Corporate Finance Ch. 13

Weak-form efficiency implies that past stock returns

do not help to predict future returns

Which of the following is a statement of semistrong form efficiency? Multiple choice question. a. Stock prices reflect all information. b. Stock prices will adjust to newly published information after a long time delay. c. Stock prices will adjust immediately to public information.

c

market is said to be strong form efficient if prices incorporate which type of information? Multiple choice question. a. Only publicly available information b. Only information about past prices and volumes c. All information, both public and private

c

Generally, a firm is able to find positive-NPV opportunities among its: a. long term borrowing b. financing decisions c. working capital decisions d. investment decisions

d

A market is said to be ______ form efficient if prices incorporate all publicly available information.

semistrong

One important implication of the efficient markets hypothesis is that most investors

should avoid active training

A market is said to be ______ form efficient if prices incorporate all information, both public and private.

strong

If you beat the market with inside information, you have violated the concept of ________ form efficiency.

strong

Match each information type to the form of market efficiency that identifies that type of information as being quickly and accurately reflected in stock prices. all information- all public information- historical stock prices-

strong, semistrong, weak

True or False: Weak form efficiency considers trading strategies that use information based solely on past stock prices.

true

Which of the following is a statement of weak-form efficiency? I) If markets are efficient in the weak form, then it is impossible to make consistently superior profits by using trading rules based on past returns. II) If markets are efficient in the weak form, then prices will adjust immediately to public information. III) If markets are efficient in the weak form, then prices reflect all information.

I only

Whether analyzing a real or a financial asset we will use ____________ to make the best decision.

NPV (net present value)

If you can beat the market by _____ then you are violating weak form efficiency. a. analyzing historical price patterns b. using your intuition c. analyzing balance sheets d. utilizing insider information

a

Markets are more likely to be weak form efficient than semi-strong form efficient because ___. Multiple select question. a. easy profits would lead everyone to trade on historical information b. historical stock price information is easy to get c. if everyone traded on historical information, prices would gyrate wildly

a

In Market Efficiency, where all prices incorporate all information contained in past prices, is called _____________.

weak efficiency

In order to test the strong form of market efficiency, researchers have examined the: Multiple select question. a. performance of mutual funds b. performance of pension funds c. recommendations of professional security analysts d. impact of insider information

a, b, c

Predictable cycles in stock price movements: Multiple choice question. a. tend to persist for a long time b. tend to self-destruct as soon as investors recognize them c. never appear, since stock returns change randomly

b

Strong-form efficiency implies that mutual fund managers should

buy the index that maximizes diversification and minimizes the cost of managing portfolios

If markets are semistrong efficient, the prices will react ________ to new public information.

immediately

The semistrong form of the efficient markets hypothesis has been tested by measuring how rapidly security prices react to various news items like I) earnings announcements; II) dividend announcements; III) news of takeovers; IV) macroeconomic information

I, II, II, and IV

Financing decisions differ from investment decisions because I) financing decisions are easier to reverse; II) markets for financial assets are generally more competitive than real asset markets; III) generally, financing decisions have NPVs very close to zero

I, II, and III

Generally, a firm is able to find positive-NPV opportunities among its I) financing decisions; II) capital investment decisions; III) short-term borrowing decisions

II only

Predictable cycles in stock price movements I) tend to persist for a long time; II) tend to self-destruct as soon as investors recognize them; III) never appear, since stock returns change randomly

II only

Markets are more likely to be weak form efficient than semi-strong form efficient because ___. Multiple select question. a. historical stock price information is easy to get b. easy profits would lead everyone to trade on historical information c. if everyone traded on historical information, prices would gyrate wildly

a, b

Whether analyzing a real or a financial asset we will use ____________ to make the best decision. a. the profitability index b. net present value c. internal rate of return d. accounting return

b

In an efficient market, firms should expect to receive ______ value for securities they sell.

fair

Studies have shown that stock and commodity market prices:

follow a random walk

True or false: If markets are efficient in the weak form, then it is impossible to make consistently superior profits by using trading rules based on past returns.

true

An efficient market is one that fully reflects all available ______.

information

The statement that stock prices follow a random walk implies that I) successive price changes are independent of each other; II) successive price changes are positively related; III) successive price changes are negatively related; IV) the autocorrelation coefficient is either +1.0 or −1.0

