Chapter 05 – Efficient Capital Markets, Behavioral Finance, and Technical Analysis
1. Prices in efficient capital markets fully reflect all available information and rapidly adjust to new information.
a.
True
b.
False
2. An efficient market requires a large number of profit-maximizing investors.
a.
True
b.
False
3. If the efficient market hypothesis is true, price changes are independent and biased.
a.
True
b.
False
4. The random walk hypothesis contends that stock prices occur randomly.
a.
True
b.
False
5. The weak form of the efficient market hypothesis contends that stock prices fully reflect all public and private
information.
a.
True
b.
False
6. The weak form of the efficient market hypothesis contends that technical trading rules are of little value.
a.
True
b.
False
7. 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.
a.
True
b.
False
8. In tests of the semistrong-form EMH, it is not necessary to use risk-adjusted rates of return.
a.
True
b.
False
9. Results of initial public offering (IPOs) studies tend to support the semi-strong EMH because it appears that prices
adjusted rapidly after initial underpricing.
a.
True
b.
False
10. 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.
a.
True
b.
False
11. Studies concerning quarterly earnings reports indicate that information in quarterly statements is of value and can
provide an above-average, risk-adjusted return.
a.
True
b.
False
12. Results of studies concerning corporate insider trading indicate that corporate insiders generally enjoy above-average
returns.
a.
True
b.
False
13. The strong form of the efficient market hypothesis contends that only insiders can earn abnormal returns.
a.
True
b.
False
14. Technical analysis and the efficient market hypothesis have a consistent set of assumptions concerning stock market
behavior.
a.
True
b.
False
15. Even when fees and costs are considered, most mutual fund managers outperform the aggregate market.
a.
True
b.
False
16. When considering markets in Europe, it is inappropriate to assume a level of efficiency similar to that for U.S.
markets.
a.
True
b.
False
17. The weak-form efficient market hypothesis assumes all publicly available information is reflected in current stock
prices.
a.
True
b.
False
18. Studies examining stock splits support the semistrong-form efficient market hypothesis.
a.
True
b.
False
19. There is little evidence from studies examining initial public offerings (IPOs) that suggest markets are semistrong-
form efficient.
a.
True
b.
False
20. There is empirical evidence that low P/E stocks have outperformed high P/E stocks for some historical time periods.
a.
True
b.
False
21. Recent studies indicate that due to lower transaction costs, intraday patterns of returns and volume persisted and result
in profitable momentum trading strategies.
a.
True
b.
False
22. Behavioral finance considers how various psychological traits affect how individuals or groups act as investors,
analysts, and portfolio managers.
a.
True
b.
False
23. The prospect theory contends that utility depends on deviations from moving reference points rather than absolute
wealth.
a.
True
b.
False
24. Fusion investing is the integration of two elements of investment valuation—fundamental value and investor
sentiment.
a.
True
b.
False
25. To take advantage of long-run price movements in an efficient market, you must do a superior job of estimating the
relevant variables that cause these long-run movements.
a.
True
b.
False
26. An investor who can do a superior job of estimating intrinsic value can consistently make superior market timing
(asset allocation) decisions or acquire undervalued securities and generate above-average returns.
a.
True
b.
False
27. Fundamentalists contend that past price movements will indicate future price movements.
a.
True
b.
False
28. Technical analysts believe that security prices do not adjust rapidly.
a.
True
b.
False
29. One of the potential disadvantages of technical analysis is that it can lead to investing too early, even before
fundamental analysts do.
a.
True
b.
False
30. Because technicians are suspicious of financial statements, they consider it advantageous not to depend on them.
a.
True
b.
False
31. The use of trading rules requires a great deal of subjective judgment.
a.
True
b.
False
32. If a technical trading rule is successful, then more traders use it, causing the rule to become even more successful.
a.
True
b.
False
33. For technical trading rules to consistently generate superior returns, the market would have to be inefficient.
a.
True
b.
False
34. The majority of technicians follow many trading rules and attempt to arrive at a consensus among their rules.
a.
True
b.
False
35. Contrary trading rules assert that investors tend to be wrong except at market peaks and troughs.
a.
True
b.
False
36. A high put/call ratio indicates a pervasive bearish attitude by sophisticated investors, so it is a bearish indicator.
a.
True
b.
False
37. Two major classes of technicians include the contrarians and those who “follow the smart money”
a.
