CFA level 1 - EI - market efficiency

The efficiency of a market is affected by what 3 important factors?

1. number of market participants and depth of analyst coverage 2. information availability 3. limits to trading

A number of anomalies have been documented that contradict the notion of market efficiency. What are the 3 most common anomolies?

1. size anomaly 2. January anomaly 3. winners-losers anomalies

When markets are efficient, are intrinsic and market value the same or difference?

the two should be the same or very close

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 market anomaly. evidence of market inefficiency. a strategy to produce future abnormal returns.

a market anomaly

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? Passive portfolio management. Active portfolio management based on technical analysis. Active portfolio management based on fundamental analysis.

active portfolio management based on fundamental analysis

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: leptokurtic. symmetrical. 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: decreased. remained the same. increased.

decreased

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

momentum pattern

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: dividend yields. market-to-book ratios. price-to-earnings ratios.

dividend yields

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

equal to zero

In the strong form, asset prices reflect what?

fully reflect all information, which includes both public and private information

In the weak form, asset prices reflect what?

fully reflect all market data, which refers to all past price and trading volume information

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

greater than the asset's market value

Whereas behavioral finance is helpful in understanding observed decisions, a market can still be considered efficient even if market participants exhibit seemingly irrational behaviors, such as what?

herding

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: lower. higher. the same.

higher

Regulation that restricts some investors from participating in a market will most likely: impede market efficiency. not affect market efficiency. 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: increase. decrease. remain the same.

increase

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

insiders trading with nonpublic information

Behavioral finance uses human psychology, such as behavioral biases, in an attempt to explain what?

investment decisions

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

loss aversion

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

new information coming into the market

Does empirical evidence support the strong form of the efficient market hypothesis?

no

With respect to rational and irrational investment decisions, the efficient market hypothesis requires: only that the market is rational. that all investors make rational decisions. 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: earn abnormal returns. outperform active trading strategies. underperform active trading strategies.

outperform active trading strategies

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

receiving additional information about the company (Explanation: If markets are efficient, the information from the annual report is reflected in the stock prices; therefore, the gradual changes must be from the release of additional information.)

In the semi-strong form, asset prices reflect what?

reflect all publicly known and available information

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

release of new information in January (Explanation: The excess returns in January are not attributed to any new information or news; however, research has found that part of the seasonal pattern can be explained by tax-loss selling and portfolio window dressing.)

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

restricting traders' ability to short sell

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

security prices reflect all publicly known and available information

Most empirical evidence supports the idea that securities markets in developed countries are what type of efficient market?

semi-strong-form efficient

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

semi-strong-form inefficient

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

strong-form efficient

What is the general conclusion drawn from the efficient market hypothesis?

that it is not possible to beat the market on a consistent basis by generating returns in excess of those expected for the level of risk of the investment

What is market value?

the price at which an asset can be bought or sold

What is intrinsic value?

the true value of an asset

When markets are not efficient, are intrinsic and market value the same or difference?

the two can diverge significantly

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

There are three forms of efficient markets, each based on what is considered to be the information used in determining asset prices. What are they?

weak form, semi-strong form, and strong form

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

weak-form efficient

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

weak-form inefficient (Explanation: Technical analysts use past prices and volume to predict future prices, which is inconsistent with the weakest form of market efficiency (i.e., weak-form market efficiency). Weak-form market efficiency states that investors cannot earn abnormal returns by trading on the basis of past trends in price and volume.)

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

zero