I only

Strong-form market efficiency states that the market incorporates all information into stock prices. Strong-form efficiency implies that I) an investor can only earn risk-free rates of return; II) an investor can always rely on technical analysis; III) professional investors cannot consistently outperform the market;

III only

In order to test the semistrong form of the efficient-market hypothesis, researchers have mostly relied on the: Multiple choice question. a. measurement of how rapidly security prices adjust to different news items b. none of the options c. estimation of the correlation coefficients for securities and markets d. measurement of the performance of technical trading strategies over the years

a

Which of the following statements is/are true if the strong-form efficient market hypothesis holds? Multiple choice question. a. Stock prices reflect all available information. b. Financial markets are irrational. c. Analysts can easily forecast stock price changes. d. Stock returns follow a particular pattern.

a

The higher returns from value stocks could be due to ___. Multiple select question. a. differences in risk b. investor expectations c. biases in commercial databases d. investor misinformation

a, c

Financing decisions differ from investment decisions because: (Select all that apply.) Multiple select question. a. it is more difficult to find positive-NPV financing strategies than positive-NPV investment strategies. b. financing decisions focus on the left hand side of the balance sheet. c. financing decisions are easier to reverse. d. markets for financial assets are generally more competitive than real asset markets.

a, c, d

For most stocks, a scatter plot chart of stock returns versus stock returns on the prior trading day will appear as: Multiple choice question. a. a random pattern mostly concentrated in the lower-left and upper-right quadrants b. a shotgun pattern centered close to the origin c. a random pattern mostly concentrated in the top-right and lower-left quadrants

b

Stock price cycles or patterns tend to self-destruct as soon as investors recognize them through: Multiple choice question. a. the actions of corporate treasurers b. trading by investors c. stock market regulation by the Securities and Exchange Commission (SEC) d. price fixing by the specialists on the New York Stock Exchange

b

Strong-form market efficiency states that the market incorporates all information into stock prices. Strong-form efficiency implies that: Multiple choice question. a. an investor can always rely on technical analysis b. an insider or corporate officer cannot outperform the market by trading on inside information c. an investor can only earn risk-free rates of return

b

The statement that stock prices follow a random walk implies that: Multiple choice question. a. successive price changes are negatively related b. successive price changes are independent of each other c. successive price changes are positively related

b

____________ occurs, if the stock market changes, and stock prices adjust instantly, and the stock fully reflects all new information. Multiple choice question. a. An inefficient market reaction b. An efficient market reaction c. An overreaction and correction

b

The different forms of market efficiency are: Multiple select question. a. semiweak form b. weak form c. strong form d. semistrong form

b, c, d

Beating the market ______ would illustrate a violation of semistrong form efficiency.

by analyzing financial statements

A market is said to be semistrong efficient if prices incorporate which type of information? Multiple choice question. a. Insider information b. All information, both public and private c. Publicly available information

c

According to the random walk theory, if the prices have been going up for the last 20 days, on the 21th day the prices will: Multiple choice question. a. will certainly go down b. will certainly go up c. not necessarily go up

c

The overwhelming evidence on mutual funds is that, on average, they: Multiple choice question. a. outperform broad-based indexes after fees b. perform as well as a broad-based index of stocks after fees c. underperform broad-based indexes after fees

c

Which of the following is a correct statement of weak-form efficiency? Multiple choice question. a. If markets are efficient in the weak form, then prices will adjust immediately to public information. b. If markets are efficient in the weak form, then prices reflect all information. c. If markets are efficient in the weak form, then it is impossible to make consistently superior profits by using trading rules based on past returns.

c

Stock price cycles or patterns tend to self-destruct as soon as investors recognize them through: Multiple choice question. a. price fixing by the specialists on the New York Stock Exchange b. stock market regulation by the Securities and Exchange Commission (SEC) c. the actions of corporate treasurers d. trading by investors

d

The semistrong form of efficiency focuses on the economic ineffectiveness of the following type of information: Multiple choice question. a. only information provided by the SEC b. privileged information c. insider information d. publicly available information

d

One argument against efficient markets is that stocks with high earnings-to-price ratios (value stocks) have ______ returns than stocks with low earnings-to-price ratios (growth stocks).

higher

An efficient market is one in which any change in available information will be reflected in the company's stock price ___.

immediately

To test semistrong market efficiency, we can compare actively managed mutual funds with ___.

index funds

Weak form efficiency considers trading strategies that use information based solely on ______ stock prices.

past