FIN4501 Chapter 8

Small stocks underperformed relative to the S&P 500 during the following years: Never for a period longer than 1 year 1945-1964 1965-1984 1985-2014

1945-1964

Which of the following is not a role of portfolio management in an efficient capital market? Adjusting portfolio based on risk aversion Low cost diversification Tax consideration Identifying mispriced securities

Identifying mispriced securities

effect is the tendency of poorly performing stocks and well-performing stocks in one period to continue that abnormal performance in following periods.

Momentum

Which one of the following cannot be used to test the semi-strong form of the efficient market hypothesis? Price to earnings ratio effect Small-firm and January effect Momentum effect Neglected-firm effect

Momentum effect

Active vs. passive portfolio management: which of the following is related to active investment strategies? Buy and hold Index fund Overvalued stock

Overvalued stock

What data point would a practitioner of fundamental analysis find most useful to study? stock sell pressure earnings Tren stat stock buy pressure

earnings

In an efficient capital market, stock prices should follow a(n) walk.

random

Financial economists have found some easily observed variables can be used to predict broad market returns. Which one of the following is not one of the variables? total debt ratio dividend yield credit spread earnings yield

total debt ratio

In an efficient capital market among many well-backed, highly paid, aggressive analysts ensures that stocks prices reflect all available information.

competition

If investors could generate abnormal returns consistently by using the _______ of a stock, it would be evidence against the weak form of the efficient market hypothesis. book to market ratio insider information price to earnings ratio resistance level

resistance level

True or false: Due to the adjustment needed to account for risk when evaluating the success of investment strategies to test market efficiency, the tests are joint tests of market efficiency and the risk adjustment procedure.

true

Find a false statement. Rational market forecasts in an efficient market will not turn out to be wrong as prices reflect all available information. If financial markets were inefficient, resources in the economy would be systematically misallocated. Deviations from market efficiency may offer profit opportunities to better-informed traders at the expense of less informed traders.

Rational market forecasts in an efficient market will not turn out to be wrong as prices reflect all available information.

analysis is to search for predictable patterns in stock prices. This type of analysis will not generate consistent abnormal return if the capital market is at least form efficient.

Technical Weak

If markets are , then a portfolio manager's primary goal is not to beat the market.

efficient

True or false: It is often said that the most precious commodity on Wall Street is good advice

false

The primary conclusion of the efficient market hypothesis is stock price already reflects available information. the stock with the greatest return to risk ratio is also the most efficient stock. the stock with the greatest return potential is also the most efficient stock. that when markets are efficient, the expected return is the risk-free rate.

stock price already reflects available information.

Which of the following cannot be used as evidence against the weak form of the efficient market hypothesis? Reversal effect Momentum effect January effect Positive serial correlation in stock returns

January effect

What data point would a practitioner of fundamental analysis find most useful to study? stock sell pressure earnings stock buy pressure Tren stat

earnings

If information can be used to generate returns, the financial market is -form efficient.

insider abnormal semi strong

If additional predictors, wuch as dividend/price ratio, dividend yield and earnings yield aren't taken as proof that markets are inefficient, then these variables are proxying for variations in the .

market risk premium

The bulk of evidence suggest that markets are inefficient enough that earning superior risk adjusted returns is time consuming but not difficult the efficient market hypothesis has been proven incorrect, resoundly. markets are competitive enough that earning superior risk adjusted returns is impossible markets are competitive enough that only superior information or insight will earn superior risk adjusted returns

markets are competitive enough that only superior information or insight will earn superior risk adjusted returns

If investors could generate abnormal returns consistently by using the _______ of a stock, it would be evidence against the weak form of the efficient market hypothesis. insider information resistance level price to earnings ratio book to market ratio

resistance level

If markets were fundamentally inefficient and securities commonly mispriced, then this implies a systematic misallocation of in the economy.

resources

The effect and the book to market effect have been interpreted as the results of market's to the performance of firms.

reversal overreaction past

In the Fama and French (1993) three-factor model, what are the two additional factors, besides market returns? book-to-market ratio and price/earnings ratio size and price/earnings ratio size and leverage size and book-to-market ratio

size and book-to-market ratio

The primary conclusion of the efficient market hypothesis is the stock with the greatest return potential is also the most efficient stock. the stock with the greatest return to risk ratio is also the most efficient stock. that when markets are efficient, the expected return is the risk-free rate. stock price already reflects available information.

stock price already reflects available information.

If a financial market is weak-form efficient, a stock price already reflects all information on ___________. the balance sheet composition the quality of management the previous stock prices the minutes of the firm's board meeting

the previous stock prices

If a financial market is form efficient, stock prices should already be market trading data, such as price and volume data.

weak

Find a false statement about market efficiency. As the financial market is competitive enough and efficient, no research effort can be justified to outperform the market. Skilled mutual fund managers with abnormal performance attract new capital and thus the funds grow in size. The financial market history shows that most actively managed mutual funds under-performed index funds. Statisticians can easily detect the margin of superiority added by a professional manager.

As the financial market is competitive enough and efficient, no research effort can be justified to outperform the market.

Which of the following are common issues taken with the Efficient Market Hypothesis? Selection Bias Issue Magnitude Issue Lucky Event Issue Backfill BIas Issue Survivorship Bias Issue

Selection Bias Issue Magnitude Issue Lucky Event Issue

Which of the following are typical research determinants within the fundamental analysis framework? the moving average of the stock's historical price earnings prospects expectations of future interest rates dividends prospects the risk level of the firm

earnings prospects expectations of future interest rates dividends prospects the risk level of the firm

In an efficient capital market, only ______ or ________ information will make stock prices move. past, known past, unexpected new, unexpected new, known

new, unexpected

Which of the following best describes a drawback of implementing portfolio strategies based on analyst consensus recommendations? Heavy trading activity and associated costs Overly positive and biased recommendations Frequent changes in analysts' recommendations

Heavy trading activity and associated costs

One necessary condition for the efficient market hypothesis to exist is stock prices are predictable. stock prices follow a random walk. stock prices follow mean reversion. stock prices adjust slowly to new information allowing time to determine the accuracy of the new information.

stock prices follow a random walk.

If all investors attempted to follow a passive investment strategy, ________. index funds would outperform actively managed funds arbitrage opportunities would quickly disappear the financial market would become more efficient stock prices would fail to reflect new information

stock prices would fail to reflect new information

If all investors attempted to follow a passive investment strategy, ________. index funds would outperform actively managed funds the financial market would become more efficient arbitrage opportunities would quickly disappear stock prices would fail to reflect new information

stock prices would fail to reflect new information

Since insiders can trade profitably, as documented in studies by Jaffe (1974), Scyhun (1986), Givoly and Plamon (1985) and others, then it is likely that markets are not strong form efficient. semi-strong form efficient. semi-weak form efficient. weak form efficient.

strong form efficient.

The efficient market hypothesis has never been widely accepted on Wall Street because it implies that ____________. the search for undervalued securities is wasted effort there is a selection bias when evaluating fund performance investors should hold a diversified portfolio

the search for undervalued securities is wasted effort