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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) I and II only
B) I and III only
C) II and IV only
D) I, II, and III only
50) The broadest information set is included in the ________.
A) weak-form efficiency argument
B) semistrong-form efficiency argument
C) strong-form efficiency argument
D) 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) high book-to-market firms are underpriced or the book-to-market ratio is a proxy for a unique
risk factor
B) low book-to-market firms are underpriced or the book-to-market ratio is a proxy for a
systematic risk factor
C) either high book-to-market firms are underpriced or the book-to-market ratio is a proxy for a
systematic risk factor
D) high book-to-market firms have more post-earnings drift
52) According to results by Seyhun, ________.
A) investors cannot usually earn abnormal returns by following inside trades after knowledge of
the trades are made public
B) investors can usually earn abnormal returns by following inside trades after knowledge of the
trades are made public
C) investors cannot earn abnormal returns by following inside trades before knowledge of the
trades are made public
D) investors cannot earn abnormal returns by trading before insiders
22
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No reproduction or distribution without the prior written consent of McGraw-Hill Education.
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%
Answer: A
Explanation: Prob = 1 - N[(-.2300 - .0005)/.01] ≈ 0
Difficulty: 3 Hard
Topic: Random Walks and the Efficient Market Hypothesis
Learning Objective: 08-01 Demonstrate why security price changes should be essentially
unpredictable in an efficient market.
Bloom's: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
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) I only
B) II only
C) I and III only
D) I, II, and III
57) Stock market analysts have tended to be ________ in their recommendations to investors.
A) slightly overly optimistic
B) overwhelmingly optimistic
C) slightly overly pessimistic
D) 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) The average rate of return is significantly greater than zero.
B) The correlation between the market return one week and the return the following week is
zero.
C) You could have consistently made superior returns by buying stock after a 10% rise in price
and selling after a 10% fall.
D) 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) technical analysis cannot; fundamental analysis can
B) technical analysis can; fundamental analysis can
C) technical analysis can; fundamental analysis cannot
D) technical analysis cannot; fundamental analysis cannot
64) An implication of the efficient market hypothesis is that ________.
A) high-beta stocks are consistently overpriced
B) low-beta stocks are consistently overpriced
C) nonzero alphas will quickly disappear
D) growth stocks are better buys than value stocks
65) One type of passive portfolio management is ________.
A) investing in a well-diversified portfolio without attempting to search out mispriced securities
B) investing in a well-diversified portfolio while only seeking out passively mispriced securities
C) investing an equal dollar amount in index stocks
D) 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) the tenure of the fund manager
B) momentum
C) fees
D) 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 stocks are likely to generate positive-earnings surprises.
A) I only
B) II only
C) I and III only
D) I, II, and III
68) Value stocks usually exhibit ________ price-to-book ratios and ________ price-to-earnings
ratios.
A) low; low
B) low; high
C) high; low
D) high; high
69) Growth stocks usually exhibit ________ price-to-book ratios and ________ price-to-earnings
ratios.
A) low; low
B) low; high
C) high; low
D) high; high
70) A day trade with an average stock holding period of under 8 minutes might be most closely
associated with which trading philosophy?
A) EMH
B) fundamental analysis
C) strong-form market efficiency
D) technical analysis
71) A technical analyst is most likely to be affiliated with which investment philosophy?
A) active management
B) buy and hold
C) passive investment
D) index funds
72) Someone who invests in the Vanguard Index 500 mutual fund could most accurately be
described as using which approach?
A) Active management
B) Arbitrage
C) Fundamental analysis
D) Passive investment
73) Evidence by Blake, Elton, and Gruber indicates that, on average, actively managed bond
funds ________.
A) outperform passive fixed-income indexes
B) underperform passive fixed-income indexes by a wide margin
C) perform as well as passive fixed-income indexes
D) underperform passive fixed-income indexes by an amount equal to fund expenses
74) Insiders are able to profitably trade and earn abnormal returns prior to the announcement of
positive news. This is a violation of which form of efficiency?
