fin 510 chapter 11

What is illustrated by the figure? (Click to enlarge.) Multiple choice question. The P/E effect The small-firm effect Insider trading The neglected-firm effect

The small-firm effect

True or false: The momentum effect refers is where good or bad recent stock performance of particular stocks continue over time.

True

True or false: The pattern of returns on the days preceding a public announcement date can yield some interesting evidence regarding efficient markets and information leakage.

True

The return on a stock beyond what would be predicted by market movements alone is referred to as the ___________ return.

abnormal

Which of the following are predictors of stock market returns? Multiple select question. accruals and earnings quality volatility growth investor interest profitability

accruals and earnings quality volatility growth profitability

Patterns of returns that seem to contradict the efficient market hypothesis are referred to as __________ .

anomalies

A ______________investment strategy refers to investing in recent losers and avoiding recent winners.

contrarian

A technique of empirical financial research that enables a researcher to assess the impact of something on a firm's stock price is referred to as a(n) _____________ study.

event

The financial turmoil of 2008 is said to be attributed to the collapsing bubble in ___________ prices.

housing

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

momentum

If all investors attempted to follow a passive investment strategy, ______. Multiple choice question. arbitrage opportunities would quickly disappear index funds would outperform actively managed funds the financial market would become more efficient stock prices would fail to reflect new information

stock prices would fail to reflect new information

The __________-form version of the efficient market hypothesis states that stock prices reflect all information relevant to the firm.

strong

True or false: An event study would qualify the relationship between dividend changes and stock returns.

False note: Quantify

Limitations on insider trading should lead to which form of market efficiency not holding? Multiple choice question. Semistrong-form Weak form Strong-form

Strong-form

True or False Question The semistrong-form efficient market hypothesis states that all publicly available information regarding the prospects of a firm must be reflected already in the stock price.

True. The semistrong-form efficient market hypothesis states that all publicly available information regarding the prospects of a firm must be reflected already in the stock price.

When evaluating the performance of equity mutual funds, the conventional benchmark today is a four-factor model that includes the market, size, book-to-market, and _________ factors.

momentum

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

random

Multiple Select Question Select all that apply If investors could generate abnormal returns consistently by using _______ of a stock, it would be evidence against the weak form of the efficient market hypothesis. Multiple select question. technical analysis fundamental analysis the relative strength charts of past prices

technical analysis the relative strength charts of past prices note: Reason: The use of fundamental analysis to generate abnormal returns would be a violation of the semistrong and strong forms.

Broad market indexes demonstrate a strong or stronger momentum at ______________ horizons, multiyear periods.

long

Multiple Choice Question In an efficient capital market, only ______ or ______ information will make stock prices move. Multiple choice question. new; known past; known new; unexpected past; unexpected

new; unexpected

An investment strategy that does not attempt to identify mispriced securities or otherwise "beat" the market is referred to as _____________ .

passive

Match

rt matches Choice, Stock return Stock return a matches Choice, Average rate of return the stock would realize in a period with a zero market return Average rate of return the stock would realize in a period with a zero market return rMt matches Choice, Market return Market return b matches Choice, Sensitivity to the market return Sensitivity to the market return et matches Choice, Abnormal return Abnormal return

Select all that apply Which statements are true of the figure? (Click to enlarge.) Multiple select question. It depicts post-earnings-announcement price drift. It provides support for the semi-strong form of market efficiency. It shows that all information from an earnings announcement is incorporated in prices within a day. When good news is made public, the stock price jumps immediately.

It depicts post-earnings-announcement price drift. When good news is made public, the stock price jumps immediately.

Multiple Select Question Select all that apply Which types of information are reflected in stock prices according to the strong-form efficient market hypothesis? Multiple select question. Past prices Trading volume Information available only to company insiders Balance sheet composition Management strategies Earnings forecasts Short interest

Past prices Trading volume Information available only to company insiders Balance sheet composition Earnings forecasts Short interest

The ________________ and ____________ ______________ requires insiders to register their trading activity, making the trades public.

