Investments Analysis Chapters 11.2 Flashcards - Efficient Market Flashcards Quizlet PDF

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18/03/2021

Ch 8 EMH book questions Flashcards | Quizlet

Ch 8 EMH book questions Terms in this set (21) If markets are efficient, what

The correlation coefficient between stock returns

should be the correlation

for two non-overlapping periods should be zero.

coefficient between stock

If not, one could use returns from one period to

returns for two non-

predict returns in later periods and make

overlapping time periods?

abnormal profits.

A successful firm like

No. Microsoft's continuing profitability does not

Microsoft has consistently

imply that stock market investors who purchased

generated large profits for

Microsoft shares after its success was already

years. Is this a violation of the

evident would have earned an exceptionally high

EMH?

return on their investments.

"If all securities are fairly

Expected rates of return differ because of

prices, all must offer equal

differential risk premiums

expected rates of return."

Steady growth industries has

No. The value of dividend predictability would be

never missed a dividend

already reflected in the stock price

payment in its 94-year history. Does this make it more attractive to you as a possible purchase for your stock portfolio?

Which of the following most appears to contradict the proposition that the stock market is weakly efficient?

Every January, the stock market earns abnormal returns Reasoning--->This is a predictable pattern in returns which should not occur if the weak form EMH is valid

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18/03/2021

Ch 8 EMH book questions Flashcards | Quizlet

Suppose that, after

One could have made superior returns by buying

conducting an analysis of past

stock after 10% rise in price and selling after a 10%

stock prices, you come up

fall

with the following

Reasoning--->This is a classic filter rule which

observations. Which would

should not produce superior returns in an efficient

appear to contradict the weak

market

form of the efficient market hypothesis?

Which of the following

It implies that all prices reflect all available

statements are true if the

information

efficient market hypothesis

Reasoning-->This is the definition of an efficient

holds?

market

Buy shares in companies for which you have advance knowledge of an improvement in the management team Which of the following would be a viable way to earn abnormally high trading profits if markets are semistrong-form efficient?

Reasoning-->in a semistrong-form efficient market, it is not possible to earn abnormally high profits by trading on pubically available information. Info about P/E ratios and recent price changes is pubically known. On the other hand, an investor who has knowledge of management improvements could abnormally high trading profits (unless the market is also strong-form efficient)

Suppose you find that prices of stocks before large dividend increases show on average consistently positive abnormal returns. Is this a violation of the EMH?

Market efficiency implies investors cannot earn excess risk-adjusted profits. If the stock price runup occurs when only insiders know of the coming dividend increase, then it is a violation of strongform efficiency. If the public also knows of the increase, then this violates semisrong-form efficiency.

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18/03/2021

Which of the following

Ch 8 EMH book questions Flashcards | Quizlet

...

phenomena would be either consistent with or a violation of the efficient market hypothesis?

Nearly half of all

Reasoning --> Consistent. Based on pure luck, half

professionally managed

of all managers should beat the market in any

mutual funds are able to

year.

outperform the S&P 500 in a typical year.

Money managers that

Reasoning--> Inconsistent. This would be the basis

outperform the market (on a

of an "easy money" rule: simply invest with last

risk-adjusted basis) in one

year's best managers

year are likely to outperform in the following year

Stock prices tend to be

Reasoning-->Consistent. In constrast to

predictably more volatile in

predictable returns, predictable volatility does not

January than in other months

convey a means to earn abnormal returns

Stock prices of companies

Reasoning-->Inconsistent. The abnormal

that announce increased

performance out to occur in January when

earnings in January tend to

earnings are announced.

outperform the market in February

Stocks that perform well in

Reasoning-->Inconsistent. Reversals offer a means

one week perform poorly in

to earn easy money: just buy last week's losers.

the following week.

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18/03/2021

Ch 8 EMH book questions Flashcards | Quizlet

Good News, Inc. just

The market may have anticipated even greater

announced an increase in its

earnings. Compared to prior expectations, the

annual earnings, yet its stock

announcement was a disappointment.

price fell. Is there a rational explanation for this phenomenon?

The semistrong form of

fully reflect all publicly available information

efficient market hypothesis asserts that stock prices:

Assume that a company

an abnormal price change at the announcement

announces an unexpectedly large cash dividend to its shareholders. In an efficient market without information leakage, one might expect

Low P/E stocks tend to have positive abnormal Which one of the following

returns over the long run

would provide evidence

Reasoning -->if low P/E stocks tend to have

against the semistrong form

positive abnormal returns, this would represent an

of the efficient market

unexploited profit opportunity that would provide

theory?

evidence that investors are not using all available information to make profitable investments

According to the efficient

positive alphas on stocks will quickly disappear

market hypothesis:

future price changes are uncorrelated with past price changes A "random walk" occurs when:

Reasoning --> a random walk implies that stock price changes are unpredictable, using past price changes or any other data

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