Chapter 14 Self Assessment (Conceptual)

Studies of the performance of professionally managed mutual funds find that these funds:

do not outperform a market index. Assuming mutual fund managers rely primarily on public information, this finding supports the semi-strong form of the efficient market hypothesis.

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

semi-strong In this problem the friend has insider information and makes consistent profits. In general, when a market is efficient, a person CANNOT make abnormal profits. Specifically, when a market is strong-form efficient, one cannot use insider information to make profits. In this case, the person makes profits based on insider information; therefore, the market cannot be strong form efficient. It is at best semi-strong form efficient.

The hypothesis that market prices reflect all available information of every kind is called _____ form efficiency.

strong

A lawyer works for a firm that advises corporate firms planning to sue other corporations for antitrust damages. He finds that he can "beat the market" by short-selling the stock of the firm that will be sued. This finding is a violation of the:

strong form of the efficient market hypothesis.

Individuals that continually monitor the financial markets seeking mispriced securities:

tend to make the markets more efficient.

Event studies attempt to measure:

All of the above whether there is a significant reaction to public announcements. if the market is at least semi-strong form efficient. the influence of information released to the market on returns in days surrounding its announcement. how quickly security prices react to positive and negative news.

The hypothesis that market prices reflect all historical information is called _____ form efficiency.

weak

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

A firm will generally receive a fair price when it sells shares of stock.

The notion that actual capital markets, such as the NYSE, are fairly priced is called the:

Efficient Markets Hypothesis (EMH).

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

I, II, III, and IV

If the securities market is efficient, an investor need only throw darts at the stock pages to pick securities and be just as well off.

This is false because investors may not hold a desirable risk-return combination in their portfolio.

Event studies have been used to examine:

all of these. mergers and acquisitions. changes in earnings. dividend announcements. IPOs, and other equity issuances.

According to the efficient market hypothesis, financial markets fluctuate daily because they:

are continually reacting to new information.

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

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

In an efficient market when a firm makes an announcement of a new product or product enhancement with superior technology providing positive NPV, the price of the stock will:

rise on the same day to the new price.

An efficient capital market is one in which:

security prices reflect available information.

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

semi-strong

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

strong form efficient.

An investor discovers that for a certain group of stocks, large positive price changes are always followed by large negative price changes. This finding is a violation of the:

weak form of the efficient market hypothesis.