Question 1

One reason why the efficient capital market hypothesis may not hold in reality is that:

Accepted Answer

A)  risk has been eliminated from the process of arbitrage.
B)  most investors appear in studies to be rational.
C)  arbitrage appears to be fully effective.
D)  irrationality may be related across individuals.
E)  irrationalities cancel out across investors.F) A) and B)
G) B) and D)

Question 2

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

Accepted Answer

A)  open
B)  strong
C)  semistrong
D)  weak
E)  stableF) A) and D)
G) A) and E)

Question 3

Why should a financial decision maker such as a corporate treasurer or CFO be concerned with market efficiency?

Accepted Answer

Good answers to this question might indi...

Question 4

Psychologists generally agree that irrational traits such as those related to behavioral finance are generally:

Accepted Answer

A)  temporary and limited to a small sector of the population.
B)  pervasive across individuals.
C)  offset within the overall population.
D)  cyclical in nature.
E)  unique to a few individuals.F) A) and E)
G) D) and E) B

Question 5

Studies of the performance of professionally managed mutual funds find that these funds:

Accepted Answer

A)  all have a tendency to consistently outperform the overall market.
B)  perform in a manner consistent with semistrong form efficiency.
C)  all have a tendency to underperform the market consistently year after year.
D)  perform in a manner that definitely refutes both strong and semistrong form efficiency.
E)  indicate that stock prices consistently adhere to a daily continuation pattern.F) A) and B)
G) A) and C) B

Question 6

A fully efficient market will eliminate which one of the following?

Accepted Answer

A)  Cyclical patterns
B)  Daily price fluctuations
C)  Unexpected price declines
D)  All abnormal profits except those related to insider trading
E)  Price increases over any period of time in excess of six monthsF) C) and D)
G) None of the above

Question 7

The notion that actual capital markets,such as the NYSE,are fairly priced is called the:

Accepted Answer

A)  efficient market Hypothesis (EMH) .
B)  law of one price (LOP) .
C)  open markets theorem (OMT) .
D)  laissez-faire axiom.
E)  monopoly pricing theorem (MPT) .F) A) and E)
G) A) and D)

Question 8

Financial markets fluctuate daily because they:

Accepted Answer

A)  are inefficient.
B)  are slowly reacting to new information.
C)  are continually reacting to new information.
D)  offer tremendous arbitrage opportunities.
E)  only reflect historical information.F) C) and E)
G) A) and E)

Question 9

Insider trading does not offer any advantages if the financial markets are:

Accepted Answer

A)  weak form efficient.
B)  semiweak form efficient.
C)  semistrong form efficient.
D)  strong form efficient.
E)  inefficient.F) A) and D)
G) B) and E)

Question 10

Explain the risk that often accompanies the behavioral concept of familiarity.

Accepted Answer

Investors who display the behavioral cha...

Question 11

An investor discovers that predictions about weather patterns published years in advance and found in the Farmer's Almanac are amazingly accurate.In fact,these predictions enable the investor to predict the health of the farm economy and therefore certain security prices.This finding is a violation of the:

Accepted Answer

A)  moderate form of the efficient market hypothesis.
B)  semistrong form of the efficient market hypothesis.
C)  strong form of the efficient market hypothesis.
D)  weak form of the efficient market hypothesis.
E)  efficient market hypothesis at all levels.F) None of the above
G) A) and B)

Question 12

If a market is strong form efficient then:

Accepted Answer

A)  company insiders are the only investors capable of earning an abnormal profit.
B)  abnormal profits are obtainable by any and all investors.
C)  technical analysts who study past market performance have a market advantage.
D)  all investments should have positive NPVs.
E)  company insiders have no advantage over John Q.Public investor.F) A) and D)
G) A) and C)

Question 13

Your best friend works in the finance office of the Delta Corporation.You are aware this friend trades Delta stock based on information he overhears in the office but which is not known to the general public.Your friend continually brags to you about the profits he earns trading Delta stock.Based on this information,you would tend to argue that the financial markets are at best ________ form efficient.

Accepted Answer

A)  weak
B)  semiweak
C)  semistrong
D)  strong
E)  perfectF) D) and E)
G) A) and D)

Question 14

Define the three forms of market efficiency.

Accepted Answer

The weak form of market efficiency states that all past prices are reflected in the current market price.The semistrong form includes the weak form plus all public information.The strong form states that all information,public and private,is reflected in current market prices.

Question 15

Arbitrage involves the simultaneous purchase:

Accepted Answer

A)  of one security and the corporate repurchase of another similar security.
B)  of two substitute securities with their sales following within the hour.
C)  of two or more similar securities.
D)  and sale of the same security.
E)  and sale of different,but substitute,securities.F) C) and E)
G) A) and C)

Question 16

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)  switching depreciation methods can significantly affect stock prices.
C)  accounting changes that increase accounting earnings also increase stock prices.
D)  accounting changes can affect stock prices if the company were either to withhold information or provide incorrect information.
E)  accounting reporting has little,if any effect,ever on stock prices.F) C) and D)
G) A) and D)

Question 17

Which one of the following statements is true?

