BSAD 181 Midterm Exam (Chapter 14)

Strong form market efficiency

Accurately reflects all information, both public and private

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

Are continually reacting to new information

When the stock price follows a random walk, the price today is said to be equal to the prior period price plus the expected return for the period with any remaining difference to the actual return due to

A component based on new information unrelated to past prices

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

An investor who picks a portfolio by throwing darts at the financial pages

Believes that efficient markets will protect the portfolio from harm as all information is priced

An example of financially irrational behavior is

Both gambling in Las Vegas; and when a firm announces an increase in earnings and the stock price enjoys three days of large abnormal returns

Which of the following would be indicative of inefficient markets?

Both overreaction and reversion; and delayed response

Financial managers can create value through financing decisions that

Both reduce costs or increase subsidies; and create a new security

If the efficient market hypothesis holds, investors should expect:

Both to earn only a normal return; and to receive a fair price for their securities

The market price of a stock moves or fluctuates daily. This fluctuation is

Consistent with the semistrong form of the efficient market hypothesis because as new information arrives daily prices will adjust to it

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

Efficient Markets Hypothesis (EMH)

Valuable financing opportunities can be created by

Fooling investors; reducing costs or increasing subsidies; and the creation of a new security

If the financial markets are efficient, then investors should expect their investments in those markets to

Generally have zero net present values

Which of the following is not true about serial correlation?

It measures the correlation between the current return on a security and the current return on another security

Efficient capital markets are financial markets

I. In which current market prices reflect available information. II. In which current market prices reflect the present value of securities. III. In which there is no excess profit from using available information.

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

If the weak form of efficient markets holds, then

I. Technical analysis is useless II. Stock prices reflect all information contained in past prices III. Stock prices follow a random walk

Event studies attempt to measure

I. The influence of information released to the market on returns in days surrounding its announcement. II. If the market is at least semistrong form efficient. III. Whether there is a significant reaction to public announcements.

A semistrong form efficient market is distinct from a weak form efficient market by

Incorporating all publicly available information the price

Suppose that firms with unexpectedly high earnings earn abnormally high returns for several months after the announcement. This would be evidence of

Inefficient markets in the semistrong form

Ritter's study of Initial Public Offerings (IPOs) showed that the post offering stock performance was

Less than the control group by about 2% in the five years following the IPO

Market efficiency says

Managers cannot boost stock prices in foreign currency

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

The semistrong form of the efficient market hypothesis states that

Security prices reflect all publicly available information

An efficient capital market is one in which

Security prices reflect available information

The U.S. Securities and Exchange Commission periodically charges individuals for insider trading and claims those individuals have made unfair profits. Based on this fact, you would tend to argue that the financial markets are at best _____ form efficient.

Semistrong

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

Semistrong

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

Semistrong

If a market is strong form efficient, it also implies that

Semistrong form efficiency holds; and weak form efficiency holds; and one cannot earn abnormal returns with inside information

If the market is weak form efficient

Semistrong form efficiency may hold

An investor discovers that predictions about weather patterns published years in advance and found in the Farmer's Almanac are amazingly accurate. In fact, these predictions enable the investor to predict the health of the farm economy and therefore certain security prices. This finding is a violation of the

Semistrong form of the efficient market hypothesis

The following time period(s) is/are consistent with the bubble theory

Stock market crashes in 1929 and 1987

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

Strong

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

Strong Form Efficient

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

The abnormal return in an event study is described as

The excess return earned on the day of announcement for the stock

Under the concept of an efficient market, a random walk in stock prices means that

The unexplained portion of price change in one period is unrelated to the unexplained portion of price change in any other period

Evidence on stock prices finds that the sudden death of a chief executive officer causes stock prices to fall and the sudden death of an active founding chief executive officer causes stock price to rise. This contrary evidence happens because

The value of the founding executive was a negative to the firm.

If you excel in analyzing the future outlook of firms, you would prefer that the financial markets be ____ form efficient so that you can have an advantage in the marketplace.

Weak

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

Weak

Which form of the efficient market hypothesis implies that security prices reflect only information contained in past prices?

Weak

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

According to theory, studying historical prices in order to identify mispriced stocks will not work in markets that are _____ efficient

Weak, Semistrong, and Strong