Chapter 05 – Efficient Capital Markets, Behavioral Finance, and Technical Analysis
109. The implication of efficient capital markets and a lack of superior analysts have led to the introduction of
a.
balanced funds.
b.
naive funds.
c.
January funds.
d.
index funds.
e.
futures and options.
110. Which is NOT an implication of the EMH?
a.
To do superior industry or company analysis, you must understand the variables that affect returns and do a
superior job of estimating these variables.
b.
Aggregate market analysis that involves very detailed analysis of reliable historical economic data should
outperform a simple buy-and-hold policy.
c.
A superior analyst is one who can consistently select stocks that provide positive abnormal returns on a risk–
adjusted basis.
d.
If a portfolio manager does not have any superior analysts, he/she should consider investing funds in an index
fund.
e.
If a portfolio manager has some superior analytical skills, they should be encouraged to concentrate in second
tier stocks which have liquidity but may be neglected.
111. The results of studies that have looked at the relationship between PEG ratios and subsequent stock returns find
a.
b.
c.
d.
e.
112. Fama and French examined the relationship between the Book Value to Market Value ratio and average stock returns
and found
a.
no evidence of a relationship for U.S. stocks.
b.
evidence of a negative relationship in U.S. stocks only.
c.
evidence of a positive relationship for Japanese stocks only.
d.
evidence of a negative relationship for U.S. and Japanese stocks.
e.
evidence of a positive relationship for U.S. and Japanese stocks.
113. Investigators have tested the strong form EMH by examining the performance of the following type of investor:
a.
corporate insiders.
b.
stock exchange specialists.
c.
security analysts.
d.
professional money managers.
e.
All of these are correct.
Chapter 05 – Efficient Capital Markets, Behavioral Finance, and Technical Analysis
114. Studies of the relationship between P/E ratios and stock returns have found that
a.
low P/E stocks of large cap stocks outperformed low P/E stocks of small cap stocks.
b.
low P/E stocks of small cap stocks outperformed high P/E stocks of large cap stocks.
c.
high P/E stocks of large cap stocks outperformed low P/E stocks of small cap stocks.
d.
high P/E stocks of large cap stocks outperformed high P/E stocks of small cap stocks.
e.
low P/E stocks of small cap stocks equaled the performance high P/E stocks of large cap stocks.
115. Tests of the efficient market hypothesis (EMH) are sometimes based on examining its abnormal rate of return. The
abnormal rate of return is calculated by
a.
subtracting the expected rate of return from the actual return, where the expected return is based on the stock’s
beta and the CAPM.
b.
subtracting the actual rate of return from the expected return, where the expected return is based on the stock’s
beta and the CAPM.
c.
subtracting the expected rate of return from the actual return, where the expected return is based on the stock’s
projected dividend yields.
d.
subtracting the expected rate of return from the actual return, where the expected return is based on the stock’s
projected dividend yields.
e.
adding the expected rate of return to the actual return, where the expected return is based on the stock’s
projected dividend yields.
116. Which of the following ratios is the most commonly used ratio for predicting the performance of a growth company?
a.
PE ratio
b.
PG ratio
c.
PEG ratio
d.
MV/BV ratio
e.
BV/MV ratio
117. Technical analysis differs from fundamental analysis in that
a.
technical analysts contend that in-depth assessments of basic aggregate market, industry, and company
performance is necessary; past price movements indicate future price movements.
b.
technical analysts believe the market value of common stocks is determined by the interaction of supply and
demand.
c.
technical analysts argue that the market constantly weighs rational and irrational factors and that both of these
affect price.
d.
technical analysts depend far more heavily on objective, data-based approaches than the fundamentalists do.
e.
technical analysts hold that the price of a security is determined by an expected return risk.
118. Which of the following is NOT considered an assumption of technical analysis?
a.
Market value is determined solely by supply and demand.
b.
Supply and demand are governed by both rational and irrational factors.
c.
Security prices tend to move in trends that persist for an appreciable length of time.
d.
Stock prices follow a random walk.
e.
Changes in trend are caused by the shifts in supply and demand relationships.
119. For technical trading rules to generate returns that are superior to a buy-and-hold strategy, net of transaction costs,
the market would have to be
a.
rising.
b.
falling.
c.
inefficient.
d.
overvalued.
e.
undervalued.
120. An advantage of technical analysis over fundamental analysis is that technical analysis
a.
has an increased amount of data that allows the analyst to process the information.
b.
can more thoroughly investigate accounting information.
c.
adjusts for differences in GAAP accounting procedures across the industry.
d.
can capture non-quantifiable variables such as psychological factors.
e.
can capture variables such as macroeconomic factors.
121. Which of the following is NOT an advantage of technical analysis identified by technicians?
a.
Fundamental analysis depends heavily on financial accounting statements.
b.
The majority of investors cannot consistently process new information correctly.
c.
Fundamental analysis may not time the investment properly when trading under– or over-valued securities.
d.
The majority of investors cannot process new information quickly enough.
e.
All of these are correct.
