Questions on Chapters

Chapter 8 Q. Which of the following is not true? a)There are three versions of EMH b)Semi-strong form of EMH means that insider information cannot be used to predict the market c)Weak form of the EMH indicates that correct, technical analysis using historical data cannot predict the market d)Very few managers outperform market indices in large liquid and transparent markets

A. b) is the answer as it is not true. Only in the strong form of EMH does a trader have little to gain from insider trading as the hypothesis is that prices adjust to all information including insiders.

Chapter 8 There are three versions of the efficient market hypothesis (EMH). Which one is TRUE among the following statements? A). If the weak form of EMH is right, the fundamental analysis cannot succeed. B) If the semi-weak form of EMH is right, the technical analysis cannot succeed. C) If the semi-strong form of EMH is right, the trader with inside information can succeed. D) If the strong form of EMH is right, the trader with inside information can succeed.

Answer (C) Explanation: C is right because the semi-strong form of EMH prohibits FA and TA but not the inside information. A is wrong because the weak form prohibit TA not FA. B is wrong because semi-weak form is not one of the three versions of EMH. D is wrong because even inside information cannot succeed.

Chapter 8 Which option is a correct assumption of Efficient market hypothesis? A. Small number of investors interacting in the market for profit B. New information arrives consistently C. Prices adjust quickly D. Previous prices reflect all available information

Answer is C. Prices adjust quickly

Question: re: Chapter 8: The Efficient Market Hypothesis (EMH)-Its Three Versions The EMH has three forms, Weak EMH - Asset prices cannot be predicted using historical data. Semi-strong EMH - Asset prices adjust immediately to all publicly available data. Strong EMH - Asset prices adjust immediately to reflect all relevant (including insider) information. Debates exist over EMH. Academic studies have supportef validity of EMH, although different forms (Weak, Semi-Strong, Strong) apply to different markets. Which of the following choices is least supported by the arguments from Romero,Balch? A. When EMH applies, Hedge Funds and Active management cannot succeed. B. When EMH applies, Hedge Funds and active traders who make the market efficient. C. High Hedge Fund Fees provide incentive to force greater market efficiency. D.Strong EMH applies to large, transparent, liquid markets (e.g. U.S. large cap stocks).

Answer: A. When EMH applies, Hedge Funds and Active management cannot succeed. Proof: The answer comes directly from p57 in the section "Debates over the EMH". Answer A appears in the first sentence of the second paragraph, but is immediaely countered by the statement "Active managers may be precisely the agents that make markets efficient." And makes the argument using the other four statements as prima-facia evidence to support the counter argument.

Chapter 8 The Efficient Market Hypothesis states which of the following: a) Orders to buy and sell assets will be completed in a timely manner. b) Future asset prices cannot be predicted using historical price and volume data. c) Across different asset classes it is virtualy imposible to increase return without also increasing risk. d) Combining assets with negative correlations but similar returns can lower risk without sacrificing return.

Answer: B Explanation: The weak-form of the EMH states "Future asset prices cannot be predicted using historical price and volume data", from "What Hedge Funds Really Do, chapter 8"

Chapter 12: Overcoming Data Quirks to Design Trading Strategies XYZ Corp. declared a 2:1 stock split in November 2010. Its actual (not adjusted) closing prices on some selected dates were as follows: Jan. 2, 2010: $100 Dec. 31, 2010: $250 Assuming there are no other relevant factors, what should the adjusted closing price of XYZ be on Dec. 31, 2010? A) $125 B) $250 C) $500 D) $50

Answer: B. The adjusted prices before the split would be halved, so the adjusted price on 1/2/10 would be $50. The prices after the split are not changed.

Chapter 12: Overcoming Data Quirks to Design Trading Strategies Assuming a company's price per share has reached a very high amount, such that it may be unattractive to investors with lower buying power, what could that company do to correct for this without harming current shareholders? A) Issue new shares at a lower cost B) Implement dividends / increase dividend payouts C) Split stocks D) Change the ratio of common stock to preferred stock

Answer: C) Split stocks. Stock price falls per share, for instance by half, but current shareholders need not to worry because they also get issued more shares to retain the same value they held originally.

Which of the following can give your portfolio more breadth? Choose the best answer.1 Diversification of Assets2 Trading More Frequently3 Including more people in the decision on where to investA) 1B) 2C) 1,2D) 1,2,3

Answer: CJustification: Breadth is "the number of trading opportunities presented over time" (p65). In a conventionally managed portfolio, having more assets presents more trading opportunities over time because trade decisions aren't cornered by the performance of one asset. Making more frequent trades with portfolio equities is a way of creating more trading opportunities in a more active management strategies (p61).

Chapter 12: Overcoming Data Quirks to Design Trading Strategies Why should we use adjusted price vs actual price for backtesting? A) Naive use of stock price data as reported by financial services (actual price data) can be misleading B) Stock prices can change for reasons related not related to market supply and demand like splits and mergers, dividends C) Use of adjusted price streamlines backtesting by removing the complexity of manipulating data. D) All of the above

Answer: D) All of the above. Explanation: A: Actual price data does not take into account non market factors B: Splits, mergers and dividends cause the actual price to fluctuate C: Manipulating actual price for backtesting would require knowledge of a database with information about stock splits, dividends etc. and that would require accounting for adding to complexity D: All the above reasons are valid for the use for adjusted price vs actual price for backtesting

Chapter 8 There are three versions of Efficient Market Hypothesis (EMH). Please match the version with the correct definition: Versions: 1. Weak Form 2. Semi-Strong Form 3. Strong Form Definitions: I. Asset prices adjust immediately to reflect all relevant information, including that available to insiders. II. Future asset prices cannot be predicted using historical price and volume data. III. Asset prices adjust immediately to all publicly available information, including that which reflects the company’s fundamentals. Choose one answer with all correct version-definition pairs: a) 1-I, 2-III, 3-II b) 1-II, 2-III, 3-I c) 1-III, 2-II, 3-I d) 1-II, 2-I, 3-III

Answer: b Explanation: Taken from book What Hedge Funds Really Do, Chapter-8, The Efficient Market Hypothesis (EMH)-Its Three Versions: Eugene Fama postulated the EMH which has the following three versions - 1. Weak form: Future asset prices cannot be predicted using historical price and volume data. Such information is widely available from the business press and on investing websites such as Google Finance or Yahoo Finance. 2. Semi-strong form: Asset prices adjust immediately to all publicly available information, including that which reflects the company’s fundamentals like financial disclosures. 3. Strong form: Asset prices adjust immediately to reflect all relevant information, including that available to insiders.

