Question 1

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 2

Patell and Woflson (1984) report that most of the stock-price response to corporate dividend or earnings announcements occurs within ____________ of the announcement.

Accepted Answer

A)  10 minutes 
B)  45 minutes 
C)  2 hours 
D)  4 hours 
E)  2 trading days

Question 3

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)  unable to determine. 
C)  increase immediately. 
D)  gradually decline for the next several weeks. 
E)  gradually increase for the next several weeks.

Question 4

QQAG just announced yesterday that its fourth quarter earnings will be 35% higher than last year's fourth quarter. You observe that QQAG had an abnormal return of 1.7% yesterday. This suggests that

Accepted Answer

A)  the market is not efficient. 
B)  QQAG 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 5

The stock market follows a

Accepted Answer

A)  nonrandom walk. 
B)  submartingale. 
C)  predictable pattern that can be exploited. 
D)  nonrandom walk and predictable pattern that can be exploited. 
E)  submartingale and predictable pattern that can be exploited.

Question 6

Studies of stock price reactions to news are called

Accepted Answer

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

Question 7

If you believe in the reversal effect, you should

Accepted Answer

A)  buy bonds in this period if you held stocks in the last period. 
B)  buy stocks in this period if you held bonds in the last period. 
C)  buy stocks this period that performed poorly last period. 
D)  go short. 
E)  buy stocks this period that performed poorly last period and go short.

Question 8

Proponents of the EMH think technical analysts

Accepted Answer

A)  should focus on relative strength. 
B)  should focus on resistance levels. 
C)  should focus on support levels. 
D)  should focus on financial statements. 
E)  are wasting their time.

Question 9

Studies of positive earnings surprises have shown that there is

Accepted Answer

A)  a positive abnormal return on the day positive earnings surprises are announced. 
B)  a positive drift in the stock price on the days following the earnings surprise announcement. 
C)  a negative drift in the stock price on the days following the earnings surprise announcement. 
D)  a positive abnormal return on the day positive earnings surprises are announced and a positive drift in the stock price on the days following the earnings surprise announcement. 
E)  a positive abnormal return on the day positive earnings surprises are announced and a negative drift in the stock price on the days

Question 10

Nicholas Manufacturing just announced yesterday that its fourth quarter earnings will be 10% higher than last year's fourth quarter. 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 11

Your professor finds a stock-trading rule that generates excess risk-adjusted returns. Instead of publishing the results, she keeps the trading rule to herself. This is most closely associated with

Accepted Answer

A)  regret avoidance. 
B)  selection bias. 
C)  framing. 
D)  insider trading.

Question 12

Proponents of the EMH typically advocate

Accepted Answer

A)  buying individual stocks on margin and trading frequently. 
B)  investing in hedge funds. 
C)  a passive investment strategy. 
D)  buying individual stocks on margin, trading frequently, and investing in hedge funds. 
E)  investing in hedge funds and a passive investment strategy.

Question 13

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.

Question 14

_________ above which it is difficult for the market to rise.

Accepted Answer

A)  A book value is a value 
B)  A resistance level is a value 
C)  A support level is a value 
D)  A book value and a resistance level are values 
E)  A book value and a support level are values

Question 15

Which of the following are used by fundamental analysts to determine proper stock prices? I) Trendlines II) Earnings
III. Dividend prospects
IV. Expectations of future interest rates
V. Resistance levels

Accepted Answer

A)  I, IV, and V 
B)  I, II, and III 
C)  II, III, and IV 
D)  II, IV, and V 
E)  All of the items are used by fundamental analysts.

Question 16

If you believe in the _________ form of the EMH, you believe that stock prices reflect all available information, including information that is available only to insiders.

Accepted Answer

A)  semistrong 
B)  strong 
C)  weak 
D)  All of the options are correct. 
E)  None of the options are correct.

Question 17

Del Guerico and Reuter (2014) report that the average underperformance of actively-managed mutual funds is driven largely by

Accepted Answer

A)  sector mutual funds. 
B)  index funds. 
C)  direct-sold funds. 
D)  broker-sold funds. 
E)  bank-sold mutual funds.

Question 18

In an efficient market,

Accepted Answer

A)  security prices react quickly to new information. 
B)  security prices are seldom far above or below their justified levels. 
C)  security analysis will not enable investors to realize superior returns consistently. 
D)  one cannot make money. 
E)  security prices react quickly to new information, security prices are seldom far above or below their justified levels, and security analysis will not enable investors to realize superior returns consistently.

Question 19

__________ focus more on past price movements of a firm's stock than on the underlying determinants of future profitability.

Accepted Answer

A)  Credit analysts 
B)  Fundamental analysts 
C)  Systems analysts 
D)  Technical analysts

Question 20

A support level is the price range at which a technical analyst would expect the

Accepted Answer

A)  supply of a stock to increase dramatically. 
B)  supply of a stock to decrease substantially. 
C)  demand for a stock to increase substantially. 
D)  demand for a stock to decrease substantially. 
E)  price of a stock to fall.

Exam 11: The Efficient Market Hypothesis