Investment Analysis and Portfolio Management 9th Edition TestBank Chapter 6

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CHAPTER 6—EFFICIENT CAPITAL MARKETS TRUE/FALSE Question: Prices in

efficient capital markets fully reflect all available information and rapidly adjust to new

information. Answer:

Question: An efficient market requires a large number of profit-maximizing investors.

Answer:

Question: If the efficient market hypothesis is true price changes are independent and

biased. Answer:

Question: The random walk hypothesis contends that stock prices occur randomly.

Answer:

Question: In his original article, Fama divided the efficient market hypothesis into two

subhypotheses. Answer:

Question: The weak form of the efficient market hypothesis contends that stock prices

fully reflect all public and private information. Answer:

Question: The weak form of the efficient market hypothesis contends that technical trading

rules are of little value. Answer:

Question: Tests have shown that if small filters are used in simulating trading rules, these

trading rules have produced above average returns after transactions costs are factored in.

Answer:

Question: In tests of the semi-strong form EMH, it is not necessary to use risk-adjusted

rates of return. Answer:

Question: Results of initial public offering (IPOs) studies tend to support the semi-strong

EMH, because it appears that prices adjusted rapidly after initial underpricing. Answer:

Question: Results from studies on the effects of unexpected world events have consistently

indicated that the price change is so rapid, that it takes place between the close of one day

and the opening of the next day. Answer:

Question: Studies concerning quarterly earnings reports indicate that information in

quarterly statements is of value and can provide an above-average risk-adjusted return.

Answer:

Question: Results of studies concerning corporate insider trading indicate that corporate

insiders generally enjoy above-average returns. Answer:

Question: The strong form of the efficient market hypothesis contends that only insiders

can earn abnormal returns. Answer:

Question: Technical analysis and the efficient market hypothesis have a consistent set of

assumptions concerning stock market behavior. Answer:

Question: Even when fees and costs are considered most mutual fund managers

outperform the aggregate market. Answer:

Question: When considering markets in Europe, it is inappropriate to assume a level of

efficiency similar to that for U.S. markets. Answer:

Question: The weak-form efficient market hypothesis assumes all publicly available

information is reflected in current stock prices. Answer:

Question: Studies examining stock splits support the semi-strong form efficient market

hypothesis. Answer:

Question: There is little evidence from studies examining initial public offerings (IPOs)

that suggest markets are semi-strong form efficient. Answer:

Question: Which of the following would be inconsistent with an efficient market?

Answer:

Question: Fusion investing is the integration of the following elements of investment

valuation:

Answer:

Question: The weak form of the efficient market hypothesis states that

Answer:

Question: Which statement is true concerning alternative efficient market hypothesis?

Answer:

Question: If statistical tests of stock returns over time support the efficient market

hypothesis the resulting correlations should be

Answer:

Question: A “runs test” on successive stock price changes which supports the efficient

market hypothesis would show the actual number of runs

Answer:

Question: A trading rule which signals purchase of a stock if it rises X percent and sale of a

stock if it falls X percent is known as a

Answer:

Question: Which of the following has not been involved in a direct test of the semi-strong

form of the efficient market hypothesis?

Answer:

Question: Examples of anomalies providing contrary evidence to the semi-strong efficient

market hypothesis include studies of all of the following except

Answer:

Question: The opportunity to take advantage of the downward pressure on stock prices that

result from end-of-the-year tax selling is known as

Answer:

Question: Banz and Reinganum found that small firms consistently outperformed large

firms. This anomaly is referred to as the

Answer:

Question: The performance of four major groups of investors has been studied in

connection with tests of the strong-form of the efficient market hypothesis. These include

all of the following except

Answer:

Question: Abnormal returns associated with rankings by a major advisory service are

associated with

Answer:

Question: The implication of efficient capital markets and a lack of superior analysts have

led to the introduction of

Answer:

Question: Superior analysts are encouraged to concentrate their efforts in “middle tier”

stocks. This is recommended because

Answer:

Question: A portfolio manager without superior analytical skills should

Answer:

Question: Which is not an implication of the EMH?

Answer:

Question: Some studies have attempted to determine whether it is possible to predict future

returns for a stock based on publicly available quarterly earnings reports. The results of

these studies indicate

Answer:

Question: The results of studies that have looked at the relationship between PEG ratios

and subsequent stock returns

Answer:

Question: The strongest explanations for the size anomaly are

Answer:

Question: Fama and French examined the relationship between the Book Value to Market

Value ratio and average stock returns and found

Answer:

Question: Investigators have tested the strong form EMH by examining the performance of

the following type of investor

Answer:

Question: Escalation bias refers to the situation where

Answer:

Question: Confirmation bias refers to the situation where

Answer:

Question: According to prospect theory

Answer:

Question: Behavioral finance differs from the standard model of finance because

behavioral finance

Answer:

Question: Studies of the relationship between P/E ratios and stock returns have found that

Answer:

Question: The January anomaly refers to the phenomenon where stock prices

Answer:

Question: Researchers have found a positive relationship between default spread and stock

returns in the long run because a large default spread implies

Answer:

Question: The results of return prediction studies have found

Answer:

Question: In tests of the semi-strong form efficient market hypothesis, an adjustment for

market effects is carried out by

Answer:

Question: In an event study the objective is to

Answer:

Question: In order to confirm the weak-form efficient market hypothesis you could

develop trading rules that consider,

Answer:

Question: In order to confirm the weak-form efficient market hypothesis, an examination

of stock price runs over time would reveal that stock price changes over time were

Answer:

Question: According to the strong-form efficient market hypothesis, stock prices fully

reflect

Answer:

Question: According to the semi-strong form efficient market hypothesis, which of the

following types of information are fully reflected in stock prices?

