Chapter 08 Practice Questions PDF

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Student: _______________________________________________________________________________________

1. A. B. C. D. 2. A. B. C. D. 3. A. B. C. D. 4. A. B. C. D. 5. A. B. C. D. 6. A. B. C. D. 7. A. B. C. D.

Which of the following beliefs would not preclude charting as a method of portfolio management? The market is strong-form efficient. The market is semistrong-form efficient. The market is weak-form efficient. Stock prices follow recurring patterns. In a 1953 study of stock prices, Maurice Kendall found that ________. there were no predictable patterns in stock prices stock prices exhibited strong serial autocorrelation day-to-day stock prices followed consistent trends fundamental analysis could be used to generate abnormal returns The weak form of the EMH states that ________ must be reflected in the current stock price. all past information, including security price and volume data all publicly available information all information, including inside information all costless information The semistrong form of the EMH states that ________ must be reflected in the current stock price. all security price and volume data all publicly available information all information, including inside information all costless information The strong form of the EMH states that ________ must be reflected in the current stock price. all security price and volume data all publicly available information all information, including inside information all costless information Random price movements indicate ________. irrational markets that prices cannot equal fundamental values that technical analysis to uncover trends can be quite useful that markets are functioning efficiently When the market risk premium rises, stock prices will ________. rise fall recover have excess volatility

8. The small-firm effect is strongest in which month? A. January B. June C. July D. December

9. Evidence suggests that there may be _______ momentum and ________ reversal patterns in stock price behavior. rev: 04_03_2014_QC_47804 A. B. C. D.

short-run; short-run long-run; long-run long-run; short-run short-run; negligible

10. Proponents of the EMH typically advocate __________. A. B. C. D.

a conservative investment strategy a liberal investment strategy a passive investment strategy an aggressive investment strategy

11. Stock prices that are stable over time _______. A. B. C. D.

indicate that prices are useful indicators of true economic value indicate that the market is not incorporating new information into current stock prices ensure that an economy allocates its resources efficiently indicates that returns follow a random-walk process

12. The tendency when the ______ performing stocks in one period are the best performers in the next and the current ________ performers are lagging the market later is called the reversal effect. A. B. C. D.

worst; best worst; worst best; worst best; best

13. Which of the following is not a method employed by followers of technical analysis? A. charting B. relative strength analysis C. earnings forecasting D. trading around support and resistance levels

14. Which of the following is not a method employed by fundamental analysts? A. analyzing the Fed's next interest rate move B. relative strength analysis C. earnings forecasting D. estimating the economic growth rate

15. The primary objective of fundamental analysis is to identify __________. A. B. C. D.

well-run firms poorly run firms mispriced stocks high P/E stocks

16. If you believe in the __________ form of the EMH, you believe that stock prices reflect all publicly available information but not information that is available only to insiders. A. B. C. D.

semistrong strong weak perfect

17. If you believe in the __________ form of the EMH, you believe that stock prices reflect all relevant information, including information that is available only to insiders. A. B. C. D.

semistrong strong weak perfect

18. Most of the stock price response to a corporate earnings or dividend announcement occurs within ________________. A. B. C. D.

about 30 seconds about 10 minutes 6 months 2 years

19. __________ is the return on a stock beyond what would be predicted from market movements alone. A. B. C. D.

A normal return A subliminal return An abnormal return None of these options

20. You believe that stock prices 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, but you do not believe stock prices reflect all publicly available and inside information. You are a proponent of the ____________ form of the EMH. A. B. C. D.

semistrong strong weak perfect

21. You are an investment manager who is currently managing assets worth $6 billion. You believe that active management of your fund could generate an additional one-tenth of 1% return on the portfolio. If you want to make sure your active strategy adds value, how much can you spend on security analysis? A. B. C. D.

$12,000,000 $6,000,000 $3,000,000 $0

22. A mutual fund that attempts to hold quantities of shares in proportion to their representation in the market is called an __________ fund.

A. B. C. D.

stock index hedge money market

23. Choosing stocks by searching for predictable patterns in stock prices is called ________. A. B. C. D.

fundamental analysis technical analysis index management random-walk investing

24. Which of the following is not an issue that is central to the debate regarding market efficiency? A. the magnitude issue B. the tax-loss selling issue C. the lucky event issue D. the selection bias issue

25. Most people would readily agree that the stock market is not _________. A. B. C. D.

weak-form efficient semistrong-form efficient strong-form efficient efficient at all

26. Small firms have tended to earn abnormal returns primarily in __________. A. B. C. D.

the month of January the month July the trough of the business cycle the peak of the business cycle

27. Fama and French have suggested that many market anomalies can be explained as manifestations of ____________. A. B. C. D.

regulatory effects high trading costs information asymmetry varying risk premiums

28. Proponents of the EMH think technical analysts __________. A. B. C. D.

should focus on relative strength should focus on resistance levels should focus on support levels are wasting their time

29. Evidence supporting semistrong-form market efficiency suggests that investors should _________________________. A. B. C. D.

rely on technical analysis to select securities rely on fundamental analysis to select securities use a passive trading strategy such as purchasing an index fund or an ETF select securities by throwing darts at the financial pages of the newspaper

30. "Buy a stock if its price moves up by 2% more than the Dow Average" is an example of a _________________. A. B. C. D.

trading rule market anomaly fundamental approach passive trading strategy

31. Jaffe found that stock prices __________ after insiders intensively bought shares and __________ after insiders intensively sold shares. A. B. C. D.

decreased; decreased decreased; increased increased; decreased increased; increased

32. In a 1988 study, Fama and French found that the return on the aggregate stock market was __________ when the dividend yield was higher.