Chapter 12: Overcoming Data Quirks to Design Trading Strategies You bought 100 shares of company "X" priced at $10/share. When X reached $20/share the company performed a 2 for 1 split. X is now trading at $30/share. How many shares do you own now and how much are they worth? a.) 100 shares, $3000 b.) 200 shares, $6000 c.) 100 shares, $6000 d.) 50 shares, $1500

Answer: b) You start with 100 shares worth $10/share = $1000. Immediately before the stock split you have 100 shares worth $20/share = 100*20 = $2000. After the stock split you have 200 shares worth $2000, but at $10/share. When the price triples to $30/share, you end up with 200 shares worth $30/share, or 200*30 = $6000.

Question: Under the WEAK FORM version of the Efficient Market Hypothesis (EMH), which one of the answers related to trading strategies are NOT true: Answer Choices: a) Data available on google finance or yahoo finance will not likely succeed in predicting future asset prices that will beat the market b) Fundamental analysis or book value — not based historical price and trading volume data — may succeed as trading strategy c) Asset pricing will adjust immediately to all publicly and privately available information, insider information will not add value here d) Disclosures requirements by laws and regulations increase efficiency of the market

Answer: c) Explanation: Weak form version of EMH states that publicly available information from value and historical data will not help predict asset prices to beat the market. Technical Answer c) is not correct because it describes strong form version of EMH, where any information - private or public - will be taken into account by a highly efficient market.

Chapter 12: Overcoming Data Quirks to Design Trading Strategies Why is it better to use adjusted price over actual price ? a. Adjusted price accounts for stock splits b. Adjusted price accounts for stock dividends c. Adjusted price accounts for both stock splits and stock dividends. d. Adjusted price accounts for gaps in data.

Answer: c. Adjusted price accounts for both stock splits and stock dividends. - From the book - "This is better than using actual price because; actual price could be misleading, since stock prices could change for reasons that has nothing to do with market supply and demand. To properly account for value returned by holding a stock we need to account for stock splits and dividends."

Question relates to Chapter 9 Barren Wuffett's portfolio has returned 20% over the past year, while making 10 trades. Rebirth Technology's portfolio has returned 20% over the past year, while making 10,000 trades.Assume both portfolios carry the same levels of risk.According to the fundamental law of active portfolio management, which manager has the most skill as measured by information coefficient?a) Barren Wuffett.b) Rebirth Technology.c) The two have equal skill, because their

Answer:a) IR_wuffett == IR_rebtec, and because IR = IC * sqrt(breadth): IC_w * sqrt(BR_w) == IC_rt * sqrt(BR_rt) IC_w * sqrt(10) == IC_rt * sqrt(10000) IC_w * 3.16 == IC_rt * 100 IC_w > IC_rt

Question relates to Chapter 9 Assume you enter into a bet with Jim Simons to see who is the better investor(achieve a higher information ratio). You know that the breadth of his portfolio exceeds your own by 400x. How much higher does your Information Coefficient(skill) need to be to level the playing field?a) 10b) 20c) 15d) 5

Answer:b) 20 Grinold's Fundamental Law of portfolio management can be specified as:IR=IC*sqrt(breadth)setting the IR values equal and substituting Jim Simon's breadth given in the questionIC1*sqrt(b1)=IC2*sqrt(b2)IC1*sqrt(b1)=IC2*sqrt(400b1)IC1=20*IC2so given a breadth increase of 400x you must have a 20x improvement in your IC(IC1) to compensate

Chapter 12: Overcoming Data Quirks to Design Trading Strategies A company announces an increase in its payout ratio. What do you expect to happen? a) The next dividend payment will be increased for subsidiaries. b) The portion of the company's annual earnings going to dividends will increase.c) The number of dividend payouts will increase per year.d) The number of dividend payouts will decrease per year.

B

Chapter 12: Overcoming Data Quirks to Design Trading Strategies When a company pays a dividend to shareholders, what is the effect of the dividend on the assets of the company? a) The assets of the company are increased.b) The assets of the company are reduced.c) The assets of the company do not change.d) The change in the assets depends on whether the value of the company has increased or decreased during the period for which the dividends were paid.

B

Chapter 12: Overcoming Data Quirks to Design Trading Strategies Below is a company's stock price over 5 days. The letters 'E' and 'F' represent missing values. Day Value 1E2 173 18 4F 5 22 What values should 'E' and 'F' be filled-in with? The first value is 'E', and the second 'F'. SELECT ONE ANSWER: a) 16, 18 b) 16, 20 c) 17, 18 d) 17, 20

C

Chapter 12: Overcoming Data Quirks to Design Trading Strategies How can shareholders earn income from stocks without selling them? A) SplitsB) Reverse splitsC) Dividends D) Fill Forward

C

Chapter 8 Which option is a correct assumption of Efficient market hypothesis? A. Small number of investors interacting in the market for profitB. New information arrives consistentlyC. Prices adjust quickly D. Previous prices reflect all available information

C

Given a market for which the semi-strong version of the EMH is valid, which of the following types of information (if any) can be exploited by investors in order to outperform the market? 1) Technical 2) Fundamental 3) Insider a) 1, 2, 3 b) 2, 3c) 3d) None of These

C

Market efficiency tells how fast the relevant information travels throughout the market, and greatly affects the investment decisions. Which of the following is true? a) A hedge fund manager would prefer to work in a market with high efficiency, because he can make money more efficiently.b) A hedge fund manager would prefer to work in a market with high efficiency, because opportunities come and go fast, one can make profit from these opportunities. c) A hedge fund manager would prefer to work in a market with low efficiency, because he can develop relevant information such as independent fundamental estimate of intrinsic value, and have an information advantage. d) A hedge fund manager would prefer to work in a market with low efficiency, because he can trade on inside information to make large profit

C

Question relates to Chapter 9 Fund A has outperformed SPY by 2% over the last year. The standard deviation of the difference between Fund A and SPY has been 8%. Consider these two questions: What is the information ratio (IR) of the fund? Assuming the fund can maintain it's IR over more stocks or trades what change to its trading could enable the fund to triple its information ratio?a) IR = 4; Fund A needs to double trades to triple IRb) IR = .25; Fund A cannot triple its information ratioc) IR = .25; Fund A needs to utilize 9x as many trading opportunitiesd) IR = .5; Fund needs to diversify into 3x as many stocks

C

Question relates to Chapter 9 Modern portfolio theory distinguishes between two broad categories of risk. Which type of risk is reduced by diversifying your portfolio, and why? a) Systematic Risk is reduced because diversification reduces volatility of a portfolio.b) Specific Risk is reduced because diversification increases your information coefficient.c) Specific Risk is reduced because diversification reduces volatility of a portfolio.d) Systematic Risk is reduced because diversification increases your information coefficient.

