30) Serial correlation:
A) measures the relationship between the current return on a security with that of a second
security.
B) involves multiple securities within the same industry.
C) indicates a tendency for continuation when the correlation is positive.
D) indicates a tendency toward reversal when the correlation coefficient is zero.
E) supports weak form efficiency when the correlation coefficient is near zero.
31) Event studies attempt to determine:
A) the influence of information released to the market on stock prices in days surrounding the
information’s release.
B) if the market is at least weak form efficient.
C) whether the market is semi strong or strong form efficient.
D) the correlation between the returns on two diverse securities.
E) the optimal time to release new information to the public.
32) The abnormal return in an event study is described as the:
A) total return earned on a security on the day of an announcement.
B) daily return on a security minus the daily return on the overall market.
C) average return on a security for the 7-day period surrounding an announcement.
D) average return on a security for the 7-day period surrounding an announcement minus the
average return on the security for the past year.
E) daily return on a security on the announcement date minus the risk-free rate of return.
33) Assume the price of a stock rises upon the announcement that the firm’s chief executive
officer (CEO) was killed in a freak accident. This market reaction is most indicative of the:
A) uncertainty of the firm’s future existence.
B) random nature of stock price movements.
C) expected management turmoil that is anticipated.
D) underperformance of that CEO.
E) sadness of hearing the news.
34) Studies of the performance of professionally managed mutual funds find that these funds:
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.
35) Which one of the following statements is true?
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.
36) Event studies of dividend omissions indicate that:
A) this type of announcement generally has no effect on abnormal returns.
B) the cumulative abnormal return remains constant when this type of announcement is made.
C) stock returns are positively, and efficiently, impacted when dividend omission
announcements are made.
D) this type of an event is incorporated into stock prices slowly over a 10-day period.
E) the cumulative abnormal return declines on the day prior to and the day of the announcement.
37) Which one of these is an example of financially irrational behavior?
A) An investor selling stock to realize a profit
B) Increasing the amount you are willing to pay for a stock following a positive announcement
C) Buying a mutual fund to benefit from diversification
D) Casino gambling
E) A firm issuing new shares when their managers feel the stock is overpriced
38) An overconfident investor will tend to:
A) trade primarily in securities from their local area.
B) trade less frequently than an average investor.
C) underperform due to excess trading.
D) suffer from the disposition effect.
E) underestimate their ability to pick a winning stock.
39) The disposition effect refers to:
A) the underreaction of investors to bad news.
B) selling any security that creates a tax liability.
C) the hesitancy to sell a security of any firm with which you are affiliated.
D) the urge to sell all your securities when market values decline.
E) selling your winners while holding your losers.
40) Which term best applies to the situation where an investor cares less about losing $1 of his
profits than he does about losing $1 of his original investment?
A) Get-evenitis
B) Snakebite effect
C) Familiarity
D) Home bias
E) House money effect
41) Drawing conclusions from too small of a sampling describes the behavioral characteristic of:
A) conservatism.
B) familiarity.
C) representativeness.
D) overconfidence.
E) underreaction.
42) Psychologists generally agree that irrational traits such as those related to behavioral finance
are generally:
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.
43) One reason why the efficient capital market hypothesis may not hold in reality is that:
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.
44) Stock market events in 1929, 1987, and 2008 are most apt to be used as examples in support
of which one of these theories?
A) Blanket theory
B) Advanced markets theory
C) Value theory
D) Bubble theory
E) Behavioral theory
45) Who is credited with saying “Markets can stay irrational longer than you can stay solvent”?
A) G.C. Biddle
B) Warren Buffett
C) R.S. Kaplan
D) John Maynard Keynes
E) Jay Ritter
46) The Kolasinski and Li study of earnings surprises showed that:
A) prices tend to overreact and then properly adjust the following day.
B) prices tend to be unaffected by these types of announcements.
C) prices tend to adjust rapidly and efficiently to these announcements.
D) prices adjust slowly to earnings announcements.
E) earnings surprises tend to be predicted such that prices adjust prior to the announcement.
47) The studies conducted by Fama and French show that:
A) value stocks have higher average returns than growth stocks around the world.
B) growth stocks have higher average returns than value stocks around the world.
C) value stocks outperform in the U.S. while growth stocks outperform elsewhere.
D) growth stocks outperform in the U.S. while value stocks outperform elsewhere.
E) value and growth stocks perform relatively the same over longer periods of time.
48) Critics of behavioral finance use which one of these as an argument for market efficiency?
A) Research papers supporting market efficiency tend to end up “in file drawers”
B) Underreactions fail to exist in actual studies
C) The overall community of financial economists firmly decided the markets are efficient
D) Overreactions offset underreactions in almost every market study conducted to date
E) Conservatism has been found to be absent in studies under actual market conditions
49) If financial markets are efficient, then attempting to accurately predict interest rates is:
A) an endeavor best left to corporate executives.
B) a relatively easy and accurate exercise.
C) a waste of good time.
D) relatively easy to do if you have a general understanding of finance and economics.
E) a little tricky but wise managers tend to succeed at it on an ongoing basis.
50) In the three years prior to a forced departure of a top manager, stock prices, adjusted for
market performance, on average:
A) decline about 20 percent.
B) decline about 40 percent.
C) decline about 60 percent.
D) remain stable.
E) increase about 20 percent.
51) Ritter’s study of SEO’s suggests that:
A) managers appear to be able to successfully time SEO issues when the stock is overpriced.
B) managers can only successfully time SEO issuance by pure chance.
C) managers tend to be incorrect in their market assessment of the market movement of their
firm’s stock price.
D) returns on SEO-issuing firms are statistically the same as those of style-matched non-issuers
for the five years following issuance.
E) firms are better at timing IPOs than they are at timing SEOs.
52) In examining the issue of whether the choice of accounting methods affects stock prices,
studies have found that:
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.
53) Empirical evidence suggests that:
A) prices may not reflect their true underlying value.
B) financial managers lack any ability to correctly time stock repurchases.
C) managers may profitably speculate in foreign currency.
D) managers cannot boost stock prices by changing their accounting methods.
E) wise accounting choices can impact a firm’s stock price.
54) Assume today is an earnings announcement day for a firm. For the day, the firm’s return was
.8 percent, while the risk-free daily rate was .01 percent and the market rate of return was 1.1
percent. The firm’s industrial class returned 1.2 percent on average for the day. What was the
firm’s abnormal return for the day?
A) .8 percent
B) .79 percent
C) −.3 percent
D) −.4 percent
E) −.39 percent
55) Explain why in an efficient market all investments have an expected NPV of zero.
56) Suppose your cousin invests in the stock market and doubles her money in a single year
while the market, on average, earned a return of only 15 percent. Is your cousin’s performance a
violation of market efficiency?
57) Why should a financial decision maker such as a corporate treasurer or CFO be concerned
with market efficiency?
58) Define the three forms of market efficiency.
59) Explain the risk that often accompanies the behavioral concept of familiarity.