Equity Investments : Market Efficiency

If a market is weak-form efficient but semi-strong-form inefficient, then which of the following types of portfolio management is most likely to produce abnormal returns? A. Passive portfolio management. B. Active portfolio management based on technical analysis. C. Active portfolio management based on fundamental analysis.

Active portfolio management based on fundamental analysis.

Which of the following situations will most likely promote an increase in market efficiency? A. An increase in arbitrage opportunities B. A decrease in trading activity C. An increase in information availability

An increase in information availability

An internal evaluation of the trading behavior of three fund managers of a mutual fund company during the past year has revealed the following: -Manager X Was slower than peers when reacting to changes in information -Manager Y Rarely realized investment losses but realized most of the investment gains -Manager Z Tended to overreact by disliking losses more than liking comparable gains Which of the three managers most likely displayed the disposition effect bias? A. Manager Y B. Manager X C. Manager Z

Manager Y

Which of the following market anomalies is inconsistent with weak-form market efficiency? A. Earnings surprise. B. Momentum pattern. C. Closed-end fund discount.

Momentum pattern.

Which of the following is least likely to explain the January effect anomaly? A. Tax-loss selling. B. Release of new information in January. C. Window dressing of portfolio holdings.

Release of new information in January.

Which of the following market regulations will most likely impede market efficiency? A. Restricting traders' ability to short sell. B. Allowing unrestricted foreign investor trading. C. Penalizing investors who trade with nonpublic information.

Restricting traders' ability to short sell.

Which of the following statements is most accurate in an efficient market? A. Active strategies will lead to excess risk-adjusted portfolio returns. B. Securities market prices fully reflect their fundamental values. C. Securities market prices respond over time to changes in economic information.

Securities market prices fully reflect their fundamental values.

Which one of the following statements best describes the semi-strong form of market efficiency? A. Empirical tests examine the historical patterns in security prices. B. Security prices reflect all publicly known and available information. C. Semi-strong-form efficient markets are not necessarily weak-form efficient.

Security prices reflect all publicly known and available information.

After the public announcement of the merger of two firms, an investor makes abnormal returns by going long on the target firm and short on the acquiring firm. This most likely violates which form of market efficiency? A. Semi-strong-form only B. Semi-strong-form and strong-form C. Weak-form and semi-strong-form

Semi-strong-form and strong-form

If markets are only weak-form efficient, which of the following investment approaches is least likely to consistently earn abnormal profits? A. Exploiting of non-public information B. Buying and selling based on fundamental analysis C. Trading based on patterns of prices and volume

Trading based on patterns of prices and volume

An observation that stocks with above average price-to-earnings ratios have consistently underperformed those with below average price-to-earnings ratios least likely contradicts which form of market efficiency? A. Strong form B. Semi-strong form C. Weak form

Weak form

If a researcher conducting empirical tests of a trading strategy using time series of returns finds statistically significant abnormal returns, then the researcher has most likely found: A. a market anomaly. B. evidence of market inefficiency. C. a strategy to produce future abnormal returns.

a market anomaly.

Like traditional finance models, the behavioral theory of loss aversion assumes that investors dislike risk; however, the dislike of risk in behavioral theory is assumed to be: A. leptokurtic. B. symmetrical. C. asymmetrical.

asymmetrical.

An increase in the time between when an order to trade a security is placed and when the order is executed most likely indicates that market efficiency has: A. decreased. B. remained the same. C. increased.

decreased.

Researchers have found that value stocks have consistently outperformed growth stocks. An investor wishing to exploit the value effect should purchase the stock of companies with above-average: A. dividend yields. B. market-to-book ratios. C. price-to-earnings ratios.

dividend yields.

If markets are semi-strong efficient, standard fundamental analysis will yield abnormal trading profits that are: A. negative. B. equal to zero. C. positive.

equal to zero.

The weak-form market efficiency most accurately assumes that current security prices: A. adjust rapidly to the release of all public information. B. fully reflect all past market information, including transactions by exchange specialists. C. fully reflect all information from public and private sources.

fully reflect all past market information, including transactions by exchange specialists.

The intrinsic value of an undervalued asset is: A. less than the asset's market value. B. greater than the asset's market value. C. the value at which the asset can currently be bought or sold.

greater than the asset's market value.

