Economics 9

If markets are semistrong efficient, _____.

If markets are semistrong efficient, it is futile trying to identify mispriced securities, since the current market prices already fully reflect all available public information. Therefore, it does NOT make sense to pay for investment advice from stock market analysts.

In an efficient market, _____.

The efficient market hypothesis states that all securities are fairly priced given the information available to investors. As such, their expected returns differ if they entail different levels of risk.

A market where prices reflect all past trading data is _____.

weak form efficient

A market where prices reflect all available public information is _____.

A market where prices reflect all available public information (but not insider information) is semistrong efficient.

Good Firm is highly profitable and will grow rapidly in the future. Bad Firm faces the same risks but barely makes a profit and will not grow at all. In an efficient market, _____.

Both stocks are equally good investments. In an efficient market, prices reflect all available information. For simplicity, assume that the two firms have the same number of shares outstanding. In that case, Good Firm's stock price will be much higher than Bad Firm's, resulting in the same risk-adjusted expected return.

The fact that less than half of all equity fund managers beat the market in most years indicate that the stock market is _____.

largely efficient

In an efficient market, _____. Check all that apply: prices reflect all available information prices change only in response to new information patterns in past prices help predict future prices prices adjust quickly in response to new information

prices reflect all available information prices change only in response to new information prices adjust quickly in response to new information

A market where prices reflect all information is _____.

strong form efficient

_____ makes markets efficient.

Competition between investors very quickly corrects any security mispricing, as underpriced security get bought and overpriced securities get sold, thus leading to an increase or decrease in their prices until they reach their intrinsic (fair) value.

If markets are efficient, _____.

If markets are efficient, asset allocation is still useful, but security selection does not make sense.

Which of the following statements are inconsistent with the efficient market hypothesis? Check all that apply: Stocks that outperform the index in March always underperform it in April. Stocks that outperform the index in March always outperform it in April. Half of fund managers are able to beat their relevant index each year, before fees. The average annual return on stocks is greater than zero.

Stocks that outperform the index in March always underperform it in April. Stocks that outperform the index in March always outperform it in April.

If the stock price of a target company jumps up when the acquisition of the company is announced, the market _____.

The market cannot be strong form efficient, as the announcement of the acquisition affects the stock price and thus was not already priced in, even though the insiders of the target company (and of the acquirer) knew about the acquisition beforehand.