A. B. C. D.

higher lower unaffected more skewed

33. In their 2010 study, Fama and French used a four-factor model to analyze excess returns on equity mutual funds. They found that the funds

______. A. had negative alphas before fees were considered B. had positive alphas after fees were considered C. had negative alphas after fees were considered D. had negative alphas before fees were considered and had negative alphas after fees were considered

34. Joe bought a stock at $57 per share. The price promptly fell to $55. Joe held on to the stock until it again reached $57, and then he sold it once he had eliminated his loss. If other investors do the same to establish a trading pattern, this would contradict _______. A. B. C. D.

the strong-form EMH the weak-form EMH technical analysis the semistrong-form EMH

35. According to 1968 research by Ball and Brown, securities markets fully adjust to earnings announcements _______. A. B. C. D.

instantly in 1 day in 1 week gradually over time

36. When stock returns exhibit positive serial correlation, this means that __________ returns tend to follow ___________ returns. A. B. C. D.

positive; positive positive; negative negative; positive positive; zero

37. Basu found that firms with high P/E ratios __________. A. B. C. D.

earned higher average returns than firms with low P/E ratios earned the same average returns as firms with low P/E ratios earned lower average returns than firms with low P/E ratios had higher dividend yields than firms with low P/E ratios

38. Fundamental analysis is likely to yield best results for _______. A. B. C. D.

NYSE stocks neglected stocks stocks that are frequently in the news fast-growing companies

39. You are looking to invest in one of three stocks. All other things being equal, Stock A has high expected earnings growth, stock B has only modest expected earnings growth, and stock C is expected to generate poor earnings growth. According to LaPorta's 1996 study, which stock is likely to generate the greatest alpha for you? A. B. C. D.

Stock A Stock B Stock C The answer cannot be determined from the information given.

40. You believe that you can earn 2% more on your portfolio if you engage in full-time stock research. However, the additional trading costs and tax liability from active management will cost you about .5%. You have an $800,000 stock portfolio. What is the most you can afford to spend on your research? A. B. C. D.

$4,000 $8,000 $12,000 $16,000

41. Even if the markets are efficient, professional portfolio management is still important because it provides investors with: I. Low-cost diversification II. A portfolio with a specified risk level III. Better risk-adjusted returns than an index A. B. C. D.

I only I and II only II and III only I, II, and III

42. Banz found that, on average, the risk-adjusted returns of small firms __________. A. B. C. D.

were higher than the risk-adjusted returns of large firms were the same as the risk-adjusted returns of large firms were lower than the risk-adjusted returns of large firms were negative

43. If the U.S. capital markets are not informationally efficient, ______. A. B. C. D.

the markets cannot be allocationally efficient systematic risk does not matter no type of analysis can be used to generate abnormal returns returns must follow a random walk

44. "Active investment management may at times generate additional returns of about .1%. However, the standard deviation of the typical well-diversified portfolio is about 20%, so it is very difficult to statistically identify any increase in performance." Even if true, this statement is an example of the _________ problem in deciding how efficient the markets are. A. B. C. D.

magnitude selection bias lucky event allocation

45. DeBondt and Thaler (1985) found that the poorest-performing stocks in one time period experienced __________ performance in the following period and that the best-performing stocks in one time period experienced __________ performance in the following time period. A. B. C. D.

good; good good; poor poor; good poor; poor

46. J. M. Keyes put all his money in one stock, and the stock doubled in value in a matter of months. He did this three times in a row with three different stocks. J. M. got his picture on the front page of the Wall Street Journal. However, the paper never mentioned the thousands of investors who made similar bets on other stocks and lost most of their money. This is an example of the ________ problem in deciding how efficient the markets are. A. B. C. D.

magnitude selection bias lucky event small firm

47. Most tests of semistrong efficiency are _________. A. B. C. D.

designed to test whether inside information can be used to generate abnormal returns based on technical trading rules unable to generate any evidence of market anomalies joint tests of market efficiency and the risk-adjustment measure

48. The _________ effect may explain much of the small-firm anomaly. I. January II. neglected III. liquidity A. B. C. D.

I only II only II and III only I, II, and III

49. The effect of liquidity on stock returns might be related to: I. The small-firm effect II The book-to-market effect III The neglected-firm effect IV. The P/E effect A. B. C. D.