Accepted Answer

A)  Highly positive serial correlations are indicators of market efficiency.
B)  Abnormal returns limited to the announcement date are indicators of market inefficiency.
C)  Market studies indicate that stock markets are only weak form efficient.
D)  Studies seem to indicate stock markets are semistrong but not strong form efficient.
E)  Mutual funds provide little,if any,benefit to investors.F) A) and C)
G) C) and D)

Question 18

If a stock price follows a random walk,the price today is said to be equal to the prior period price plus the expected return for the period with any remaining difference from the actual return considered to be:

Accepted Answer

A)  a predictable amount based on the past prices.
B)  due to new information related to the stock.
C)  related to the security's risk.
D)  related to the risk-free rate.
E)  an overall market abnormality.F) A) and D)
G) B) and E)

Question 19

If the financial markets are efficient,then investors should expect their investments in those markets to:

Accepted Answer

A)  earn extraordinary returns on a routine basis.
B)  generally have positive net present values.
C)  generally have zero net present values.
D)  produce arbitrage opportunities on a routine basis.
E)  produce negative returns on a routine basis.F) C) and E)
G) B) and E)

Question 20

Suppose firms with unexpectedly high earnings earn abnormally high returns for several months after the earnings 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 strong form.F) C) and E)
G) All of the above

Exam 14: Efficient Capital Markets and Behavioral Challenges

One reason why the efficient capital market hypothesis may not hold in reality is that:

Correct Answer
verified

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

Correct Answer
verified

Why should a financial decision maker such as a corporate treasurer or CFO be concerned with market efficiency?

Correct Answer
verified
Good answers to this question might indi...
View Answer

Psychologists generally agree that irrational traits such as those related to behavioral finance are generally:

Correct Answer
verified
B

Studies of the performance of professionally managed mutual funds find that these funds:

Correct Answer
verified
B

A fully efficient market will eliminate which one of the following?

Correct Answer
verified

The notion that actual capital markets,such as the NYSE,are fairly priced is called the:

Correct Answer
verified

Financial markets fluctuate daily because they:

Correct Answer
verified

Insider trading does not offer any advantages if the financial markets are:

Correct Answer
verified

Explain the risk that often accompanies the behavioral concept of familiarity.

Correct Answer
verified
Investors who display the behavioral cha...
View Answer

Correct Answer
verified

If a market is strong form efficient then:

Correct Answer
verified

Correct Answer
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Define the three forms of market efficiency.

Arbitrage involves the simultaneous purchase:

Correct Answer
verified

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

Correct Answer
verified

Which one of the following statements is true?

Correct Answer
verified

If a stock price follows a random walk,the price today is said to be equal to the prior period price plus the expected return for the period with any remaining difference from the actual return considered to be:

Correct Answer
verified

If the financial markets are efficient,then investors should expect their investments in those markets to:

Correct Answer
verified

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

Correct Answer
verified

Exam 14: Efficient Capital Markets and Behavioral Challenges

One reason why the efficient capital market hypothesis may not hold in reality is that:

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Why should a financial decision maker such as a corporate treasurer or CFO be concerned with market efficiency?

Correct AnswerverifiedGood answers to this question might indi...View AnswerShow Answer

Psychologists generally agree that irrational traits such as those related to behavioral finance are generally:

Correct AnswerverifiedB

Studies of the performance of professionally managed mutual funds find that these funds:

Correct AnswerverifiedB

A fully efficient market will eliminate which one of the following?

Correct AnswerverifiedShow Answer

The notion that actual capital markets,such as the NYSE,are fairly priced is called the:

Correct AnswerverifiedShow Answer

Financial markets fluctuate daily because they:

Correct AnswerverifiedShow Answer

Insider trading does not offer any advantages if the financial markets are:

Correct AnswerverifiedShow Answer

Explain the risk that often accompanies the behavioral concept of familiarity.

Correct AnswerverifiedInvestors who display the behavioral cha...View AnswerShow Answer

Correct AnswerverifiedShow Answer

If a market is strong form efficient then:

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Define the three forms of market efficiency.

Correct AnswerverifiedThe weak form of market efficiency states that all past prices are reflected in the current market price.The semistrong form includes the weak form plus all public information.The strong form states that all information,public and private,is reflected in current market prices.

Arbitrage involves the simultaneous purchase:

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Which one of the following statements is true?

Correct AnswerverifiedShow Answer

If a stock price follows a random walk,the price today is said to be equal to the prior period price plus the expected return for the period with any remaining difference from the actual return considered to be:

Correct AnswerverifiedShow Answer

If the financial markets are efficient,then investors should expect their investments in those markets to:

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Correct Answer
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Correct Answer
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Correct Answer
verified
Good answers to this question might indi...
View Answer

Correct Answer
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B

Correct Answer
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B

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Correct Answer
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Correct Answer
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Investors who display the behavioral cha...
View Answer

Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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