Corporate Finance, 12e (Ross)
1) Which one of these is the best means of creating a valuable financing opportunity?
A) Reduce a tax subsidy
B) Fool investors in an efficient market
C) Create a new security to meet the needs of an unsatisfied clientele
D) Issue new securities in a market niche of satisfied clientele
E) Create new securities to minimize tax benefits
2) An efficient capital market is one in which:
A) brokerage commissions are zero.
B) taxes are irrelevant.
C) securities always offer a positive NPV.
D) all investments earn the market rate of return.
E) security prices reflect all available information.
3) The notion that actual capital markets, such as the NYSE, are fairly priced is called the:
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).
4) Which of the following are conditions that Andrei Shleifer presents as the conditions that
create market efficiency?
A) Arbitrage, independent deviations from rationality, rationality
B) Competition, arbitrage, and rational investors
C) Rational investors, dependent deviations from rationality, and competition
D) Wide public access to information, rational investors, and arbitrage
E) Professional investors, easy access to information, rational independent investors
5) Individuals that continually monitor the financial markets seeking mispriced securities:
A) tend to make substantial profits on a daily basis.
B) tend to make the markets more efficient.
C) are never able to find a security that is temporarily mispriced.
D) are always quite successful using only well-known public information as their basis of
evaluation.
E) are always quite successful using only historical price information as their basis of evaluation.
6) Market efficiency requires:
A) arbitrage conducted by irrational investors.
B) the absence of arbitrage.
C) speculation by amateur investors.
D) all investors to be rational.
E) countervailing irrationalities.
7) Which of the following would be indicative of inefficient markets?
A) Overreaction and reversion
B) Delayed response
C) Immediate and accurate response
D) Overreaction with reversion and delayed response
E) Immediate and accurate response with a zero NPV
8) Arbitrage involves the simultaneous purchase:
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.
9) The hypothesis that market prices reflect all available information of every kind is called
________ form efficiency.
A) open
B) strong
C) semistrong
D) weak
E) stable
10) The hypothesis that market prices reflect all publicly available information is called
________ form efficiency.
A) open
B) strong
C) semistrong
D) weak
E) stable
11) The form of market efficiency that only relates to whether past market returns are useful in
predicting future market returns is ________ form efficiency.
A) open
B) strong
C) semistrong
D) weak
E) stable
12) In an efficient market, the price of a security will:
A) always rise immediately upon the release of new information with no further price
adjustments related to that information.
B) react to new information over a two-day period after which time no further price adjustments
related to that information will occur.
C) rise sharply when new information is first released and then decline to a new stable level by
the following day.
D) react immediately to any new information that affects the value of the issuing firm.
E) be slow to react for the first few hours after new information is released allowing time for that
information to be reviewed and analyzed.
13) If the financial markets are efficient, then investors should expect their investments in those
markets to:
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.
14) Which one of the following statements is correct concerning market efficiency?
A) Markets tend to be more efficient when the frequency of price changes diminishes.
B) If a market is efficient, arbitrage opportunities should be common.
C) In an efficient market, some market participants will have an advantage over others.
D) A firm will generally receive a fair price when it sells newly issued shares of stock.
E) New information will gradually be reflected in a stock’s price to avoid spooking investors.
15) Financial markets fluctuate daily because they:
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.
16) Insider trading does not offer any advantages if the financial markets are:
A) weak form efficient.
B) semiweak form efficient.
C) semistrong form efficient.
D) strong form efficient.
E) inefficient.
17) According to theory, studying historical prices in order to identify mispriced stocks will:
A) only work if the market is at least weak form efficient.
B) work as long as the market is less than strong form efficient.
C) work only in a strong form efficient market.
D) not work in any market regardless of the level of efficiency.
E) not work if the market is at least weak form efficient.
18) If you excel in analyzing the future outlook of firms based on past performance, you would
prefer that the financial markets be less than ________ form efficient so that you can have an
advantage in the marketplace.
A) weak
B) semiweak
C) semistrong
D) strong
E) perfect
19) 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.
A) weak
B) semiweak
C) semistrong
D) strong
E) perfect
20) The U.S. Securities and Exchange Commission periodically charges individuals with insider
trading and claims those individuals have made unfair profits. Based on this fact, you would tend
to argue that the financial markets are at best ________ form efficient.
A) weak
B) semiweak
C) semistrong
D) strong
E) perfect
21) An investor discovers that for a certain group of stocks, large positive price changes are
always followed by large negative price changes. This finding is a violation of the ________
form of the efficient market hypothesis.
A) moderate
B) semistrong
C) strong
D) weak
E) historical
22) 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:
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.
23) A fully efficient market will eliminate which one of the following?
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 months
24) If a market is strong form efficient then:
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.
25) 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:
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.
26) An investor discovers that stock prices change drastically as a result of certain events. This
finding is a violation of:
A) the moderate form of the efficient market hypothesis.
B) the semistrong form of the efficient market hypothesis.
C) the strong form of the efficient market hypothesis.
D) the weak form of the efficient market hypothesis.
E) no form of market efficiency but rather an indication of an efficient market.
27) The market price of a stock tends to fluctuate throughout every trading day. This fluctuation
is:
A) inconsistent with the semistrong form of the efficient market hypothesis because prices
should be stable.
B) inconsistent with the weak form of the efficient market hypothesis because all past
information should already be included in the price.
C) consistent with the semistrong form of the efficient market hypothesis because daily prices
should adjust as new information becomes available.
D) consistent with the strong form of market efficiency because prices are controlled by insiders.
E) a strong indicator that abnormal profits can be realized.
28) Suppose firms with unexpectedly high earnings earn abnormally high returns for several
months after the earnings announcement. This would be evidence of:
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.
29) If the securities market is efficient, an investor need only throw darts at the stock pages to
pick securities and be just as well off as they would be with a professionally-developed portfolio.
This statement is:
A) true because there would be no significant difference in risk and return.
B) true because in an efficient stock market all portfolios earn the market rate of return.
C) false because professionals guarantee higher returns given the same level of risk.
D) false because investors may not hold a desirable risk-return combination.
E) false because the markets are controlled by the institutional investors.