Answer:

Question: According to the weak-form efficient market hypothesis, which of the following

types of information are fully reflected in stock prices?

Answer:

Question: Which of the following assumptions imply capital markets will be efficient?

Answer:

Question: Autocorrelation and runs tests are used to test the

Answer:

Question: Event studies are used to test the

Answer:

Question: Evidence supporting the strong form efficient market hypothesis (EMH) resulted

from examining

Answer:

Question: Which of the following behaviors is consistent with escalation bias?

Answer:

Question: Fusion investing refers to the combination of

Answer:

USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S)

Rit = return for stock i during period t Rmt = return for the aggregate market during period

t NARREND Question: Refer to Exhibit 6-1. What is the abnormal rate of return for Stock

C during period t using only the aggregate market return (ignore differential systematic

risk)?

Answer:

Question: Refer to Exhibit 6-1. What is the abnormal rate of return for Stock E during

period t using only the aggregate market return (ignore differential systematic risk)?

Answer:

Question: Refer to Exhibit 6-1. What is the abnormal rate of return for Stock C when you

consider its systematic risk measure (beta)?

Answer:

Question: Refer to Exhibit 6-1. What is the abnormal rate of return for Stock E when you

consider its systematic risk measure (beta)?

Answer:

USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S)

Rit = return for stock i during period t Rmt = return for the aggregate market during period

t NARREND Question: Refer to Exhibit 6-2. What is the abnormal rate of return for Stock

ABC during period t using only the aggregate market return (ignore differential systematic

risk)?

Answer:

Question: Refer to Exhibit 6-2. What is the abnormal rate of return for Stock XYZ during

period t using only the aggregate market return (ignore differential systematic risk)?

Answer:

Question: Refer to Exhibit 6-2. What is the abnormal rate of return for Stock ABC when

you consider its systematic risk measure (beta)?

Answer:

Question: Refer to Exhibit 6-2. What is the abnormal rate of return for Stock XYZ when

you consider its systematic risk measure (beta)?

Answer:

USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S)

Rit = return for stock i during period t Rmt = return for the aggregate market during period

t NARREND Question: Refer to Exhibit 6-3. What is the abnormal rate of return for Elliot

during period t using only the aggregate market return (ignore differential systematic risk)?

Answer:

Question: Refer to Exhibit 6-3. What is the abnormal rate of return for Hemlick during

period t using only the aggregate market return (ignore differential systematic risk)?

Answer:

Question: Refer to Exhibit 6-3. What is the abnormal rate of return for Elliot when you

consider its systematic risk measure (beta)?

Answer:

Question: Refer to Exhibit 6-3. What is the abnormal rate of return for Hemlick when you

consider its systematic risk measure (beta)?

Answer:

USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S)

Rit = return for stock i during period t Rmt = return for the aggregate market during period

t NARREND Question: Refer to Exhibit 6-4. What is the abnormal rate of return for Stock

A during period t using only the aggregate market return (ignore differential systematic

risk)?

Answer:

Question: Refer to Exhibit 6-4. What is the abnormal rate of return for Stock B during

period t using only the aggregate market return (ignore differential systematic risk)?

Answer:

Question: Refer to Exhibit 6-4. What is the abnormal rate of return for Stock A when you

consider its systematic risk measure (beta)?

Answer:

Question: Refer to Exhibit 6-4. What is the abnormal rate of return for Stock B when you

consider its systematic risk measure (beta)?

Answer:

USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S)

Rit = return for stock i during period t Rmt = return for the aggregate market during period

t NARREND Question: Refer to Exhibit 6-5. What is the abnormal rate of return for Stock

A during period t using only the aggregate market return (ignore differential systematic

risk)?

Answer:

Question: Refer to Exhibit 6-5. What is the abnormal rate of return for Stock Z during

period t using only the aggregate market return (ignore differential systematic risk)?

Answer:

Question: Refer to Exhibit 6-5. What is the abnormal rate of return for Stock A when you

consider its systematic risk measure (beta)?

Answer:

Question: Refer to Exhibit 6-5. What is the abnormal rate of return for Stock Z when you

consider its systematic risk measure (beta)?

Answer:

USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S)

Rit = return for stock i during period t Rmt = return for the aggregate market during period

t NARREND Question: Refer to Exhibit 6-6. What is the abnormal rate of return for Stock

A during period t using only the aggregate market return (ignore differential systematic

risk)?

Answer:

Question: Refer to Exhibit 6-6. What is the abnormal rate of return for Stock A when you

consider its systematic risk measure (beta)?

Answer:

Question: Refer to Exhibit 6-6. What is the abnormal rate of return for Stock B when you

consider its systematic risk measure (beta)?

Answer: