Chapter 05 – Efficient Capital Markets, Behavioral Finance, and Technical Analysis
all of the following EXCEPT
a.
quarterly earnings reports.
b.
price earnings ratios.
c.
total market value.
d.
stocks ranked by Standard & Poor’s.
e.
the January effect.
63. The opportunity to take advantage of the downward pressure on stock prices that result from end-of-the-year tax
selling is known as the
a.
End-of-the-Year Effect.
b.
December Anomaly.
c.
End-of-the-Year Anomaly.
d.
January Anomaly.
e.
New Year Anomaly.
64. Banz and Reinganum found that small firms consistently outperformed large firms. This anomaly is referred to as the
a.
b.
c.
d.
e.
65. 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
a.
professional money managers.
b.
stock exchange specialists.
c.
securities Exchange officers.
d.
security analysts.
e.
corporate insiders.
66. 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
a.
stock prices adjust to reflect quarterly earnings reports.
b.
stock prices do not adjust to reflect quarterly earnings reports.
c.
support for the semistrong-EMH.
d.
stock prices adjust if earnings reports are released in January.
e.
stock prices do not adjust if earnings reports are released in January.
67. The January anomaly refers to the phenomenon where stock prices
Chapter 05 – Efficient Capital Markets, Behavioral Finance, and Technical Analysis
a.
decline in December.
b.
decline in January.
c.
rise in January.
d.
decline in December and rise in January.
e.
rise in December and decline in January.
68. Abnormal returns associated with rankings by a major advisory service are associated with
a.
the earnings effect.
b.
the Value-Line Enigma.
c.
the Value-Line Effect.
d.
the Standard and Poor’s Anomaly.
e.
the rankings anomaly.
69. Researchers have found a positive relationship between default spread and stock returns in the long run because a
large default spread implies a
a.
high risk premium and higher expected returns.
b.
high risk premium and lower expected returns.
c.
low risk premium and higher expected returns.
d.
low risk premium and lower expected returns.
e.
low risk premium and the same expected returns.
70. In tests of the semistrong-form efficient market hypothesis, an adjustment for market effects is carried out by
a.
calculating the historical return.
b.
calculating the market rate of return.
c.
calculating the abnormal rate of return.
d.
calculating the cross-sectional return.
e.
calculating the monthly return.
71. In an event study the objective is to
a.
determine whether it is possible to predict stock prices.
b.
determine how fast stock prices adjust to news.
c.
examine the cross-sectional distributions of returns.
d.
conduct a time series analysis of returns.
e.
determine normal P/E ratios.
72. 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
a.
highly positively correlated.
b.
moderately positively correlated.
Chapter 05 – Efficient Capital Markets, Behavioral Finance, and Technical Analysis
c.
highly negatively correlated.
d.
moderately negatively correlated.
e.
not correlated.
Exhibit 5.1
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Stock
Rit
Rmt
ai
Beta
C
12
10
0
0.8
E
10
8.0
0
1.1
Rit = return for stock i during period t
Rmt = return for the aggregate market during period t
73. Refer to Exhibit 5.1. What is the abnormal rate of return for Stock C during period t using only the aggregate market
return (ignore differential systematic risk)?
a.
4.0 percent
b.
1.2 percent
c.
−1.05 percent
d.
2.0 percent
e.
−8.5 percent
74. Refer to Exhibit 5.1. What is the abnormal rate of return for Stock E during period t using only the aggregate market
return (ignore differential systematic risk)?
Chapter 05 – Efficient Capital Markets, Behavioral Finance, and Technical Analysis
a.
4.0 percent
b.
2.0 percent
c.
1.2 percent
d.
−1.05 percent
e.
−8.5 percent
75. Refer to Exhibit 5.1. What is the abnormal rate of return for Stock C when you consider its systematic risk measure
(beta)?
a.
4.0 percent
b.
1.2 percent
c.
2.0 percent
d.
−1.05 percent
e.
−8.5 percent
76. Refer to Exhibit 5.1. What is the abnormal rate of return for Stock E when you consider its systematic risk measure
(beta)?
a.
2.0 percent
b.
1.2 percent
c.
4.0 percent
d.
−1.05 percent
e.
−8.5 percent
Chapter 05 – Efficient Capital Markets, Behavioral Finance, and Technical Analysis
Exhibit 5.2
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Stock
Rit
Rmt
ai
Beta
ABC
11.5
13.0
0
0.7
XYZ
9.0
7.0
0
1.1
Rit = return for stock i during period t
Rmt = return for the aggregate market during period t
77. Refer to Exhibit 5.2. What is the abnormal rate of return for Stock ABC during period t using only the aggregate
market return (ignore differential systematic risk)?
a.
3.2 percent
b.
2.4 percent
c.
1.3 percent
d.
−1.5 percent
e.
2.0 percent
78. Refer to Exhibit 5.2. What is the abnormal rate of return for Stock XYZ during period t using only the aggregate
market return (ignore differential systematic risk)?
a.
−3.2 percent
b.
2.4 percent
c.
2.0 percent
d.
1.3 percent
e.
−1.5 percent
79. Refer to Exhibit 5.2. What is the abnormal rate of return for Stock ABC when you consider its systematic risk measure
(beta)?
a.
2.4 percent
b.
1.5 percent
c.
−1.5 percent
d.
2.0 percent
e.
−3.2 percent
80. Refer to Exhibit 5.2. What is the abnormal rate of return for Stock XYZ when you consider its systematic risk measure
(beta)?
a.
2.0 percent
b.
−1.5 percent
c.
2.4 percent
d.
1.3 percent
e.
−3.2 percent
Chapter 05 – Efficient Capital Markets, Behavioral Finance, and Technical Analysis
Exhibit 5.3
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Stock
Rit
Rmt
ai
Beta
Elliot
9.9
15.0
0
0.8
Hemlick
9.1
8.0
0
1.1
Rit = return for stock i during period t
Rmt = return for the aggregate market during period t
81. Refer to Exhibit 5.3. What is the abnormal rate of return for Elliot during period t using only the aggregate market
return (ignore differential systematic risk)?
a.
1.50
b.
1.10
c.
−1.50
d.
−5.10
e.
−8.00
82. Refer to Exhibit 5.3. What is the abnormal rate of return for Hemlick during period t using only the aggregate market
return (ignore differential systematic risk)?
a.
0.11
b.
1.10
c.
−1.80
d.
−1.80
e.
−4.60
83. Refer to Exhibit 5.3. What is the abnormal rate of return for Elliot when you consider its systematic risk measure
(beta)?
a.
−2.10 percent
b.
−2.00 percent
c.
5.20 percent
d.
14.10 percent
e.
3.00 percent
84. Refer to Exhibit 5.3. What is the abnormal rate of return for Hemlick when you consider its systematic risk measure
(beta)?
a.
0.1 percent
b.
0.3 percent
c.
0.5 percent
d.
1.5 percent
e.
3.0 percent
Exhibit 5.4
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Stock
Rit
Rmt
ai
Beta
A
10.3
12
0
0.6
Chapter 05 – Efficient Capital Markets, Behavioral Finance, and Technical Analysis
B
9.4
9.0
0
1.2
Rit = return for stock i during period t
Rmt = return for the aggregate market during period t
85. Refer to Exhibit 5.4. What is the abnormal rate of return for Stock A during period t using only the aggregate market
return (ignore differential systematic risk)?
a.
3.34
b.
1.75
c.
−1.75
d.
−3.70
e.
−1.70
86. Refer to Exhibit 5.4. What is the abnormal rate of return for Stock B during period t using only the aggregate market
return (ignore differential systematic risk)?
a.
0.40
b.
1.40
c.
−1.10
d.
−4.40
e.
−6.40
87. Refer to Exhibit 5.4. What is the abnormal rate of return for Stock A when you consider its systematic risk measure
(beta)?
a.
2.30 percent
Chapter 05 – Efficient Capital Markets, Behavioral Finance, and Technical Analysis
b.
2.10 percent
c.
3.10 percent
d.
12.40 percent
e.
17.25 percent
88. Refer to Exhibit 5.4. What is the abnormal rate of return for Stock B when you consider its systematic risk measure
(beta)?
a.
0.1 percent
b.
−1.4 percent
c.
0.5 percent
d.
1.5 percent
e.
2.0 percent
Exhibit 5.5
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Stock
Rit
Rmt
ai
Beta
A
10.6
15
0
0.8
Z
9.8
8.0
0
1.1
Rit = return for stock i during period t
Rmt = return for the aggregate market during period t
89. Refer to Exhibit 5.5. What is the abnormal rate of return for Stock A during period t using only the aggregate market
return (ignore differential systematic risk)?
Chapter 05 – Efficient Capital Markets, Behavioral Finance, and Technical Analysis
a.
3.40
b.
4.40
c.
−1.86
d.
−4.40
e.
−1.70
90. Refer to Exhibit 5.5. What is the abnormal rate of return for Stock Z during period t using only the aggregate market
return (ignore differential systematic risk)?
a.
1.80
b.
1.40
c.
−1.80
d.
−4.80
e.
−8.80
91. Refer to Exhibit 5.5. What is the abnormal rate of return for Stock A when you consider its systematic risk measure
(beta)?
a.
1.40 percent
b.
−1.40 percent
c.
2.80 percent
d.
−2.80 percent
e.
0 percent
92. Refer to Exhibit 5.5. What is the abnormal rate of return for Stock Z when you consider its systematic risk measure
(beta)?
a.
0.1 percent
b.
1.0 percent
c.
0.5 percent
d.
−1.0 percent
e.
