Exam
Name___________________________________
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
1)
Following the theory of the “efficient market hypothesis” all of the following are true EXCEPT
1)
A)
securities are typically in equilibrium, meaning they are fairly priced and their expected
returns equal their required returns.
B)
since stocks are fully and fairly price, it follows that investors should not waste their time
trying to find and capitalize on miss–priced (under– or over–valued) securities.
C)
insider trading scandals have proven that stocks are not fully and fairly priced; as a result, it
would be worthwhile for investors should spend time searching for mispriced (over– or
under–valued) stocks.
D)
at any point in time, security prices fully reflect all public information available about the
firm and its securities, and these prices react swiftly to new information.
2)
Which three of the following are implications of the efficient market hypothesis (EMH) for
companies?
2)
A)
Large quantities of new shares can be sold without moving the price.
B)
Signals from price movements should be taken seriously.
C)
The timing of security issues must be fine–tuned.
D)
Focus on substance, not on short–term appearances
3)
It has been found that the share values of firms whose shares are traded publicly in an efficient
marketplace is
3)
A)
generally positively affected by diversification, because of the reduction in risk.
B)
generally not affected by diversification, unless greater returns are expected.
C)
generally negatively affected by diversification, because of the increase in risk.
D)
generally negatively affected by diversification, because of the increase in the required rate of
return.
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4)
Which of the following is an implication of the efficient market hypothesis (EMH) for investors?
4)
A)
For the vast majority of people public information cannot be used to earn abnormal returns.
B)
Investors need to press for a greater volume of timely information.
C)
Effective EMH will always ensure higher levels of dividend for alert investors.
D)
The perception of a fair game market could be improved by more constraints and deterrents
placed on insider dealers.
5)
What is X in the formula X =Share price
Earnings per share ?
5)
A)
Price–earning ratio
B)
Dividend cover
C)
Dividend yield
D)
Share dividend
6)
Which three of the following are benefits of an efficient market?
6)
A)
It encourages share buying.
B)
It helps to allocate resources.
C)
Share prices are based on partial information.
D)
It gives correct signals to company managers.
7)
Economically rational buyers and sellers use their assessment of an asset’s risk and return to
determine its value. Relative to this concept, which of the following is true?
7)
A)
To a seller the asset’s value represents the maximum sale price.
B)
To a buyer the asset’s value represents the minimum price that he or she would pay to acquire
it.
C)
The interaction of buyers and sellers can result in a value that differs from the stock’s true
value.
D)
To a buyer the asset’s value represents the maximum price that he or she would pay to
acquire it.
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8)
Which of the following best describes the term ‘weak–form efficiency’?
8)
A)
Share prices fully reflect all information contained in past price movements.
B)
Share prices fully reflect all the relevant, publicly available information.
C)
All relevant information, including that which is privately held, is reflected in the share price.
D)
Share prices fully reflect information available only to certain shareholders.
9)
Which two options best describe how new information is incorporated into share prices in an
efficient market?
9)
A)
Rapidly
B)
Rationally
C)
Through official channels
D)
Gradually
10)
Which two of the following are implications of the efficient market hypothesis (EMH) for
companies?
10)
A)
Large quantities of new shares can be sold without moving the price.
B)
Signals from price movements should be taken seriously.
C)
The timing of security issues must be fine–tuned.
11)
If expected return is less than required return on an asset, rational investors will
11)
A)
buy the asset, since price is expected to increase.
B)
sell the asset, which will drive the price up and cause the expected return to reach the level of
the required return.
C)
sell the asset, which will drive the price down and cause the expected return to reach the level
of the required return.
D)
buy the asset, which will drive the price up and cause expected return to reach the level of the
required return.
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12)
If the expected return is above the required return on an asset, rational investors will
12)
A)
buy the asset, which will drive the price up and cause expected return to reach the level of the
required return.
B)
sell the asset, which will drive the price up and cause the expected return to reach the level of
the required return.
C)
sell the asset, which will drive the price down and cause the expected return to reach the level
of the required return.
D)
sell the asset, since price is expected to decrease.
13)
Which of the following best describes ‘strong–form efficiency’?
13)
A)
All relevant information, including that which is privately held, is reflected in the share price.
B)
Share prices fully reflect all the relevant, publicly available information.
C)
Share prices fully reflect information available only to certain shareholders.
D)
Share prices fully reflect all information contained in past price movements.
14)
According to the efficient market theory,
14)
A)
prices of actively traded stocks can only be under–valued in an efficient market.
B)
prices of actively traded stocks can be under– or over–valued in an efficient market, and bear
searching out.
C)
prices of actively traded stocks do not differ from their true values in an efficient market.
D)
prices of actively traded stocks can only be over–valued in an efficient market.
15)
Which three of the following accurately describe insider trading?
15)
A)
It is likely to be profitable.
B)
It is trading on privileged information.
C)
It is any trading in shares of the company by its employees.
D)
It is illegal.
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16)
Which of the following best describes ‘strong–form efficiency’?
16)
A)
All relevant information, including that which is privately held, is reflected in the share price.
B)
Share prices fully reflect information available only to certain shareholders.
C)
Share prices fully reflect all the relevant, publicly available information.
D)
Share prices fully reflect all information contained in past price movements.
TRUE/FALSE. Write ‘T’ if the statement is true and ‘F’ if the statement is false.
17)
Efficient market hypothesis is the theory describing the behavior of an assumed “perfect” market in
which securities are typically in equilibrium, security prices fully reflect all public information
available and react swiftly to new information, and, because stocks are fairly priced, investors need
not waste time looking for mispriced securities.
17)
18)
In an efficient market, stock prices adjust quickly to new public information.
18)
19)
In an inefficient market, stock prices adjust quickly to new public information.
19)
20)
If the expected return is less than the required return, investors will sell the asset, because it is not
expected to earn a return commensurate with its risk.
20)
21)
Behavioral finance is a growing body of research that focuses on investor behavior and its impact
on investment decisions and stock prices.
21)
22)
In an efficient market, the expected return and the required return are equal.
22)
23)
In an inefficient market, securities are typically in equilibrium, which means that they are fairly
priced and that their expected returns equal their required returns.
23)
24)
If a market is truly efficient, investors should not waste their time trying to find and capitalise on
mispriced securities.
24)
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25)
An efficient market is a market that allocates funds to their most productive use as a result of
competition among wealth–maximizing investors.
25)
26)
If the expected return were above the required return, investors would buy the asset, driving its
price up and its expected return down.
26)
27)
To a buyer, an asset’s value represents the minimum price that he or she would pay to acquire it.
27)
28)
If a market is truly efficient, investors should not waste their time trying to find and capitalise on
mispriced securities.
28)
29)
Rational investors purchase a stock when they believe that it is undervalued and sell when they feel
that it is overvalued.
29)
30)
In an efficient market, securities are typically in equilibrium, which means that they are fairly
priced and that their expected returns equal their required returns.
30)
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Answer Key
Testname: C14
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