Question 1

On November 22,2009 the stock price of WalMart was $39.50 and the retailer stock index was 600.30.On November 25,2009 the stock price of WalMart was $40.25 and the retailer stock index was 605.20.Consider the ratio of WalMart to the retailer index on November 22 and November 25.WalMart is _______ the retail industry and technical analysts who follow relative strength would advise _______ the stock.

Accepted Answer

A) outperforming, buying 
B) outperforming, selling 
C) underperforming, buying 
D) underperforming, selling 
E) equally performing,neither buying nor selling

Question 2

If you believe in the _______ form of the EMH,you believe that stock prices only reflect all information that can be derived by examining market trading data such as the history of past stock prices,trading volume or short interest.

Accepted Answer

A) semistrong 
B) strong 
C) weak 
D) all of the above 
E) none of the above

Question 3

What is an event study? It is a test of what form of market efficiency? Discuss the process of conducting an event study,including the best variable(s)to observe as tests of market efficiency.

Accepted Answer

The answer of What is an event study? It is...

Question 4

Studies of stock price reactions to news are called

Accepted Answer

A) reaction studies. 
B) event studies. 
C) drift studies. 
D) both A and D are true. 
E) both B and D are true.

Question 5

A common strategy for passive management is ____________.

Accepted Answer

A) creating an index fund 
B) creating a small firm fund 
C) creating an investment club 
D) A and C 
E) B and C

Question 6

Nicholas Manufacturing just announced yesterday that its fourth quarter earnings will be 10% higher than last year's fourth quarter.You observe that Nicholas had an abnormal return of -1.2% yesterday.This suggests that

Accepted Answer

A) the market is not efficient. 
B) Nicholas' stock will probably rise in value tomorrow. 
C) investors expected the earnings increase to be larger than what was actually announced. 
D) investors expected the earnings increase to be smaller than what was actually announced. 
E) earnings are expected to decrease next quarter.

Question 7

When Maurice Kendall examined the patterns of stock returns in 1953 he concluded that the stock market was __________.Now,these random price movements are believed to be _________.

Accepted Answer

A) inefficient; the effect of a well-functioning market 
B) efficient; the effect of an inefficient market 
C) inefficient; the effect of an inefficient market 
D) efficient; the effect of a well-functioning market 
E) irrational; even more irrational than before

Question 8

In an efficient market the correlation coefficient between stock returns for two non-overlapping time periods should be

Accepted Answer

A) positive and large. 
B) positive and small. 
C) zero. 
D) negative and small. 
E) negative and large.

Question 9

Basu (1977,1983)found that firms with high P/E ratios

Accepted Answer

A) earned higher average returns than firms with low P/E ratios. 
B) earned the same average returns as firms with low P/E ratios. 
C) earned lower average returns than firms with low P/E ratios. 
D) had higher dividend yields than firms with low P/E ratios. 
E) none of the above.

Question 10

Matthews Corporation has a beta of 1.2.The annualized market return yesterday was 13%,and the risk-free rate is currently 5%.You observe that Matthews had an annualized return yesterday of 17%.Assuming that markets are efficient,this suggests that

Accepted Answer

A) bad news about Matthews was announced yesterday. 
B) good news about Matthews was announced yesterday. 
C) no news about Matthews was announced yesterday. 
D) interest rates rose yesterday. 
E) interest rates fell yesterday.

Question 11

Work by Amihud and Mendelson (1986,1991)

Accepted Answer

A) argues that investors will demand a rate of return premium to invest in less liquid stocks. 
B) may help explain the small firm effect. 
C) may be related to the neglected firm effect. 
D) B and C. 
E) A,B,and C.

Question 12

The weak form of the efficient market hypothesis contradicts

Accepted Answer

A) technical analysis, but supports fundamental analysis as valid. 
B) fundamental analysis, but supports technical analysis as valid. 
C) both fundamental analysis and technical analysis. 
D) technical analysis, but is silent on the possibility of successful fundamental analysis. 
E) none of the above.

Question 13

The weather report says that a devastating and unexpected freeze is expected to hit Florida tonight,during the peak of the citrus harvest.In an efficient market one would expect the price of Florida Orange's stock to

Accepted Answer

A) drop immediately. 
B) remain unchanged. 
C) increase immediately. 
D) gradually decline for the next several weeks. 
E) gradually increase for the next several weeks.

Question 14

Music Doctors just announced yesterday that its first quarter sales were 35% higher than last year's first quarter.You observe that Music Doctors had an abnormal return of -2% yesterday.This suggests that

Accepted Answer

A) the market is not efficient. 
B) Music Doctors stock will probably rise in value tomorrow. 
C) investors expected the sales increase to be larger than what was actually announced. 
D) investors expected the sales increase to be smaller than what was actually announced. 
E) earnings are expected to decrease next quarter.

Question 15

Sehun (1986)finds that the practice of monitoring insider trade disclosures,and trading on that information,would be ________.

Accepted Answer

A) extremely profitable for long-term traders 
B) extremely profitable for short-term traders 
C) marginally profitable for long-term traders 
D) marginally profitable for short-term traders 
E) not sufficiently profitable to cover trading costs

Question 16

Banz (1981)found that,on average,the risk-adjusted returns of small firms

Accepted Answer

A) were higher than the risk-adjusted returns of large firms. 
B) were the same as the risk-adjusted returns of large firms. 
C) were lower than the risk-adjusted returns of large firms. 
D) were unrelated to the risk-adjusted returns of large firms. 
E) were negative.

Question 17

Discuss the small firm effect,the neglected firm effect,and the January effect,the tax effect and how the four effects may be related.

Accepted Answer

The answer of Discuss the small firm effect,the neglected firm...

Question 18

The main difference between the three forms of market efficiency is that

Accepted Answer

A) the definition of efficiency differs. 
B) the definition of excess return differs. 
C) the definition of prices differs. 
D) the definition of information differs. 
E) they were discovered by different people.

Question 19

Two basic assumptions of technical analysis are that security prices adjust

Accepted Answer

A) rapidly to new information and market prices are determined by the interaction of supply and demand. 
B) rapidly to new information and liquidity is provided by security dealers. 
C) gradually to new information and market prices are determined by the interaction of supply and demand. 
D) gradually to new information and liquidity is provided by security dealers. 
E) rapidly to information and to the actions of insiders.

Question 20

If stock prices follow a random walk

Accepted Answer

A) it implies that investors are irrational. 
B) it means that the market cannot be efficient. 
C) price levels are not random. 
D) price changes are random. 
E) price movements are predictable.

Exam 11: The Efficient Market Hypothesis