Chapter 6
New information reveals that a stock's price will be $150 in one year. If the stock pays no dividends, and the required return is 10%, what does the efficient market hypothesis indicate the price will be today?
A. $136.36 B. $145.00 C. $130.33 D. $142.59
Which of the following types of information will most likely enable the exploitation of a profit opportunity?
A. Hot tips from a stockbroker B. Technical analysis C. Financial analysts' published recommendations D. Insider Information
According to the efficient market hypothesis
A. Information in newspapers and in the published reports of financial analysts is already reflected in market prices. B. one cannot expect to earn an abnormally high return by purchasing a security. C. unexploited profit opportunities abound, thereby explaining why so many people get rich by trading securities. D. all of the above are true. E. only A and B of the above are true.
The efficient market hypothesis suggests that
A. Investors should purchase no-load mutual funds, which have low management fees. B. investors can use the advice of technical analysts to outperform the market. C. Investors let too many unexploited profit opportunities go by if they adopt a "buy and hold" strategy. D. only A and B of the above are sensible strategies.
Which of the following is empirical evidence indicating that the efficient market hypothesis may not always be generally applicable?
A. January effect B. Market overreaction C. Small-firm effect D. All of the above
Which of the following does not weaken the efficient markets hypothesis?
A. January effect B. Success of buy-and-hold strategy C. Mean reversion D. Excessive volatility
Sometimes one observes that the price of a company's stock falls after the announcement of favorable earnings. This phenomenon is
A. clearly inconsistent with the efficient market hypothesis. B. consistent with the efficient market hypothesis if the earnings were not as low as anticipated. C. consistent with the efficient market hypothesis if the earnings were not as high as anticipated. D. the result of none of the above.
According to the January effect, stock prices
A. follow a random walk during January. B. set the pattern for the entire year in January. C. experience an abnormal price rise from December to January. D. experience an abnormal price decline from December to January.
According to the efficient market hypothesis, the current price of a financial security
A. is determined by the highest successful bidder. B. fully reflects all available relevant information. C. is the discounted net present value of future interest payments. D. is a result of none of the above.
The efficient market hypothesis suggests that allocating your funds in the financial markets on the advice of a financial analyst
A. is not likely to prove superior to a strategy of making selections by throwing darts at the financial page. B. will certainly mean higher returns than if you had made selections by throwing darts at the financial page. C. will always mean lower returns than if you had made selections by throwing darts at the financial page. D. Is good for the economy.
The efficient market hypothesis views expectations as superior to optimal forecasts using all available information.
A. is not likely to prove superior to a strategy of making selections by throwing darts at the financial page. B. will certainly mean higher returns than if you had made selections by throwing darts at the financial page. C. will always mean lower returns than if you had made selections by throwing darts at the financial page. D. is good for the economy.
Evidence against market efficiency does not include
A. mean reversion. B. the small-firm effect. C. technical analysis. D. excessive volatility.
Rules used to predict movements in stock prices based on past patterns are, according to the efficient markets theory
A. profitably employed by all financial analysts. B. a waste of time. C. the most efficient rules to employ. D. consistent with the random walk hypothesis.
Rules used to predict movements in stock prices based on past patterns are, according to the efficient markets theory,
A. profitably employed by all financial analysts. B. a waste of time. C. the most efficient rules to employ. D. consistent with the random walk hypothesis.
Raj Rajaratnam, a successful investor in the 2000s who consistently beat the market, was able to outperform the market on a consistent basis, indicating that
A. securities markets are not efficient. B. unexploited profit opportunities were abundant. C. investors can outperform the market with inside information. D. only B and C of the above.
To say that stock prices follow a "random walk" is to argue that
A. stock prices are, for all practical purposes, unpredictable. B. stock prices tend to follow trends. C. stock prices rise, then fall. D. stock prices rise, then fall in a predictable fashion.
To say that stock prices follow a "random walk" is to argue that...
A. stock prices rise, then fall, then rise again. B. stock prices cannot be predicted based on past trends. C. stock prices rise, then fall in a predictable fashion. D. stock prices tend to follow trends.
Tests used to rate the performance of rules developed in technical analysis conclude that
A. technical analysis far outperforms the overall market, suggesting that stockbrokers provide valuable services. B. technical analysis does not outperform the overall market, suggesting that stockbrokers do not provide services of any value. C. technical analysis outperforms the overall market. D. technical analysis does not outperform the overall market.
Evidence in favor of market efficiency does not include
A. technical analysis. B. performance of investment analysts and mutual funds. C. the January effect. D. random-walk behavior.
Another way to state the efficient market condition is that in an efficient market,
A. unexploited profit opportunities will be quickly eliminated. B. unexploited profit opportunities will never exist. C. arbitrageurs guarantee that unexploited profit opportunities never exist. D. both A and C of the above occur.
Another way to state the efficient market hypothesis is that in an efficient market
A. unexploited profit opportunities will never exist as market participants, such as arbitrageurs, ensure that they are instantaneously dissipated. B. unexploited profit opportunities will not exist for long, as market participants will act quickly to eliminate them. C. every financial market participant must be well informed about securities. D. only A and C of the above.
Another way to state the efficient market hypothesis is that in an efficient market,
A. unexploited profit opportunities will never exist as market participants, such as arbitrageurs, ensure that they are instantaneously dissipated. B. unexploited profit opportunities will not exist for long, as market participants will act quickly to eliminate them. C. every financial market participant must be well informed about securities. D. only A and C of the above.
Studies of mutual fund performance indicate that mutual funds that outperformed the market in one time period
A. usually beat the market in the next three subsequent time periods. B. usually beat the market in the next two subsequent time periods. C. usually do not beat the market in the next time period. D. usually beat the market in the next time period.
Evidence in favor of market efficiency includes
A. whether stock prices reflect publicly available information. B. performance of investment analysts and mutual funds. C. the random-walk behavior of stock prices. D. all of the above.
Another way to state the efficient market condition is this: in an efficient market, all unexploited profit opportunities will be eliminated.
True False
Evidence that a mutual fund has performed extraordinarily well in the past contradicts the efficient market hypothesis
True False
If the security markets are truly efficient, there is no need to pay for help selecting securities.
True False
In an efficient market, abnormal returns are not possible, even using inside information.
True False
Technical analysis is a popular technique used to predict stock prices by studying past stock price data and searching for patterns such as trends and regular cycles.
True False
The efficient market hypothesis states that prices of securities in financial markets fully reflect allavailable information.
True False
The efficient market hypothesis views expectations as superior to optimal forecasts using all available information.
True False
Having performed well in the past indicates that an investment adviser or a mutual fund will perform well in the future.
True False
If the markets are efficient, the optimal investment strategy will be to buy and hold so as to minimize transaction costs
True False
Technical analysts look at historical prices for information to project future prices.
True False
The evidence suggests technical analysts are not superior stock pickers.
True False