Chap 8

Small stocks underperformed relative to the S&P 500 during the following years:

1945-1964

Find a false statement about market efficiency.

As the financial market is competitive enough and efficient, no research effort can be justified to outperform the market. true: - Skilled mutual fund managers with abnormal performance attract new capital and thus the funds grow in size. - The financial market history shows that most actively managed mutual funds under-performed index funds. - Statisticians can easily detect the margin of superiority added by a professional manager.

- effect is the tendency of poorly performing stocks and well-performing stocks in one period to continue that abnormal performance in following periods.

Blank 1: Momentum

- analysis is to search for predictable patterns in stock prices. This type of analysis will not generate consistent abnormal return if the capital market is at least - form efficient.

Blank 1: Technical Blank 2: Weak

In an efficient capital market, - among many well-backed, highly paid, aggressive analysts ensures that stocks prices reflect all available information.

Blank 1: competition

If markets are - , then a portfolio manager's primary goal is not to beat the market.

Blank 1: efficient

If - information can be used to generate - returns, the financial market is - - form efficient.

Blank 1: insider, inside, or proprietary Blank 2: abnormal Blank 3: semi Blank 4: strong

If additional predictors, such as dividend/price ratio, dividend yield and earnings yield are not taken as proof that markets are inefficient, then these variables are proxies for variations in the - - -

Blank 1: market Blank 2: risk Blank 3: premium

If markets were fundamentally inefficient and securities commonly mispriced, then this implies a systematic misallocation of - in the economy.

Blank 1: resources

The - effect and the book to market effect have been interpreted as the results of market's - to the - performance of firms.

Blank 1: reversal Blank 2: overreaction, overreactions, or overreact Blank 3: past

If a financial market is -form efficient, stock prices should already be market trading data, such as price and volume data as well as all publicly available information regarding the prospects of the firm.

Blank 1: semistrong

True or false: It is often said that the most precious commodity on Wall Street is good advice

False Reason: It is often said that the most precious commodity on Wall Street is information.

Which of the following best describes a drawback of implementing portfolio strategies based on analyst consensus recommendations?

Heavy trading activity and associated costs

Which of the following is not a role of portfolio management in an efficient capital market?

Identifying mispriced securities a role of portfolio management in an efficient capital market: - Low cost diversification - Tax consideration - Adjusting portfolio based on risk aversion

Which of the following cannot be used as evidence against the weak form of the efficient market hypothesis?

January effect

Which of the following are common issues taken with the Efficient Market Hypothesis?

Lucky Event Issue Selection Bias Issue Magnitude Issue

Which one of the following cannot be used to test the semi-strong form of the efficient market hypothesis?

Momentum effect

Active vs. passive portfolio management: which of the following is related to active investment strategies?

Overvalued stock

Find a false statement.

Rational market forecasts in an efficient market will not turn out to be wrong as prices reflect all available information. true: - Deviations from market efficiency may offer profit opportunities to better-informed traders at the expense of less informed traders. - If financial markets were inefficient, resources in the economy would be systematically misallocated.

True or false: Due to the adjustment needed to account for risk when evaluating the success of investment strategies to test market efficiency, the tests are joint tests of market efficiency and the risk adjustment procedure.

True Reason: If we find a strategy that generates abnormal returns, we must choose between rejecting the EMH and rejecting the risk-adjustment technique.

What data point would a practitioner of fundamental analysis find most useful to study?

earnings

Which of the following are typical research determinants within the fundamental analysis framework?

earnings prospects expectations of future interest rates dividends prospects the risk level of the firm

The bulk of evidence suggest that

markets are competitive enough that only superior information or insight will earn superior risk adjusted returns

In an efficient capital market, only ______ or ________ information will make stock prices move.

new, unexpected

In an efficient capital market, stock prices should follow a(n) - walk.

random

If investors could generate abnormal returns consistently by using the _______ of a stock, it would be evidence against the weak form of the efficient market hypothesis.

resistance level

In the Fama and French (1993) three-factor model, what are the two additional factors, besides market returns?

size and book-to-market ratio

The primary conclusion of the efficient market hypothesis is

stock price already reflects available information.

One necessary condition for the efficient market hypothesis to exist is

stock prices follow a random walk.

If all investors attempted to follow a passive investment strategy, ________.

stock prices would fail to reflect new information

Since insiders can trade profitably, as documented in studies by Jaffe (1974), Scyhun (1986), Givoly and Plamon (1985) and others, then it is likely that markets are not _______

strong form efficient.

If a financial market is weak-form efficient, a stock price already reflects all information on ___________.

the previous stock prices

The efficient market hypothesis has never been widely accepted on Wall Street because it implies that ____________.

the search for undervalued securities is wasted effort

Financial economists have found some easily observed variables can be used to predict broad market returns. Which one of the following is not one of the variables?

total debt ratio