Chapter 13. Efficient Capital Markets and Behavioral Challenges

Which one of the following serial correlation values is the strongest indicator of price continuation?

+.5

Which one of the following serial coefficient values is most consistent with weak form market efficiency?

0

Which one of the following statements is correct concerning market efficiency?

A firm will generally receive a fair price when it sells shares of stock in an efficient market.

Efficient markets require which one of the following?

Countervailing irrationalities

Which of the following tend to reinforce the argument that the financial markets are efficient? I. Information spreads rapidly in today's world. II. There is tremendous competition in the financial markets. III. Market prices continually fluctuate. IV. Market prices react suddenly to unexpected news announcements.

I, II, III, and IV

Which one of the following statements is correct?

Irrationality may be related across investors.

Donald Keim's research presents evidence that the difference in performance between small capitalization stocks and large capitalization stocks is largest in the month of:

January.

Which one of the following is an indicator that a market is efficient?

Normal rates of return

What does weak form efficiency imply?

Price patterns that existed in the past will reappear in the future.

Which one of the following terms is used to describe a principle where investors draw conclusions from insufficient data?

Representativeness

Which one of the following actions would generally be considered the most rational action for a tax-paying investor?

Selling his losing securities and holding his winning securities

The U.S. Securities and Exchange Commission periodically charges individuals for insider trading and claims those individuals have made unfair profits. Based on this fact, you would tend to argue that the financial markets are at best __________ form efficient.

Semistrong

The hypothesis that market prices reflect all publicly available information is called __________ form efficiency.

Semistrong

Your friend works in the finance department at Sedum Corporation. You are aware that this friend trades Sedum stock based on information she overhears in the office. You also know that this information is not known to the general public. Your friend continually brags to you about the profits she earns trading Sedum stock. Based on this information, you would tend to argue that the financial markets are at best __________ form efficient.

Semistrong

If you live in a remote area with limited access to the news but do a lot of historical research on firms, you would prefer that the financial markets be __________ form efficient so you can have an advantage in the marketplace.

Weak

Stocks can be efficiently priced if:

a number of interested traders use the publicly available information.

The stock of Albacore, Inc., earned an abnormal return at Time t. The efficient market hypothesis would suggest that the abnormal return is an indicator of:

a release of new information at Time t.

In an event study, the abnormal return is described as the:

actual return on a security minus the market rate of return on the same date

The efficient market hypothesis implies that:

any investment should earn a normal return commensurate with the investment's risk.

The principle that investors slowly adjust their beliefs to new information is referred to as:

conservatism.

Stock prices fluctuate daily. In relation to the efficient market hypothesis, these fluctuations are:

consistent with the semistrong form because new information arrives daily.

The efficient market hypothesis says that, on average, professional investors will:

earn a normal rate of return.

If markets are strong form efficient, event studies should show that new information affects a related stock's price:

for a single day.

The cause of the October 19, 1987 stock market crash:

has yet to be determined.

If the financial markets are efficient, then investors should expect their investments in those markets to:

have zero net present values.

Weak form efficiency is best defined as a market where current prices are based on:

historical prices

If the market is fully efficient, an announcement by a firm of a new product with a large positive net present value will cause the market price of that firm's stock to:

immediately increase to a new level equivalent to the increased value of the firm.

Danae owned 400 shares of Goodlow Co. stock. After evaluating Goodlow's historical stock price performance, Danae determined that the stock price typically fell on the last Tuesday of the month. She sold her stock on the last Monday of the month. The stock price did indeed fall by almost four percent on the last Tuesday of the month. The market in total rose .3 percent that day. These results would suggest that the stock market is at best:

inefficient

If an investor can earn above average returns based on historical information, the stock market is at best:

inefficient

If semistrong or strong form efficiency exists, on average, investors are probably best served by:

investing in index funds rather than in actively managed mutual funds.

Serial correlation:

involves the relationship of one stock's returns over various time periods. supports weak form efficiency.

Market efficiency:

or the lack thereof, is highly controversial.

Representativeness, according to financial economists, leads to:

overreactions in stock returns.

Markets tend to be efficient when:

professional arbitrage exceeds amateur speculation.

In an efficient market, the price of a security will:

react immediately to new information with no further price adjustments related to that information.

Leonie has noticed that a particular stock has increased in value during each of the last several days. Given this trend, she believes the stock price will increase over the next two trading days, as well. This is an example of:

representativeness

If an investor can earn abnormal returns based on insider trading, the stock market is at best:

semistrong form efficient.

Shoshanna is an analyst at Trident Communications. Based on her knowledge of a new product under development, she purchased 1,000 shares of Trident stock yesterday. Today, Trident announced the new product to the public. The stock price rose two percent, and Shoshanna sold her shares. Also today, the stock market increased .5 percent. These results would suggest that the stock market is at best:

semistrong form efficient.

Research has found that investors tend to react to earnings surprises:

slowly, which illustrates conservatism.

If behavioral finance holds, it implies:

some investors are irrational some of the time.

Insider trading does not offer any advantages if the financial markets are:

strong form efficient.

Given the vast resources available to mutual fund managers, these managers, on average, have generally

underperformed the market on a risk-adjusted basis

Researchers have found that over long periods of time:

value stocks may outperform growth stocks on a risk-adjusted basis, but no firm conclusion can be drawn.

Your roommate is an avid reader of The Wall Street Journal. She saw favorable news about a particular company in this morning's paper and immediately purchased 200 shares of the company's stock. By the close of business today, the company's stock price had increased 3.5 percent. Also today, the market in total increased .1 percent. These results would suggest that the stock market is at best

weak form efficient

If an investor can earn above average returns based on a thorough reading of the financial press, the stock market is at best:

weak form efficient.