Securities Exchange Commission

The total abnormal return for a time period of interest is referred to as the ___________ abnormal return.

cumulative

Which of the following statements are true regarding post-earnings-announcment price drift? Multiple select question. cumulative abnormal returns continue to rise after earnings information becomes public negative-surprise firms continue to suffer negative abnormal returns the market appears to adjust abruptly to earnings informationen rapidly, resulting in a brief period of abnormal returns

cumulative abnormal returns continue to rise after earnings information becomes public negative-surprise firms continue to suffer negative abnormal returns note: Reason: the market appears to adjust gradually to earnings informationen rapidly, resulting in a sustained period of abnormal returns

The goal for a fundamental analyst seeking to generate high risk-adjusted returns is to identify ______. Multiple choice question. firms with good prospects Reason: Unless this characteristic is not known, risk-adjusted returns will not be high. firms that have a high growth potential Reason: Unless this characteristic is not known, risk-adjusted returns will not be high. well-run firms Reason: Unless this characteristic is not known, risk-adjusted returns will not be high. firms that are better than everyone else's estimate Reason: Identifying firms that are not as bad as everyone else's estimate can also lead to abnormal returns.

firms that are better than everyone else's estimate

Portfolios of low price-earnings (P/E) ratio stocks have ______ returns than high P/E portfolios _____ if they are adjusted for portfolio beta. Multiple choice question. higher; even lower; even higher; but not lower; but not

higher; even

A mutual fund holding shares in proportion to their representation in the S&P 500 is an example of a(n) __________ fund.

index

Because small firms tend to be neglected by large institutional traders, their higher returns may be a form of compensation for risk associated with limited information which is referred to as the _____________ -firm effect.

neglected

Most bubbles become obvious in ______________ , but at the time, price run-ups seem to have a defensible rationale.

retrospect

In technical analysis, price levels below which it is difficult for stock prices to fall are referred to as ____________ levels.

support

_____________ratio stocks have provided higher returns than high __________________ portfolios and thus illustrates the P/E effect.

Blank 1: P/E Blank 2: P/E

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

Blank 1: competition

The notion that stocks already reflect all available information is referred to as the ___________ _____________ ___________.

Blank 1: efficient Blank 2: market Blank 3: hypothesis

A bulk of the evidence suggests that any supposedly superior investment strategy should be taken with a _____________ of ______________ , meaning that the market is competitive enough that only differentially superior information or insight will earn money and easy pickings have already been picked.

Blank 1: grain Blank 2: salt

The difficulty of differentiating managers who have outperformed by chance or by skill is referred to as the _______________ issue in evaluating market efficiency.

Blank 1: lucky Blank 2: event

___________is said to be the most precious commodity on Wall Street, and competition of it is intense? Listen to the complete question

Information

Multiple Select Question Select all that apply Which types of information are reflected in stock prices according to the semistrong-form efficient market hypothesis? Multiple select question. Management quality Balance sheet composition Past prices Information available only to company insiders Earnings forecasts Short interest Trading volume

Management quality Balance sheet composition Past prices Earnings forecasts Short interest Trading volume

Select all that apply Which factors are taken into account in determining the portfolio choice decision for individual investors when markets are efficient? Multiple select question. The beta of a security Tax rates Investor risk preferences Firm-specific risk The alpha of a security

The beta of a security Tax rates Investor risk preferences Firm-specific risk note: Reason: Portfolio management requires selection of the appropriate level of risk and return. Reason: Portfolios are constructed so that they eliminate firm-specific risk through diversification Reason: When markets are efficient, securities are not expected to have alpha.

Select all that apply Which statements are consistent with the figure depicting the CAR surrounding merger announcements? (Click to enlarge.) Multiple select question. The market is strong-form efficient. The market is not semistrong-form efficient. There is a large and positive abnormal return on the announcement date. Immediately after the announcement date the CAR no longer increases or decreases significantly.

There is a large and positive abnormal return on the announcement date. Immediately after the announcement date the CAR no longer increases or decreases significantly. note: The market is strong-form efficient. X Reason: If it were, the CAR would not increase on the announcement date. The market is not semistrong-form efficient. X Reason: Immediately after the announcement date the CAR does not change which is consistent with semistrong efficiency.