I and II only I and III only II and IV only I, II, and III only

50. The broadest information set is included in the _____. A. B. C. D.

weak-form efficiency argument semistrong-form efficiency argument strong-form efficiency argument technical analysis trading method

51. The Fama and French evidence that high book-to-market firms outperform low book-to-market firms even after adjusting for beta means that

_________. A. B. C. D.

high book-to-market firms are underpriced or the book-to-market ratio is a proxy for a unique risk factor low book-to-market firms are underpriced or the book-to-market ratio is a proxy for a systematic risk factor either high book-to-market firms are underpriced or the book-to-market ratio is a proxy for a systematic risk factor high book-to-market firms have more post-earnings drift

52. According to results by Seyhun, __________. A. B. C. D.

investors cannot usually earn abnormal returns by following inside trades after knowledge of the trades are made public investors can usually earn abnormal returns by following inside trades after knowledge of the trades are made public investors cannot earn abnormal returns by following inside trades before knowledge of the trades are made public investors cannot earn abnormal returns by trading before insiders

53. If the daily returns on the stock market are normally distributed with a mean of .05% and a standard deviation of 1%, the probability that the stock market would have a return of -23% or worse on one particular day (as it did on Black Monday) is approximately __________. A. .0% B. .1% C. 1% D. 10% 54. According to the semistrong form of the efficient markets hypothesis, ____________. A. stock prices do not rapidly adjust to new information B. future changes in stock prices cannot be predicted from any information that is publicly available C. corporate insiders should have no better investment performance than other investors even if allowed to trade freely D. arbitrage between futures and cash markets should not produce extraordinary profits 55. The term random walk is used in investments to refer to ______________. A. stock price changes that are random but predictable B. stock prices that respond slowly to both old and new information C. stock price changes that are random and unpredictable D. stock prices changes that follow the pattern of past price changes 56. Among the important characteristics of market efficiency is (are) that: I. There are no arbitrage opportunities. II. Security prices react quickly to new information. III. Active trading strategies will not consistently outperform passive strategies. A. B. C. D.

I only II only I and III only I, II, and III

57. Stock market analysts have tended to be ___________ in their recommendations to investors. A. B. C. D.

slightly overly optimistic overwhelmingly optimistic slightly overly pessimistic overwhelmingly pessimistic

58. Assume that a company announces unexpectedly high earnings in a particular quarter. In an efficient market one might expect _____________. A. an abnormal price change immediately after the announcement B. an abnormal price increase before the announcement

C. an abnormal price decrease after the announcement D. no abnormal price change before or after the announcement 59. Market anomaly refers to _______. A. an exogenous shock to the market that is sharp but not persistent B. a price or volume event that is inconsistent with historical price or volume trends C. a trading or pricing structure that interferes with efficient buying and selling of securities D. price behavior that differs from the behavior predicted by the efficient market hypothesis

60. Which of the following contradicts the proposition that the stock market is weakly efficient? A. Over 25% of mutual funds outperform the market on average. B. Insiders earn abnormal trading profits. C. Every January, the stock market earns above-normal returns. D. Applications of technical trading rules fail to earn abnormal returns. 61. Which of the following would violate the efficient market hypothesis?

A. Intel has consistently generated large profits for years. B. Prices for stocks before stock splits show, on average, consistently positive abnormal returns. C. Investors earn abnormal returns months after a firm announces surprise earnings. D. High-earnings growth stocks fail to generate higher returns for investors than do low earnings growth stocks. 62. Which of the following stock price observations would appear to contradict the weak form of the efficient market hypothesis? A. B. C. D.

The average rate of return is significantly greater than zero. The correlation between the market return one week and the return the following week is zero. You could have consistently made superior returns by buying stock after a 10% rise in price and selling after a 10% fall. You could have consistently made superior returns by forecasting future earnings performance with your new Crystal Ball forecast methodology.

63. The semistrong-form of the efficient market hypothesis implies that ____________ generate abnormal returns and ____________ generate abnormal returns.

A. B. C. D.

technical analysis cannot; fundamental analysis can technical analysis can; fundamental analysis can technical analysis can; fundamental analysis cannot technical analysis cannot; fundamental analysis cannot

64. An implication of the efficient market hypothesis is that __________. A. B. C. D.

high-beta stocks are consistently overpriced low-beta stocks are consistently overpriced nonzero alphas will quickly disappear growth stocks are better buys than value stocks

65. One type of passive portfolio management is ________. A. B. C. D.

investing in a well-diversified portfolio without attempting to search out mispriced securities investing in a well-diversified portfolio while only seeking out passively mispriced securities investing an equal dollar amount in index stocks investing in an equal amount of shares in each of the index stocks

66. The four-factor model used to construct performance benchmarks for mutual funds uses the three Fama and French factors and one additional factor related to _________. A. B. C. D.

the tenure of the fund manager momentum fees the age of the fund manager

67. Value stocks may provide investors with better returns than growth stocks if: I. Value stocks are out of favor with investors. II. Prices of growth stocks include premiums for overly optimistic growth levels. III. Value...