If a market is semi-strong-form efficient, the risk-adjusted returns of a passively managed portfolio relative to an actively managed portfolio are most likely: A. lower. B. higher. C. the same.

higher.

Regulation that restricts some investors from participating in a market will most likely: A. impede market efficiency. B. not affect market efficiency. C. contribute to market efficiency.

impede market efficiency.

With respect to efficient market theory, when a market allows short selling, the efficiency of the market is most likely to: A. increase. B. decrease. C. remain the same.

increase.

Which of the following regulations will most likely contribute to market efficiency? Regulatory restrictions on: A. short selling. B. foreign traders. C. insiders trading with nonpublic information.

insiders trading with nonpublic information.

Observed overreactions in markets can be explained by an investor's degree of: A. risk aversion. B. loss aversion. C. confidence in the market.

loss aversion.

If securities markets are semi-strong-form efficient, the most appropriate role of a portfolio manager is to: A. invest by analyzing publicly available information to consistently generate abnormal returns. B. manage portfolios with appropriate diversification and asset allocation, taking into consideration investor preferences. C. exploit appropriate trading rules and serial correlations for achieving excess returns.

manage portfolios with appropriate diversification and asset allocation, taking into consideration investor preferences.

A trader is able to obtain persistent abnormal returns by adopting an investment strategy that purchases stocks that have recently experienced high returns. This strategy exploits a market-pricing anomaly best described as: A. data mining. B. momentum. C. the overreaction effect.

momentum.

In an efficient market, the change in a company's share price is most likely the result of: A. insiders' private information. B. the previous day's change in stock price. C. new information coming into the market.

new information coming into the market.

With respect to rational and irrational investment decisions, the efficient market hypothesis requires: A. only that the market is rational. B. that all investors make rational decisions. C. that some investors make irrational decisions.

only that the market is rational.

If markets are semi-strong-form efficient, then passive portfolio management strategies are most likely to: A. earn abnormal returns. B. outperform active trading strategies. C. underperform active trading strategies.

outperform active trading strategies.

With respect to efficient markets, a company whose share price changes gradually after the public release of its annual report most likely indicates that the market where the company trades is: A. semi-strong-form efficient. B. subject to behavioral biases. C. receiving additional information about the company.

receiving additional information about the company.

In a highly efficient market, unexpected positive news on a stock is announced to the public. After this announcement, the difference between the market value and the intrinsic value of the stock will most likely: A. remain zero. B. decrease. C. increase.

remain zero.

Fundamental analysts assume that markets are: A. weak-form inefficient. B. semi-strong-form efficient. C. semi-strong-form inefficient.

semi-strong-form inefficient.

Which of the following statements about the forms of market efficiency is least accurate? If the form of market efficiency is: A. weak, then investment strategies based on fundamental analysis could achieve abnormal returns. B. semi-strong, then security prices fully reflect all past market data. C. strong, then prices reflect only private information.

strong, then prices reflect only private information.

If prices reflect all public and private information, the market is best described as: A. weak-form efficient. B. strong-form efficient. C. semi-strong-form efficient.

strong-form efficient.

The behavioral bias in which investors tend to avoid realizing losses but rather seek to realize gains is bestdescribed as: A. mental accounting. B. the gambler's fallacy. C. the disposition effect.

the disposition effect.

The market value of an undervalued asset is: A. greater than the asset's intrinsic value. B. the value at which the asset can currently be bought or sold. C. equal to the present value of all the asset's expected cash flows.

the value at which the asset can currently be bought or sold.

With respect to the efficient market hypothesis, if security prices reflect only past prices and trading volume information, then the market is: A. weak-form efficient. B. strong-form efficient. C. semi-strong-form efficient.

weak-form efficient.

Technical analysts assume that markets are: A. weak-form efficient. B. weak-form inefficient. C. semi-strong-form efficient.

weak-form inefficient.

Arbitrage activity will most likely be higher in securities markets: A. with no restrictions on short selling. B. that are efficient. C. with high information acquisition costs.

with no restrictions on short selling.

If markets are efficient, the difference between the intrinsic value and market value of a company's security is: A. negative. B. zero. C. positive.

zero.