Research to predict stock values that focuses on such determinants as earnings and dividends prospects, expectations for future interest rates, and risk evaluation of the firm is referred to as __________ analysis.

fundamental

In technical analysis, price levels above which it is difficult for stock prices to rise are referred to as ____________ levels.

resistance

Select all that apply Which of the following statements regarding Vanguard's 500 Index Fund are true? Multiple select question. typical charge for an actively managed equity fund is almost 1% of assets holds stocks in direct proportion to weight in the S&P's 500 stock price index fees can be kept to a minimum expense ratio of the 500 Index Fund is 4%

typical charge for an actively managed equity fund is almost 1% of assets holds stocks in direct proportion to weight in the S&P's 500 stock price index fees can be kept to a minimum notes: Reason: .04%

The ability of easily observed variables to predict broad market returns may not be a violation of market efficiency because it may reflect ______. Multiple choice question. variation in the market risk premium inside information Reason: Easily observed variables are not inside information. the presence of abnormal stock returns Reason: The predictability of abnormal returns would be a violation of market efficiency.

variation in the market risk premium

The __________ -form hypothesis asserts that stock prices already reflect all information that can be derived by examining market trading data such as the history of past prices, trading volume, or short interest.

weak

The following issues that remain ongoing regarding market efficiency include: the ____________ issue, the ___________ ___________ issue, and the ____________ _____________ issue.

Blank 1: magnitude Blank 2: selection Blank 3: bias Blank 4: lucky Blank 5: event

A rationale for the neglected ________________-firm effect shows that firms might be expected to earn higher ______________ returns as compensation for risk associated with limited information

Blank 1: neglected Blank 2: equilibrium

The problem that any investment scheme that could outperform the market would probably be kept secret is referred to as the ____________ ____________issue in evaluating market efficiency.

Blank 1: selection Blank 2: bias

The finding of differences in the returns of the highest and lowest deciles of firms by size is referred to as _____________ - _________________ (or size) effect.

Blank 1: small Blank 2: firm

The three different versions of the EMH forms of the hypothesis are ____________ ,_____________ , and _______________ forms.

Blank 1: weak Blank 2: semistrong Blank 3: strong

Select all that apply Which statements about market efficiency are correct? Multiple select question. As the financial market is competitive enough and efficient, no research effort can be justified. Skilled mutual fund managers with positive abnormal returns attract new capital which makes it harder to outperform the market. Financial market history shows that most actively managed mutual funds under-performed index funds. Among mutual fund managers, very few show consistent stock-picking ability.

Skilled mutual fund managers with positive abnormal returns attract new capital which makes it harder to outperform the market. Financial market history shows that most actively managed mutual funds under-performed index funds. Among mutual fund managers, very few show consistent stock-picking ability.

Which statements about anomalies are correct? Multiple select question. The finding of an anomaly may simply reflect incorrect adjustment for risk. Tests of risk-adjusted returns are joint tests of the efficient market hypothesis and the risk adjustment procedure. Usually the risk adjustment technique to find an anomaly is based on less-questionable assumptions than is the EMH. The correct method of risk adjustment in assessing returns is usually open to debate.

The finding of an anomaly may simply reflect incorrect adjustment for risk. Tests of risk-adjusted returns are joint tests of the efficient market hypothesis and the risk adjustment procedure. The correct method of risk adjustment in assessing returns is usually open to debate.

When evaluating the performance of equity mutual funds, using a single factor model with the S&P 500 index may not be adequate because many funds _______. Multiple choice question. have a high turnover rate invest in small stocks are pass-through entities are actively managed

invest in small stocks

Select all that apply Which of the following statements regarding high-tax-bracket investors are true? Multiple select question. generally want the same securities as low-bracket investors might tilt their portfolios in the direction of capital gains opposed to interest income are attracted to investments with sensitive to tax brackets like real estate ventures find it advantageous to buy tax-exempt municipal bonds

might tilt their portfolios in the direction of capital gains opposed to interest income are attracted to investments with sensitive to tax brackets like real estate ventures find it advantageous to buy tax-exempt municipal bonds note: Reason: do not want the same securities as low-bracket investors

Match2

poor indicator matches Choice, an abnormal return on the announcement date regarding the total impact of the information release an abnormal return on the announcement date regarding the total impact of the information release better indicator matches Choice, the CAR, which is the sum of all abnormal returns over the time period of interest the CAR, which is the sum of all abnormal returns over the time period of interest

The tendency of poorly-performing stocks and well-performing stocks in one period to do the opposite in following periods is referred to as the ___________ effect.

reversal

A broad market index demonstrates only weak serial correlations on __________ horizons, for example a month or so.

short

The search for recurrent and predictable patterns in stock prices is referred to as ___________ analysis.

technical

The efficient market hypothesis has never been widely accepted on Wall Street because it implies that ______. Multiple choice question. there is a selection bias when evaluating fund performance the actions of intelligent investors are the driving force behind the fair market price the search for undervalued securities is wasted effort investors should hold a diversified portfolio

the search for undervalued securities is wasted effort