security sales is futile because without private information the current price reflects all known information. 
C) there is limited price pressure from any large sale of stock depressing prices momentarily which then recover to prior levels. 
D) All of the above. 
E) None of the above.

Question 18

According to theory,studying historical prices in order to identify mispriced stocks will not work in markets that are _____ efficient. I.weak-form
II)semistrong-form
III)strong-form

Accepted Answer

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

Question 19

Evidence on stock prices finds that the sudden death of a chief executive officer causes stock prices to fall and the sudden death of an active founding chief executive officer causes stock price to rise.This contrary evidence happens because:

Accepted Answer

A) markets are inefficient and unsure of the real value of the events. 
B) death is inevitable and market prices are random. 
C) the value of the founding executive was a negative to the firm. 
D) things simply happen. 
E) None of the above.

Question 20

Event studies attempt to measure:

Accepted Answer

A) the influence of information release to the market on returns in days surrounding the announcement. 
B) if the market is at least semistrong efficient. 
C) whether there is a significant reaction to public announcements. 
D) All of the above. 
E) None of the above.

Exam 13: Efficient Capital Markets and Behavioral Challenges