Chapter 11 The Efficient Market Hypothesis Answer Key
Multiple Choice Questions
1.
If you believe in the ________ form of the EMH, you believe that stock prices reflect all
relevant information including historical stock prices and current public information about
the firm, but not information that is available only to insiders.
2.
When Maurice Kendall examined the patterns of stock returns in 1953, he concluded that
the stock market was __________. Now, these random price movements are believed to be
_________.
3.
The stock market follows a
4.
A hybrid strategy is one where the investor
5.
The difference between a random walk and a submartingale is the expected price change
in a random walk is ______, and the expected price change for a submartingale is ______.
Blooms: Understand
Difficulty: Basic
Topic: Efficient Market Hypothesis
6.
Topic: Efficient Market Hypothesis
Proponents of the EMH typically advocate
7.
Proponents of the EMH typically advocate
8.
If you believe in the _______ form of the EMH, you believe that stock prices only reflect all
information that can be derived by examining market trading data such as the history of
past stock prices, trading volume or short interest.
9.
If you believe in the _________ form of the EMH, you believe that stock prices reflect all
available information, including information that is available only to insiders.
10.
If you believe in the reversal effect, you should
11.
__________ focus more on past price movements of a firm’s stock than on the underlying
determinants of future profitability.
12.
_________ above which it is difficult for the market to rise.
13.
_________ below which it is difficult for the market to fall.
14.
___________ the return on a stock beyond what would be predicted from market
movements alone.
15.
The debate over whether markets are efficient will probably never be resolved because of
16.
A common strategy for passive management is
17.
Arbel (1985) found that
18.
Researchers have found that most of the small firm effect occurs
19.
Basu (1977, 1983) found that firms with low P/E ratios
20.
Basu (1977, 1983) found that firms with high P/E ratios
21.
Jaffe (1974) found that stock prices _________ after insiders intensively bought shares.
22.
Jaffe (1974) found that stock prices _________ after insiders intensively sold shares.
23.
Banz (1981) found that, on average, the risk-adjusted returns of small firms
24.
Banz (1981) found that, on average, the risk-adjusted returns of large firms
25.
Proponents of the EMH think technical analysts
26.
Studies of positive earnings surprises have shown that there is
27.
Studies of negative earnings surprises have shown that there is
28.
Studies of stock price reactions to news are called
29.
On November 22, 2012, the stock price of WalMart was $69.50 and the retailer stock index
was 600.30. On November 25, 2012, the stock price of WalMart was $70.25 and the retailer
stock index was 605.20. Consider the ratio of WalMart to the retailer index on November
22 and November 25. WalMart is _______ the retail industry, and technical analysts who
follow relative strength would advise _______ the stock.
30.
Work by Amihud and Mendelson (1986, 1991)
31.
Fama and French (1992) found that the stocks of firms within the highest decile of book-
to-market ratios had average monthly returns of _______, while the stocks of firms within
the lowest decile of book-to-market ratios had average monthly returns of ________.
32.
A market decline of 23% on a day when there is no significant macroeconomic event
______ consistent with the EMH because ________.