C

Question relates to chapter 10 Which of the following are TRUE regarding points on the Efficient Frontier? I. They represent a portfolio's change in Sharpe Ratio over time. II. They represent the lowest risk portfolio for each level of target return.III. They represent lower risk portfolios than individual assets with the same or similar returns. a) I and IIb) I and IIIc) II and IIId) I, II and III

C

What is technical analysis when evaluating a company? a) Evaluating a company's stock price based on book value such as total asset, debt, cashflow, etc. b) Evaluating a company's stock companies in the same industry. c) Evaluating a company's stock volume. d) Evaluating a company's stock insider information.

C

hapter 12: Overcoming Data Quirks to Design Trading Strategies A stock has a starting price of $100 per share. You buy 10 shares. The stock immediately goes through a 2 for 1 split, and you buy 10 more shares at the new price. How many shares do you own at this point, and how much a) 20 shares, $1000 b) 10 shares, $1200 c) 30 shares, $1500 d) 30 shares, $2000

C

Chapter 12: Overcoming Data Quirks to Design Trading Strategies Below is a company's stock price over 5 days. The letters 'E' and 'F' represent missing values. Day Value 1 E 2 17 3 18 4 F 5 22 What values should 'E' and 'F' be filled-in with? The first value is 'E', and the second 'F'. SELECT ONE ANSWER: a) 16, 18 b) 16, 20 c) 17, 18 d) 17, 20

CORRECT ANSWER: c EXPLANATION: 'E' is solved for using fill-backward as fill-forward isn't an option, so we take the first known value which is 17. 'F' is solved for using fill-forward, so we take the last known value which is 18.

Chapter 8 # MY GROUP TOPIC: "ZINC: Chapter 8: The Efficient Market Hypothesis (EMH)-Its Three Versions" QUESTION: Which of the following statements best describe the three versions of the Efficient Market Hypothesis (EMH)? CHOOSE ONE ANSWER: A) The stronger versions of the EMH are more likely to apply to the largest, most transparent & liquid markets, where inefficiencies are quickly arbitraged away by both market information outsiders and insiders, while the weaker versions are more likely to apply to less developed, illiquid, opaque, niche & "frontier" markets. B) The stronger versions of the EMH are more likely to apply in the niche/frontier markets, where experts and niche specialists have already arbitraged away the inefficiencies in those special markets where they have the best knowledge. C) Both the stronger and weaker versions of the EMH have been disproven in the real world; none of them actually apply when trading in real-world markets. D) All three versions of the EMH are really all stating the same thing in different terms; none is really "stronger" or "weaker" than the other

CORRECT ANSWER: (A) (A) is the correct answer, as it explains that in the bigger, more developed markets, there are fewer opportunities for inefficiencies to persist over long periods, as both insiders & outsiders will identify and exploit arbitrage opportunities, causing market inefficiencies to disappear very quickly. INCORRECT ANSWERS: (B) is not correct, as it essentially states the opposite of (A). (C) is not correct, as while there has been some conflicting empirical evidence, there is no clear and consistent agreement of the disproof of the EMH. In fact, some such as Burton Malkiel argue in favor of the existence of the EMH in various markets. D) is not correct, as the strong, semi-strong and weak hypotheses all argue essentially different levels of efficiency exist, based on the level of information available to traders. They are not all the same hypothesis.

Chapter 8 Which of the following statements is true with respect to the form of Efficient Market Hypothesis(EMH)? a)The weak form of an EMH cannot be used to predict future asset prices. b)If the semi-strong form of EMH is correct, technical analysis and fundamental analysis can help investing strategies succeed. c)If the semi-strong form of EMH is correct, value arbitrage opportunities exist. d)If strong form is correct, traders on inside information succeed very easily.

Correct Answer is a) because future asset prices cannot be predicted using historical price and volume data. Semi-strong forms do not have arbitrage opportunities and technical and fundamental analysis does not help in that case. Even if strong form is correct, those who have inside information cannot succeed.

Chapter 8 Which version of EMH (Efficient Market Hypothesis) gives the least advantage to investors with insider information? a) Weak form b) Semi-weak form c) Strong form d) Semi-strong from

Correct Answer is c. For strong form of EMH, asset prices adjust immediately to reflect all relevant information, including insider information. Therefore, insider information least advantageous.

Chapter 12: Overcoming Data Quirks to Design Trading Strategies Stock XYZ has the following price history during 2015: From January 1 until April 30 the stock is priced at $200 a share. On May 1st the stock splits 4 for 1, and the stock is priced at $50 a share. The $50 a share price holds steady from May 1 until August 31. On August 31 the stock splits 2 for 1, and the stock is priced at $25 dollars a share. The stock remains at the $25 a share for the rest of 2015. There is no additional trading or activity through January 4, 2016. If we reference a pandas file for stock XYZ on January 4, 2016; what will be the reported adjusted closing price for stock XYZ on February 1, 2015? a. $200 dollars a share b. $100 dollars a share c. $50 dollars a share d. $25 dollars a share

Correct Answer is d) $25 dollars a share. price = $200 / 2 for the stock split on 8.31.15 / 4 for the stock split on 5.1.15

Question relates to Chapter 9 A rubber shortage causing the stock price of a tire company to drop is an exampleof what type of risk?a) Company-specific riskb) Industry riskc) Supplier riskd) Systematic risk

Correct Answer: bIn this case, the rubber shortage which would affect the en-"tire" industry. That same rubber shortage is unlikely to affect the stock price of a movie production company illustrating how the risk is isolated to one industry.

Question relates to Chapter 9 According to the Fundamental Law of Active PortfolioManagement, to exactly double Information Ratio while the InformationCoefficient stays the same, what do we have to do?A.) A manager must find four times as many trading opportunities.B.) A manager must find eight times as many trading opportunities.C.) A manager must evaluate stocks based on systematic risk.D.) A manager must reduce the standard deviation by 4.

Correct answer A.) because IR = IC*sqrt(breadth). And breadth isthe total number of trading opportunities presented over time.

