Problem Set 4

The weak form of the EMH states that ________ must be reflected in the current stock price. a. all past information, including security price and volume data b. all publicly available data c. all information, including inside information d. all costless information

A

A mutual fund that attempts to hold quantities of shares in proportion to their representation in the market is called a __________ fund. a. Stock b. Index c. Hedge d. Money market

B

All else equal, call option values are _____ if the _____ is lower. a. Higher; stock price b. Higher; exercise price c. Lower; dividend payout d. Higher; stock volatility

B

The existence of a post-earnings drift announcement phenomenon suggests that markets are semi-strong form efficient. a. True b. False

B

The semi-strong form of the EMH states that ________ must be reflected in the current stock price. a. all past information, including security price and volume data b. all publicly available data c. all information, including inside information d. all costless information

B

Which of the following represents the intrinsic value of a put option? a. Max(S-X,0) b. Max(X-S,0) c. Min(S-X,0) d. Min(X-S,0)

B

A put option with several months until expiration has a strike price of $55 when the stock price is $50. The option has _____ intrinsic value and _____ time value. a. Negative; positive b. Positive; negative c. Positive; positive d. Zero; zero e. Zero; positive

C

Proponents of the EMH typically advocate __________. a. a conservative investment strategy b. an aggressive investment strategy c. a passive investment strategy d. a long-only investment strategy

C

The strong form of the EMH states that ________ must be reflected in the current stock price. a. all past information, including security price and volume data b. all publicly available data c. all information, including inside information d. all costless information

C

Which one of the following will increase the value of a put option? a. A decrease in the exercise price b. A decrease in time to expiration of the put c. An increase in the volatility of the underlying stock d. An increase in the stock price

C

You estimate the intrinsic value of a put option to be $4.50 using a binomial options pricing model. You observe the same put option trading for $3.50 in financial markets. What trading strategy is most appropriate in this situation? a. Long the stock b. Short the stock c. Buy the put d. Sell the put

C

An efficient market is one in which __________. a. Prices are close to intrinsic values. b. Securities are accurately priced in equilibrium. c. Investors cannot "beat" the market except through good luck. d. All of the above e. A and B only

D

If we believe a market to be strong form efficient, you could expect to earn abnormal returns (returns greater than the market) by __________. a. Utilizing private information b. Taking advantage of public information. c. Analyzing past prices and volumes. d. You could not earn abnormal returns in a strong form efficient market.

D

A call option with several months until expiration has a strike price of $55 when the stock price is $50. The option has _____ intrinsic value and _____ time value. a. Negative; positive b. Positive; negative c. Positive; positive d. Zero; zero e. Zero; positive

E

Proponents of an inefficient market would argue that anomalies occur due to which of the following? a. The existence of high-frequency traders b. Limits to arbitrage c. Behavioral effect/biases d. All of the above e. B and C only

E