True
b.
False
38. The confidence index increases as the yield on lower grade bonds decreases, everything else being constant.
a.
True
b.
False
39. The T-Bill-Eurodollar yield spread widens during periods of international crisis.
a.
True
b.
False
40. An increase in debit balances in brokerage accounts is viewed by technicians as a bullish sign.
a.
True
b.
False
41. The Confidence Index increases as the yield on lower grade bonds decreases, everything else being constant.
a.
True
b.
False
42. A rise in the Confidence Index published by Barron’s is an indication that investors will purchase more lower-quality
bonds.
a.
True
b.
False
43. An increase in debit balances means more investing by naive investors and would be a bearish indicator.
a.
True
b.
False
44. The Dow Theory contends that stock price movements are similar to the movement of tides, waves, and ripples.
a.
True
b.
False
45. A resistance level is the price range at which the technician would expect an increase in the demand of stock and a
price reversal.
Chapter 05 – Efficient Capital Markets, Behavioral Finance, and Technical Analysis
a.
True
b.
False
46. If the aggregate market is rising but the breadth index is declining, then it is a bearish signal.
a.
True
b.
False
47. The breadth of the market measures the daily volume for a particular market.
a.
True
b.
False
48. A support level is the price range at which the technician would expect an increase in the supply of stock and a price
reversal.
a.
True
b.
False
Chapter 05 – Efficient Capital Markets, Behavioral Finance, and Technical Analysis
49. Candlestick charts indicate the price change from open to close by shading whether the market went down or up for
the day.
a.
True
b.
False
50. If the 50-day moving average line crosses the 200-day moving average line from below on good volume, then this
would be a bullish signal.
a.
True
b.
False
51. The relative strength ratio for a stock can be computed by dividing the value of the S&P 500 stock index by the price
of a stock.
a.
True
b.
False
Chapter 05 – Efficient Capital Markets, Behavioral Finance, and Technical Analysis
52. When the 50-day MA line crosses the 200-day MA line from above, it is considered a buy signal.
a.
True
b.
False
53. If 10 percent of the stocks are selling above their 200-day moving average, the market is considered to be oversold.
a.
True
b.
False
54. Which of the following would be inconsistent with an efficient market?
a.
Information arrives randomly and independently.
b.
Stock prices adjust rapidly to new information.
c.
Price changes are independent.
d.
Price changes are random.
e.
Price adjustments are biased.
Chapter 05 – Efficient Capital Markets, Behavioral Finance, and Technical Analysis
55. The weak form of the efficient market hypothesis states that
a.
successive price changes are dependent.
b.
successive price changes are independent.
c.
successive price changes are biased.
d.
successive price changes depend on trading volume.
e.
properly specified trading rules are of value.
56. Which statement is true concerning alternative efficient market hypothesis?
a.
The weak hypothesis encompasses the semi-strong hypothesis.
b.
The weak hypothesis encompasses the strong hypothesis.
c.
The semi-strong hypothesis encompasses the weak hypothesis.
d.
The strong hypothesis relates only to public information.
e.
The semi-strong hypothesis encompasses the strong hypothesis.
57. According to the strong-form efficient market hypothesis, stock prices fully reflect
a.
all security market information only.
b.
all public information only.
c.
all public and private information.
d.
all private information only.
e.
limited public and private information.
58. According to the semistrong-form efficient market hypothesis, which of the following types of information are fully
reflected in stock prices?
a.
rates of return, trading volume, and news about the economy
b.
dividend and earnings announcements
c.
rates of return, trading volume, and block trades
d.
earnings announcements and rates of return
e.
All of these are correct.
59. According to the weak-form efficient market hypothesis, which of the following types of information are fully
reflected in stock prices?
a.
rates of return, trading volume, and news about the economy
b.
dividend and earnings announcements
c.
rates of return, trading volume, and block trades
d.
earnings announcements and rates of return
e.
insider information
60. 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
a.
breakout.
b.
short sale.
c.
sieve.
d.
filter.
e.
relative strength.
61. Which of the following has NOT been involved in a direct test of the semi-strong form of the efficient market
hypothesis?
a.
stock splits
b.
new Issues
c.
exchange listing
d.
accounting changes
e.
NYSE specialists’ returns
62. Examples of anomalies providing contrary evidence to the semi-strong efficient market hypothesis include studies of