122. The following are classified as contrary trading rules EXCEPT
a.
odd lot short sales.
b.
investment advisory opinions.
c.
relative OTC volume.
d.
CBOE put/call ratio.
e.
confidence index.
123. According to contrary opinion technicians, the ratio of mutual funds cash to total assets ____ near troughs in the
market cycle and ____ near peaks.
a.
levels out, spikes
b.
remains low, remains high
c.
is published near, is not published
Chapter 05 – Efficient Capital Markets, Behavioral Finance, and Technical Analysis
d.
increases, decreases
e.
decreases, increases
124. The ratio of OTC volume versus NYSE volume is a measure of ____. This ratio typically ____ at a market ____.
a.
speculative activity, bottoms, peak.
b.
hedging activity, bottoms, peak.
c.
speculative activity, peaks, peak
d.
speculative activity, bottoms, bottoms.
e.
hedging activity, peaks, peak.
125. A technical analyst might consider the following a bearish signal.
a.
The percentage of speculators in stock index futures exceeds 70 percent.
b.
The percentage of speculators in stock index futures exceeds 30 percent.
c.
The percentage of speculators in stock index futures falls to 30 percent.
d.
The percentage of speculators in stock index futures remains flat.
e.
The percentage of speculators in stock index futures exceeds 20 percent.
126. Which of the following is NOT a technical trading rule category?
a.
contrary-opinion rules
b.
follow the smart money rules
c.
anti-fundamental and anti-portfolio approaches
d.
stock price and volume techniques
e.
other market environment indicators
127. Which of the following is NOT considered a contrary trading rule?
a.
futures traders bullish on stock index futures
b.
investment advisory opinions
c.
credit balance in brokerage accounts
d.
CBOE put/call ratio
e.
confidence index
128. According to technical analysts, which mutual fund cash position guides investment decisions?
a.
A low cash ratio position is a bullish indicator.
b.
A high cash position is a bullish indicator.
c.
A high cash position is a bearish indicator.
d.
A low cash position is neither bearish nor bullish.
e.
A low cash ratio position is a bearish indicator.
129. Technicians using the confidence index published by Barron’s to make investment decisions
a.
believe the ratio is a bullish indicator because during periods of high confidence investors will invest in higher
quality bonds.
b.
believe the ratio is a bearish indicator because during periods of high confidence investors will invest in higher
quality bonds.
c.
believe the ratio is a bearish indicator because during periods of high confidence investors will invest in lower
quality bonds.
d.
believe the ratio is a bullish indicator because during periods of high confidence investors will invest in lower
quality bonds.
e.
believe the ratio is a bullish indicator because during periods of high confidence investors will not invest in
bonds.
130. A contrary opinion technician would buy stock when mutual funds
a.
are at the market peak.
b.
are fully invested.
c.
have a cash ratio approaching 4 percent.
d.
have a cash ratio approaching 7 percent.
e.
have a cash ratio approaching 11 percent.
131. A technical analyst would consider a put call ratio of ____ as a bearish indicator.
a.
30 percent
b.
40 percent
c.
50 percent
d.
60 percent
e.
70 percent
132. A narrowing of the T-bill-Eurodollar is a ____ signal, because ____.
a.
bearish, it signals falling investor confidence
b.
bullish, it signals rising investor confidence
c.
bearish, it signals a flight to quality
d.
bullish, it signals a flight to quality
e.
neutral, it signals no change in investor confidence
133. Analysts following what the smart, sophisticated investor is doing would examine
a.
mutual fund cash positions.
b.
debit balances in brokerage houses.
c.
investment advisory opinions.
d.
breadth of market.
e.
stocks above their 200-day moving average.
134. Indicators that tell what smart investors are doing include
a.
the put/call ratio.
b.
mutual fund cash position.
c.
the Dow theory.
d.
short sales by specialists.
e.
head and tail indicator.
135. The confidence index published by Barron’s is the ratio of the average yield on 10 top-grade corporate bonds to the
a.
average yield on 30 blue chip corporate stocks.
b.
average yield on 40 convertible corporate bonds.
c.
yield on U.S. Treasury bills.
d.
yield on the Dow Jones average of 40 bonds.
e.
yield on the Shearson Lehman Hutton Corporate Bond Index.
136. The Dow Theory describes stock prices as moving in trends analogous to the movement of water. Which of the
Chapter 05 – Efficient Capital Markets, Behavioral Finance, and Technical Analysis
following statements is NOT true?
a.
Major trends resemble tides.
b.
Intermediate trends resemble waves.
c.
Short-run movements are like ripples.
d.
Waves are the most important.
e.
There are three types of price movement over time.
137. According to Dow Theory, a major market
a.
advance has few price fluctuations indicate a new upward trend.
b.
advance does not go straight up, because some investors will take profits.
c.
decline is easier to predict than an advance.
d.
decline typically has a higher level of volume than a major market advance.
e.
advance goes straight up because most investors ride momentum.
138. A type of charting that normally disregards both time and volume is the
a.
bar chart.
b.
point and figure chart.
c.
pie chart.
d.
histogram.
e.
linear regression graph.