What is the range for Information Coefficient?a) -1 to 1b) 1 to 100c) 0 to 1d) 0% to 100%

Correct answer is "a". Information Coefficient is similar to correlation and it ranges from -1 to 1 inclusive. IR and IC can be negative.

Question relates to Chapter 9 Which of the following components reflects the price movement that cannot be attributed to the market overall, and is sometimes attributed to the skill of the investor?a. Sharpe Ratiob. betac. Information Ratiod. alpha

Correct answer is (d) because beta is a measure of the volatility of the stock, while alpha is the residual, or what is seen due to the skill of the investor or the quality of information used in selecting a stock.

Chapter 8 If weak form of the Efficient Market Hypothesis is true, which of the following is correct? a) Using market histories from Google or Yahoo are not the best indicators which way a stock's future price will move. b) Using fundamental or technical analysis is the best way to evaluate a stock's movement. c) Stock prices exhibit trends that can be easily discovered by such techniques as momentum. d) Stock prices reflect all information available both public and private.

Correct answer is A. Future asset pricing cannot be predicted using historical price and volume data.

Chapter 12: Overcoming Data Quirks to Design Trading Strategies How can shareholders earn income from stocks without selling them? A) Splits B) Reverse splits C) Dividends D) Fill Forward

Correct answer is C) Dividends Shareholders can earn income from stocks without selling them if the company board of directors declares a dividend.

Chapter 8 Fundamental analysis can work to exploit an information advantage if which form(s) of the Efficient Market Hypothesis (EMH) are correct? a) Weak form b) Semi-strong form c) Strong form d) both a) and b)

Correct answer is a) because if the weak form is correct, technical analysis cannot succeed but fundamental analysis can be used to exploit an information advantage. Also, fundamental analysis cannot succeed in the semi-strong and strong forms of the EMF.

Chapter 8 If stocks with lower P/E ratio consistently outperforms those with higher P/E ratio, which form of markets is most possible for this phenonmenon? a) Weak. b) Semi-strong. c) Strong. d) None above. Stocks with lower P/E ratio should always underperform those with higher P/E ratio.

Correct answer is a) because low P/E ratio correspond with higher return, it is one of the fundamental methods, which is profitable under weak form of EMH.

Question relates to Chapter 9 What is the difference between the Sharpe Ratio and the Information Ratio?a) Unlike the Sharpe Ratio, the Information Ratio measures excess return and risk relative to a specific benchmark index. The Sharpe ratio is similar but is relative to a risk free rate instead of a benchmark index.b) Unlike the Information Ratio, the Sharpe Ratio measures excess return and risk relative to a specific benchmark index. The Information ratio is similar but is relative to a risk free rate instead of a benchmark index.c) Unlike the Sharpe Ratio, the Information Ratio separates market return from stock-specific return.d) Unlike the Sharpe Ratio, the Information Ratio is the number of trading opportunities over time.

Correct answer is a) because the Information Ratio measures excess return and risk relative to a specific benchmark index. The Sharpe ratio measures excess return and risk relative to a risk free rate.

Chapter 8 Which type of analysis does the Weak form of the EMH prohibits from profiting: a) Technical Analysis b) Fundamental Analysis c) Insider Analysis d) Sentiment Analysis

Correct answer is a) because the Weak form says that you cannot predict prices based on historic prices, but it doesn't say anything about Fundamental or Insider Analysis

Chapter 8 Considering the three forms of the Efficient Market Hypothesis (EMH), which form(s) prohibit profiting from insider information analysis? a) strong b) semi-strong c) weak d) both b) and c)

Correct answer is a) because the strong form is the only form that prohibits profiting from insider information analysis. The semi-strong form prohibits profiting from fundamental and technical analysis and the weak form prohibits profiting from technical analysis.

Chapter 8 Which of the following analyses would be considered unsuccessful by ALL forms of the efficient markets hypothesis? a) Technical b) Fundamental c) Insider d) None of the above

Correct answer is a). Weak EMH prohibits technical analysis; semi-strong EMH prohibits technical and fundamental analysis; and strong EMH prohibits technical, fundamental, and insider analysis. Technical analysis is common to all three, thus a) is the correct answer.

Chapter 12: Overcoming Data Quirks to Design Trading Strategies company XYZ announces 3 for 1 split of their stock. Lets assume that you own 10 shares of XYZ. What will be the likely impact of this on: 'your ownership of XYZ stock', 'price per share of XYZ stock' and 'total number of XYZ stocks, you hold'. Please choose from the following answers: Ownership Price per share total numberof stocks a. increase decrease increase b. same decrease increase c. decrease increase same d. same increase increase

Correct answer is b Spliting stocks has no impact on your ownership, as instead of one share out of 30 shares of a company, for example, you have 3 out of 90 shares. Your ownership is still 1/10th. The price will decrease as now there are 3 times as many shares. The number of shares will increase as each share is split into 3.

Chapter 8 How does 'Semi-strong' form of Efficient Market Hypothesis looks like? a) Future prices can not be predicted by analyzing historical prices b) Prices adjust rapidly to new public information c) Future prices can be predicted by analyzing historical prices d) Prices adjust rapidly to new private information

Correct answer is b) Prices adjust rapidly to new public information

Chapter 12: Overcoming Data Quirks to Design Trading Strategies When a company pays a dividend to shareholders, what is the effect of the dividend on the assets of the company? a) The assets of the company are increased. b) The assets of the company are reduced. c) The assets of the company do not change. d) The change in the assets depends on whether the value of the company has increased or decreased during the period for which the dividends were paid.

Correct answer is b) The assets of the company are reduced.

Chapter 8 What does it mean that a market is "efficient"? a) It generates the maximum return on investment for all portfolios. b) Information that can affect prices travels quickly through it. c) All the orders are immediatly processed as soon as they get to the exchange. d) Future prices can be accurately predicted using historical prices.

Correct answer is b) according to the book: "In this context, efficiency means that information that can affect prices travels quickly through a market" (Chapter 8).

Question relates to Chapter 9 Why is it that an increment in the information coefficient (IC) has a greater reflection on the information ratio (IR) than an equal increment in the portfolio breadth?a) portfolio breadth is inversely proportional to the IR.b) portfolio breadth affects IR as square root, whereas IC affects IR proportionally.c) portfolio breadth cannot be increased at a later point.d) IR is directly proportional to the exponential of IC.