−2.0 percent
Exhibit 5.6
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Stock
Rit
Rmt
ai
Beta
A
9.7
10.0
0
0.7
B
10.4
8.0
0
1.4
Rit = return for stock i during period t
Rmt = return for the aggregate market during period t
93. Refer to Exhibit 5.6. What is the abnormal rate of return for Stock A during period t using only the aggregate market
return (ignore differential systematic risk)?
a.
−2.3 percent
b.
−0.3 percent
c.
0.3 percent
d.
2.3 percent
e.
3.0 percent
94. Refer to Exhibit 5.6. What is the abnormal rate of return for Stock A when you consider its systematic risk measure
(beta)?
a.
−2.3 percent
b.
−0.3 percent
c.
0.3 percent
d.
2.3 percent
e.
3.0 percent
95. Refer to Exhibit 5.6. What is the abnormal rate of return for Stock B when you consider its systematic risk measure
(beta)?
a.
−0.8 percent
b.
−1.2 percent
c.
1.3 percent
d.
2.4 percent
e.
6.6 percent
96. Refer to Exhibit 5.6. Stock X had an actual return of 14 percent, and Stock X’s normal return based on the market’s
return for the same period was 13.6 percent. What is Stock X’s abnormal rate of return?
a.
−0.4 percent
b.
0.1 percent
c.
0.4 percent
d.
4.0 percent
e.
6.4 percent
97. Based on Stock Z’s beta of 0.9 the normal return is 9 percent. However, the actual return for Stock Z was 8 percent.
What is Stock Z’s abnormal rate of return?
a.
−1.0 percent
b.
−0.1 percent
c.
0.1 percent
d.
1.0 percent
e.
1.1 percent
98. If statistical tests of stock returns over time support the efficient market hypothesis, then the resulting correlations
should be
a.
positive.
b.
negative.
c.
zero.
d.
lagged.
Chapter 05 – Efficient Capital Markets, Behavioral Finance, and Technical Analysis
e.
skewed.
99. A “runs test” on successive stock price changes which supports the efficient market hypothesis would show the actual
number of runs
a.
falls into the range expected of a random series.
b.
falls into the range expected of a dependent series.
c.
is small.
d.
is large.
e.
would approximate N/2.
100. Escalation bias refers to the situation in which
a.
investors have a propensity to sell winners too soon and hang on to losers too long.
b.
investors ignore bad news and overemphasize good news.
c.
investors tend to follow the herd.
d.
investors put more money into a failure rather than into a success.
e.
investors are all noise traders.
101. Confirmation bias refers to the situation in which
a.
investors have a propensity to sell winners too soon and hang on to losers too long.
b.
investors ignore bad news and overemphasize good news.
c.
investors tend to follow the herd.
d.
investors put more money into a failure rather than into a success.
e.
investors are all noise traders.
102. According to prospect theory,
a.
investors have a propensity to sell winners too soon and hang on to losers too long.
b.
investors ignore bad news and overemphasize good news.
c.
investors tend to follow the herd.
d.
investors put more money into a failure rather than into a success.
e.
investors are all noise traders.
103. Behavioral finance differs from the standard model of finance because behavioral finance
a.
precludes the impact of investor psychology.
b.
includes the impact of investor psychology.
c.
accepts the Efficient Markets Hypothesis.
d.
rejects the idea of market anomalies.
e.
rejects the idea of technical analysis.
104. Which of the following behaviors is consistent with escalation bias?
a.
buying more of a stock as it increases in value
b.
buying more of a stock as it decreases in value
c.
selling a stock as it decreases in value
d.
selling a stock as it increases in value
e.
buying or selling a stock as it increases in value
105. According to Wood (2010), which three tributaries form the river of behavioral finance?
a.
Behavioral psychology, social psychology, and quantum physics.
b.
Behavioral psychology, social psychology, and neurofinance.
c.
Behavioral psychology, contrary psychology, and quantum physics.
d.
Behavioral psychology, smart money psychology, and brain plasticity.
e.
Behavioral psychology, contrary psychology, and neurofinance.
106. Fusion investing is the integration of the following elements of investment valuation:
Chapter 05 – Efficient Capital Markets, Behavioral Finance, and Technical Analysis
a.
fundamental value and investor sentiment.
b.
fads and fashions.
c.
technical analysis and investor sentiment.
d.
historical prices and returns.
e.
transaction costs and fundamental value.
107. Fusion investing refers to the combination of
a.
technical analysis and fundamental analysis.
b.
behavioral analysis and technical analysis.
c.
fundamental analysis and investor sentiment.
d.
technical analysis and investor sentiment.
e.
behavioral analysis and market anomalies.
108. A portfolio manager without superior analytical skills should
a.
determine and quantify the risk preferences of a client.
b.
minimize transaction costs.
c.
maintain the specified risk level.
d.
ensure that the portfolio is completely diversified.
e.
All of these are correct.