A) weak-form efficiency
B) semistrong-form efficiency
C) strong-form efficiency
D) technical analysis
75) In an efficient market and for an investor who believes in a passive approach to investing,
what is the primary duty of a portfolio manager?
A) accounting for results
B) diversification
C) identifying undervalued stocks
D) no need for a portfolio manager
76) Which of the following is not a topic related to the debate over market efficiency?
A) IPO results
B) lucky event issue
C) magnitude issue
D) selection bias
77) Which Fidelity Magellan portfolio manager is often referenced as an exception to the general
conclusion of efficient markets?
A) Jeff Vinik
B) Peter Lynch
C) Robert Stansky
D) William Hayes
78) The tendency of poorly performing stocks and well-performing stocks in one period to
continue their performance into the next period is called the ________.
A) fad effect
B) martingale effect
C) momentum effect
D) reversal effect
79) Which of the following is not a concept related to explaining abnormal excess stock returns?
A) January effect
B) neglected-firm effect
C) P/E effect
D) preferred stock effect
80) The lack of adequate trading volume in stock that may ultimately lead to its ability to
produce excess returns is referred to as the ________.
A) January effect
B) liquidity effect
C) neglected-firm effect
D) P/E effect
81) Fundamental analysis determines that the price of a firm's stock is too low, given its intrinsic
value. The information used in the analysis is available to all market participants, yet the price
does not seem to react. The stock does not trade on a major exchange. What concept might
explain the ability to produce excess returns on this stock?
A) January effect
B) neglected-firm effect
C) P/E effect
D) reversal effect
82) When testing mutual fund performance over time, one must be careful of ________, which
means that a certain percentage of poorer-performing funds fail over time, making the
performance of remaining funds seem more consistent over time.
A) survivorship bias
B) lucky event bias
C) magnitude bias
D) mean reversion bias
83) Most evidence indicates that U.S. stock markets are ________.
A) reasonably weak-form and semistrong-form efficient
B) strong-form efficient
C) reasonably weak-form but not semistrong- or strong-form efficient
D) neither weak-, semistrong-, nor strong-form efficient
84) Which of the following statements is (are) correct?
A) If a market is weak-form efficient, it is also semistrong- and strong-form efficient.
B) If a market is semistrong-form efficient, it is also strong-form efficient.
C) If a market is strong-form efficient, it is also semistrong- but not weak-form efficient.
D) If a market is strong-form efficient, it is also semistrong- and weak-form efficient.
85) According to Markowitz and other proponents of modern portfolio theory, which of the
following activities would not be expected to produce any benefits?
A) diversifying
B) investing in treasury bills
C) investing in stocks of utility companies
D) engaging in active portfolio management to enhance returns
86) According to results by Seyhun, the main reason that investors cannot earn excess returns by
following inside trades after they become public is that ________.
A) the information isn't available for at least 2 weeks
B) transaction costs offset abnormal returns
C) the SEC late-disclosure rule doesn't apply to insiders
D) insiders don't have to disclose their trades
87) Approximately what percentage of assets in equity mutual funds were indexed in 2017?
A) 10%
B) 15%
C) 20%
D) 25%
88) McLean and Pontiff (2016) identify more than ________ characteristics associated with
abnormal returns.
A) 10
B) 25
C) 95
D) 100
89) Del Guercio and Reuter (2014) find
A) direct -purchase mutual fund investors outperform those who purchase through brokers.
B) broker -purchase mutual fund investors outperform those who direct purchase directly.
C) both types of investors did as well or better than index funds.
D) both types of investors underperformed index funds.
90) Which famous economist suggested that asset bubbles arise naturally as investors become
more willing to take on added risk during stable periods, leading to increased asset prices?
A) Milton Friedman
B) Hyman Minsky
C) Al Gore
D) John Keynes
91) Keown and Pinkerton (1981) found cumulative abnormal returns begin roughly _______days
prior to the announcement of a takeover.
A) 15
B) 30
C) 45
D) 60
92) Testing many different trading rules until you find one that would have worked in the past is
called ________.
A) data mining
B) perceived patterning
C) pattern searching
D) behavioral analysis