Correct answer is b) because IR (Information Ratio) = IC * sqrt(breadth)

Chapter 8 A CEO of a pharmaceutical company learns that one of his key drugs in clinical trials is about to be approved by the FDA. He quickly calls a friend to have him purchase 10,000 shares of his company's stock before the news is announced. Under which form(s) of the Efficient Markets Hypothesis (EMH) will this investment strategy work? a) Weak form b) Weak form and Semi-strong form c) Strong form d) All 3 forms

Correct answer is b) because only if the strong form is correct does those who trade on insider trading cannot succeed. Therefore insider trading will work for the weak form and semi-strong form of EMH.

Chapter 8 Which of the following features would be least likely to contribute to the establishment of a market operating under the strong form of the Efficient Market Hypothesis? a) Extensive regulatory and legal requirements governing the disclosure of financial data b) Strict penalties for insider trading c) High liquidity d) A large number of actively managed investment funds

Correct answer is b) because stronger prohibition of insider trading should suppress the immediate reaction of asset prices to non-public information, which is what makes the difference between a semi-strong and strong form of the EMH.

Chapter 12: Overcoming Data Quirks to Design Trading Strategies A company announces an increase in its payout ratio. What do you expect to happen? a) The next dividend payment will be increased for subsidiaries. b) The portion of the company's annual earnings going to dividends will increase. c) The number of dividend payouts will increase per year. d) The number of dividend payouts will decrease per year.

Correct answer is b) because the payout ratio indicates the proportion of money returned to stockholders from a company's annual earnings.

Question relates to Chapter 9 Fund manager Alice specializes in energy stocks while fund manger Bob specializes in technology stocks. Both of them exclusively build portfolios from their respective sectors. They decide to join forces and create a combined portfolio. Which of the following are true statements:A. Their information ratio (IR) is higher as their information coefficients (ICs) add upB. Their IR is higher due to the increase in breadtha) Only Ab) Only Bc) Both A and Bd) None

Correct answer is b) because their skills will get averaged out, but the breadth of the portfolio will increase.

Chapter 12: Overcoming Data Quirks to Design Trading Strategies When there is a break in the middle of a series of price data -- no price data for some period of time -- the common approach for handling this missing data is: a) fill with linear interpolation between two points b) fill forward c) fill backward d) fill with mean between two points

Correct answer is b) fill forward: to treat missing values as the same level as the last known value.

Chapter 8 What is not an information advantage when the weak form of EMH (Efficient Market Hypothesis) is correct? a) independent fundamental estimates of intrinsic value b) technical analysis c) lower latency d) arbitrage

Correct answer is b), because definition of weak form of EMH only mentions technical analysis cannot succeed. a) and d) give information advantage. Lower latency is not mentioned.

Chapter 8 Is a market exhibiting the strong form definition of Efficient Market Hypothesis (EMH) likely to have lower volatility compared to market exhibiting the weak form definition of EMH? Assume the markets are otherwise identical and trade the same assets. a) Strong form definition is likely to lead to higher volatility b) Strong form definition is likely to lead to lower volatility c) Both definitions will likely lead to the same volatility d) The EMH definition is likely have a random impact on volatility

Correct answer is b). Strong form results in faster propagation of small pieces of information allowing prices to adjust continuously. Weak form leads to large earnings surprises and therefore larger price swings.

Chapter 12: Overcoming Data Quirks to Design Trading Strategies A stock has a starting value of $100 per share when you buy 10 shares. The stock goes through a 2 for 1 split, and you buy 10 more shares at the new price point. How many shares do you own at this point, and how much is your position in this stock worth? a) 20 shares, $1000 b) 10 shares, $1200 c) 30 shares, $1500 d) 30 shares, $2000

Correct answer is c) - At the initial state you buy 10 shares at $100 each = $1000 dollars. The stock splits evenly, leaving you with 20 shares at $50 each still totaling $1000. You then buy 10 more shares at the new split price of $50 each leaving you with 30 shares and $1500 total in this stock.

Chapter 8 Which of the following is not an 'Efficient Market Hypothesis' assumption? a) Prices reflect all available information b) New information arrives randomly c) Future prices cannot be predicted by analyzing historical prices d) Prices adjust quickly

Correct answer is c) because a,b and d are EMH assumptions and c is a description of the weak form of the EMH

Question relates to Chapter 9 Modern portfolio theory distinguishes between two broad categories of risk. Which type of risk is reduced by diversifying your portfolio, and why?a) Systematic Risk is reduced because diversification reduces volatility of a portfolio.b) Specific Risk is reduced because diversification increases your information coefficient.c) Specific Risk is reduced because diversification reduces volatility of a portfolio.d) Systematic Risk is reduced because diversification increases your information coefficient.

Correct answer is c) because research has shown that the volatility of a portfolio of stocks declines as more individual stocks are included in a portfolio.

Chapter 12: Overcoming Data Quirks to Design Trading Strategies What is the reason for companies to do stock split (not reverse split)? a) To increase the value of company. b) To immediately increase the value of each share. c) To change the stock price more attractive to casual investors. d) To distribute cash to shareholders based on annual earnings.

Correct answer is c) because stock split is usually done by companies to keep stock available to small investors with reasonable price. Stock split a) doesn't change the value of company, b) decreases the value of each share, and d) distributing cash based on annual earnings is a definition of dividends.

Chapter 8 What is technical analysis when evaluating a company? a) Evaluating a company's stock price based on book value such as total asset, debt, cashflow, etc. b) Evaluating a company's stock price based on stock prices of other companies in the same industry. c) Evaluating a company's stock price based on historical price and volum. d) Evaluating a company's stock price based on business news and insider information.

Correct answer is c) because technical analysis works with historical price and volumn only.

Chapter 8 Which is NOT an assumption of the Efficient Market Hypothesis? a) Prices adjust randomly. b) Large number of investors c) Prices reflect only some of the available information. d) New information arrives randomly.

Correct answer is c) because the current price must reflect all of information. If it did not, certain investors could exploit the information asymmetry, making the market inefficient.

Chapter 8 Market efficiency tells how fast the relevant information travels throughout the market, and greatly affects the investment decisions. Which of the following is true? a) A hedge fund manager would prefer to work in a market with high efficiency, because he can make money more efficiently. b) A hedge fund manager would prefer to work in a market with high efficiency, because opportunities come and go fast, one can make profit from these opportunities. c) A hedge fund manager would prefer to work in a market with low efficiency, because he can develop relevant information such as independent fundamental estimate of intrinsic value, and have an information advantage. d) A hedge fund manager would prefer to work in a market with low efficiency, because he can trade on inside information to make large profit.

Correct answer is c) because there are less opportunities to make money in a highly efficient market, and insider trading is a crime.

Chapter 8 which one is correct about the analysis approach? The _____ approach is when analysts compare stock performance against other stock in the market or industry. a. technical analysis b. fundamental c. relative strength d. CAPM

Correct answer is c. The relative strength approach is when analysts compare stock performance against other stock in the market or industry. a. The technical analysis is the study of collective maket sentiment , as expressed by buying and selling of assests. b.The fundamental analysis uses earnings and dividend information, future interest rates, and risk evaluations to determine stable prices. d. CAPM is The capital asset pricing model which is a model that describes the relationship between risk and expected return and that is used in the pricing of risky securities.

Chapter 12: Overcoming Data Quirks to Design Trading Strategies Why might a company's board of directory elect to split the company's stock? a) To improve the appearance of the company's past performance. b) The company needs to be divided into smaller, more manageable entities. c) To raise additional capital by doubling the number of shares outstanding. d) The stock's price has made it too expensive for some groups of investors.

Correct answer is d) Splitting stock does not give a company additional shares to sell or change the company's organization. It will make a company's actual performance look worse and will have no effect on adjusted performance. From the book, "Company boards of directors occasionally believe that thir stock's price has made it too expenseive for some groups of investors."

Chapter 12: Overcoming Data Quirks to Design Trading Strategies Some companies will pay a percentage of the share price out to shareholders as a dividend. How is a dividend factored into the adjusted close prices? a) The dollar value of the dividend is subtracted retroactively from all previous adjusted close prices. b) The dollar value of the dividend is added to the stock for all future prices. c) Adjusted close price doesn't account for dividends, since the money subtracted from the company's assets will naturally lower the stock's price. d) The percentage value of the dividend is removed retroactively from historical actual prices.

Correct answer is d) because adjusting historical prices downward by the same percentage "has the effect, in backtesting, of reaping a ... percent 'reward' on the date of the dividend."

Chapter 8 Which statement is consistent with three versions of the Efficient Market Hypothesis (EMH)? a) If the weak form of the EMH is correct, only those who trade on inside information can succeed. b) If the strong form of the EMH is correct, those who trade on inside information can succeed. c) If the semi-strong form of the EMH is correct, value investors can succeed as value arbitrage opportunities exist. d) If the weak form of the EMH is correct, investors who use fundamental analysis might succeed.

Correct answer is d) because if the weak form of the EMH is correct, investors who can develop other relevant information (such as independent fundamental estimates of intrinsic value) can have and exploit an information advantage.

Chapter 8 If the weak form of the EMH(Efficient Market Hypothesis) is correct, which of the following is true? a) Technical analysis and fundamental analysis cannot work b) No one can succeed including those who trade inside information c) Only technical analysis can succeed d) Investors who develop independent fundamental estimates of intrinsic value can exploit information advantage

Correct answer is d) because technical analysis using only historical price and volume data cannot succeed, but investors who develop other relevant information like independent intrinsic value estimates can have and exploit information advantage. a) is true for semi-strong form while b) is true for strong form.

According to Grinold's simplified Fundamental Law of Active Portfolio Management, a four-times increase in breadth (number of trades) should result in what change in performance?a) Zero change.b) A four-times decrease.c) A four-times increase.d) A two-times increase.

Correct answer is d) because the law states that performance = skill * sqrt(breadth).

Chapter 8 If in the current market you discover you can predict the future stock price and earn profits using inside or private information, which of the following statements about the efficient market hypothesis (EMH) is supported by your discovery for the current market? a) The weak form version of EMH is invalid. b) The strong-form version of EMH is valid c) The semi-strong form version of EMH is invalid d) The strong-form version of EMH is invalid.

Correct answer is d) because the strong-form version of the efficient market hypothesis states that all information ®C both the information available to the public and not publicly known ®C is completely accounted for in current stock prices, and there is no type of information that can give an investor an advantage on the market. Strong-form efficient market hypothesis suggests that investors cannot make returns on investments that exceed normal market returns, regardless of information retrieved or research conducted. Thus, if investors can predict the future stock price and earn profits, the market should not be the strong-form version of EMH. It also should be noted that while insiders and specialists do have access to private or unpublic information, the SEC (Securities and Exchange Commission) regulations forbid this information to be used.

Chapter 8 Consider market efficiency and then select the statement that accurately describes what makes a market efficient: A)Higher than average trading volume of a stock. B)The speed that a stock's price adjusts to company-relevant information. C)Lower than average trading volume of a stock. D)The speed that a stock's price adjusts to market-wide information.

Correct answer: B Direct quote from Chapter 8, "What Makes Markets Efficient?" section: An indirect measure of market efficiency is the speed with which a stock's price adjusts to company-relevant information.

Chapter 8 Given a market for which the semi-strong version of the EMH is valid, which of the following types of information (if any) can be exploited by investors in order to outperform the market? 1) Technical 2) Fundamental 3) Insider a) 1, 2, 3 b) 2, 3 c) 3 d) None of These

Correct answer: C Rationale: In the semi-strong form of the EMH prices adjust rapidly to new public information. This includes historical price data, quarterly reports, and any other publicly available information. Therefore, analysis of technical and fundamental data cannot be used to outperform the market. However, the semi-strong form of the EMH does allow for insider information, thus it can be used to outperform the market.

Chapter 8 Assume you have just inherited $400,000. Being the young, savvy investor you are, with a fresh understanding of the Efficient Market Hypothesis, you are looking for a low volatility vehicle in which to invest these funds with the goal of mitigating inflation and letting the principal grow. You have the following choices: Hedge Fund: Alpha of 8% Mutual Fund: Alpha of 9.5% Index Fund Other information S&P 500: 6% Which one do you choose? A. Hedge Fund B. Mutual Fund C. Index Fund D. Mattress

Correct answer: C, Index Fund. Under the EMH, no investment strategy can consistently beat the market(s). Therefore, given the transaction costs associated with choices A & B, choice C is the best option. Choice D is a valid option, but does not meet your criteria for ensuring a hedge against inflation

Chapter 8 Which of the following is an example of using exogenous information to make a trade? A) A trader executes a large trade on a company's stock based on technical analysis of the company's most recent price and volume data B) An employee of a pharmaceutical company knows the status of a pending drug approval and trades a large amount of company shares based on this insider knowledge C) A trader executes a large trade on an airline's stock based on a recent change in the price of oil D) A trader executes a large trade on a company's stock based on the company's most recent earnings report

Correct answer: C. These examples were given in lecture 02-08: The efficient markets hypothesis. The given definition of exogenous data is information about the world that affects the company -- here, the price of oil is external information that affects the price of the airline company.

Chapter 8 Which answer best describes the Strong Form of the EMH: a) All information in a market is accounted for in the stock price. b) Technical analysis cannot be used to predict a stock price. c) Only those with inside information can consistently profit in the market. d) Stock prices adjust quickly to new public information.

Correct answer: a. Strong form of EMH encapsulates ALL information (public & private).

Question relates to Chapter 9 Diversification of a portfolio has shown to mitigate which type of risk?a. Systematic riskb. Specific riskc. Market riskd. Investor-specific risk

Correct answer: b.Research has shown that the volatility, or standard deviation of returns, of a portfolio of stocks declines as more individual stocks are included in the portfolio.

Chapter 8 Chad works closely with the exectutive team at company A and has access to their workspaces. He reads a memo accidentally left on the CEO's desk stating company B is planning to aquire company A at a substantial increase to the current price per share. This info won't be release to the public until the next week. According to the EMH, what is the only form of the efficient market where Chad could NOT exploit this information for personal gain. Select one answer: a) weak form b) semi-strong form c) strong form d) sharpe ratio form

Correct answer: c The strong form efficient market is the only form where the markets adjust immediately to reflect all relevant information, including that available to insiders.

Chapter 12: Overcoming Data Quirks to Design Trading Strategies A stock price is set to $20 before a 1 for 2 _A_ and after this the stock price is $40. The stock price doubled due to 2 shares being reduced into 1. What is the term associated with _A_? a) Dividend b) Forward Fill c) Backward Fill d) Reverse Split

Correct answer: d) Reverse Split because the amount of shares in the company are reduced and there is an increase in the price per share.

Chapter 8 Question: As a skilled individual investor, with no insider information, and investing in a very efficient market, which of the following scenarios should you hope for: A) You subscribe to the "weak form" of EMH, and do technical and fundamental analysis in order to best determine which companies to take a position in. B) You subscribe to the "weak form" of EMH, and utilize your unique knowlege of certain product segments to take positions in companies that you feel have higher intrinsic value than the market currently reflects. C) You subscribe to the "semi-strong form" of EMH, and look for financial disclosures which may help you identify value arbitrage positions. D) You subscribe to the "strong form" of EMH, and start making connections to colleagues in other companies so you can get insider information.

Correct choice: B Reason: A, C, and D all describe the exact opposite of what strategy you would want to adopt if you subscribed to the given version of the EMH. B has a strategy that is consistent with what you should do if you believe in the weak form of EMH.

Chapter 12: Overcoming Data Quirks to Design Trading Strategies Suppose that George owns 100 shares of Apple worth $500 dollars per share. Which of the following would be true if Apple underwent a 4 for 1 stock split: a)George now owns 400 shares worth $500 dollars per share. b)George now owns 25 shares worth $2,000 dollars per share. c)George now owns 100 shares worth $500 dollars per share. d)George now owns 400 shares worth $125 dollars per share.

D

Chapter 12: Overcoming Data Quirks to Design Trading Strategies A stock price is set to $20 before a 1 for 2 _A_ and after this the stock price is $40. The stock price doubled due to 2 shares being reduced into 1. What is the term associated with _A_? a) Dividend b) Forward Fill c) Backward Fill d) Reverse Split

D

Chapter 8If in the current market you discover you can predict the future stock price and earn profits using inside or private information, which of the following statements about the efficient market hypothesis (EMH) is supported by your discovery for the current market? a) The weak form version of EMH is invalid.b) The strong-form version of EMH is validc) The semi-strong form version of EMH is invalid d) The strong-form version of EMH is invalid.

D

Question relates to Chapter 9 You have the following situation: You have a biased coin (51% heads, 49% tails), and can make bets that pay off depending on the outcome of the coin toss. Which statements below are true? - In alternative 1 you can make 1000 bets for $1 each (if you toss heads you gain $1, if you toss tails, you lose $1) - In alternative 2 you can make one bet for $1000 (if you toss heads you gain $1000, if you toss tails, you lose $1000) a) Both alternatives provide the same expected return of $510 b) Both alternatives provide the same riskc) Alternative 1 is better because risk is lowerd) Both a) and c) are true.

D

Chapter 12: Overcoming Data Quirks to Design Trading Strategies What is a result of removing companies from your data that may not trade throughout the period you are examining? a) Creative Destruction b) Survivor Bias c) Having to fill forward data d) Having to adjust your prices

The answer is B. The reason for this is because removing companies that may not be present the whole time can bias your data towards only those companies that have survived. This can give you a false picture of the market.

The following can explain what makes a market strongly efficient EXCEPT: a) The existence of liquid, niche markets b) The existence of many arbitrage opportunities *** c) Adjustment of asset prices near real-time reflecting all public AND relevant insider information d) The active participation of many investors including hedge funds and institutional investors

The answer is b) because arbitrage opportunities in a truly efficient market all all arbitraged away and therefore do not exist

Chapter 12: Overcoming Data Quirks to Design Trading Strategies Question: Supposed that at the beginning of 2014, you held 600 shares of MLFT stock and then will not sell or buy any of MLFT stock. On February 1st, 2014, the MLFT Company's Board of Directors declared a 2 for 1 split for their stock. Two years later, the company decided to perform a 1 for 3 reverse stock split on February 1st, 2016. How many MLFT shares do you own now after the 1 for 3 reverse split on 2/1/2016? a) 600 b) 900 c) 400 d) 1800

The answer is c) 400 Explanation: At the beginning of 2014, you had 600 shares of MLFT stock. A 2 for 1 split converts each old share into two new shares, so an owner of 600 shares before the split will own 600*2 = 1200 shares after the split on 2/1/2014. A reverse 1 for 3 split converts three old shares into one new share, so the owner of 1200 shares before the reverse split will own 1200/3 = 400 shares after the reverse split on 2/1/2016.

Chapter 8 The EMH is true because: a) hedge funds and active management cannot succeed b) based on extensive research by finance and economic academics c) active managers are incentivized to make markets efficient by aribtraging opportunities away d) they charge high fees to find markets

The answer is c) because hedge funds compete with other managers to identify opportunities to arbitrage. These participants are compensated based on their performance to do so which in turn, makes the market efficient by pricing in the availability of all relevant information.

Chapter 12: Overcoming Data Quirks to Design Trading Strategies The following scenarios consist of two parts: (1) the market incident and (2) the responsive action to account for said incident within a data-series. From the given scenarios, select the choice that does not correspond to an appropriate (or best practice) incident-response action to curtail data quirks: [A] (1) On Feb 10, 2015 shareholders of a stock A trading at $300 a share are paid a dividend of $1.50 per share. (2) All previous historical prices of stock A are reduced by 0.5%. [B] (1) On May 5, 2014 company B split its stock 3 to 1. (2) All prices of company B prior to said date will be set to 1/3 of their value. [C] (1) Due to technical difficulties with the stock exchange Company C is not traded for 2 hours. Its price before and after the trading downtime was 15$ and $13.50 respectively (2) Company C's trading price of $13.50 will be backfilled for the two hours of downtime. [D] (1) After two years of underperforming, D-rate hedge fund shuts down business as of June 8, 2015 (2) Analysis of the performance of hedge funds is carried out from Jan 1, 2013- Dec 20, 2015 and includes D-rate for time in which it operated.

The correct answer is C as backfilling should only be used when forward filling is not an option for lack of previous pricing data. In scenario A, the cash dividend reduces assets, however it does not reduce the shareholder's proportionate claim on the company. The historical price should be adjusted downward by the percentage of the dividend paid. Scenario B maintains assets and proportionate ownership; hence, historical assets should just be divided by the ratio of the split. The action given in scenario D seeks to account for survivorship bias by not only including funds traded throughout the period.

Chapter 12: Overcoming Data Quirks to Design Trading Strategies An Analyst must study the price performance of a specific stock receives an error due to missing data. You notice that on June 6th, 1998, from 11:25am through 2:30pm, no trading had occurred during that period. What must you do to resolve the error and capture data for that entire day? A) Remove that day of trading from your analysis due to incomplete data. B) Insert zeros in place where the missing data occurred for that time period. C) Use the data taken from the last traded value which would most likely have occurred at 11:24am to fill in that period. D) Scrub that sample data to only include companies with a complete trading period.

The correct answer is C. A common approach to treat missing data under this circumstance is to fill forward by using the last traded value just prior to lapse in trading and fill in the missing data with that value.

Chapter 8 Which of the following statements is incorrect regarding the three versions of Efficient Market Hypothesis (EMH)? a) The weak form of the EMH suggests that future asset prices cannot be predicted based on historical price data alone. However profiting from fundamental analysis is possible. b) The strong form of the EMH suggests that only investors with insider information can exploit arbitrage opportunities. c) The semi-strong form of the EMH suggests that fundamental and technical analysis are of little use because opportunities have been arbitraged away immediately. d) The strong form of the EMH suggests that no known arbitrage opportunities exist.

The correct answer is b) The book said that "If the strong form is correct, even those who trade on inside information cannot succeed: they are risking jail to little gain" There are multiple plausible answers If the student is not well informed, the choices all seem pretty reasonable The questions is easy if the student has studied the book and hard if they have not There is only one correct answer. The question is not too hard nor too easy.

Chapter 8 Consider the three forms of the EMH. Imagine Company A is trading at $100 per share. In the quarterly report the company discloses massive losses. The stock price plummets to $90 by the end of trading for the day. After reading the report, if someone is fast enough he or she could short Company A's stock before the price bottoms out it is possible to make a profit. Which form of the EMH does this scenario seem to most contradict? a) Weak b) Semi-Strong c) Strong d) Both b) and c)

The correct answer is d) because both Semi-Strong and Strong versions of the EMH suggest that prices adjust immediately to reflect all information. Logically someone has to initiate the moving and that someone can gain profits before the final "new" value is reached.

Chapter 8 Under the semi-strong version of the efficient market hypothesis, which of the following pieces of information about a company's stock are not already reflected in it's price? a) P/E ratio relative to industry peers. b) A press release announcing a merger. c) An obscure research paper that forecasts the demand for raw materials in Mongolia, a country that the company has no operations in. d) None of the above; i.e. a) b) and c) are all incorporated in the stock's price

The correct response is d). In the semi-strong form, only insider information is not already incorporated in the price. Some might answer c) as the information is obscure and unrelated to the company. However, it is still public knowledge and would be reflected in the stock's price.

Which is true of the Weak form of the Efficient Market Hypothesis (EMH)? a. All information in a market is not accounted for in the stock price. b. Technical analysis cannot be used to predict a stock price. c. Only insider can can consistently profit in the market. d. Stock prices adjust quickly to new private information.

ans: b, using public information you cannot predict future prices from past prices.

Chapter 8 Which form of the EMH prohibit profiting from Fundamental Analysis? a. weak b. semi-strong & weak c. strong d. strong & semi-strong

ans: d) strong prohibits insider & fundamental, and semi-strong prohibits technical & fundamental analysis

Question relates to Chapter 9 In Grinold's Fundamental Law of Active Portfolio Management, which of the following represents a perfectly correct predictor for the managers Information Coefficient or IC.a. -1.0b. 1.5c. 1.0d. 0.0

answer is = c. 1.0

Chapter 12: Overcoming Data Quirks to Design Trading Strategies Assume there exists an imaginary stock, XYZ, that (for whatever reason) only changes price when it splits (it is not affected by the normal day-to-day supply/demand pressures of the market). The stock had 2-for-one splits in 2002 and 1996, and a 3-for-1 split in 1990. The price of the stock in 2016 is $12.05 What was the [actual] price of the stock in 1989? a) $4.05 b) $144.60 c) $48.20 d) $72.30

answer: B explanation: the price only changes when it splits, so you have to backtrack, multiplying the current stock price as you go: $12.05 * 2(2002 split) *2(1996 split) * 3(1990 split) = $144.60

Chapter 8 Which form of EMH describes the following statement? The current market stock price reflects all public and private information related to the stock immediately. a)weak form EMH b)strong form EMH c)semi-strong form EMH d)both b) and c)

answer: b) explanation: the strong form EMH says that asset prices adjust immediately to reflect all relevant information, including that available to insiders.

Chapter 8 Which of the following are assumptions in the Efficient Markets Hypothesis? 1) Large number of investors operating for profit 2) New information arrives randomly 3) Prices adjust quickly 4) Prices reflect all available information a) 2,3,4 b) 1,3,4 c) 1,2,4 d) 1,2,3,4

correct answer is d since all are assumptions as explained in the 2nd section of lecture. The large number of investors quickly react to any random new information and thus prices adjust quickly. Since new information is consumed and prices quickly adjusted, the current price always reflects available information.