CH. VIII

semi-strong efficiency

All public information is reflected in the share price. It implies that security analysts who try to identify mispriced shares are wasting their time, and thus, is controversial. information includes past prices, quality, PE, balance sheet materials, patents, earnings, etc.

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 best describes a drawback of implementing portfolio strategies based on analyst consensus recommendations?

Heavy trading activity and associated costs

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

Heavy trading activity and associated costs

Which of the following is not a role of portfolio management in an efficient capital market?

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

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; If we find a strategy that generates abnormal returns, we must choose between rejecting the EMH and rejecting the risk-adjustment technique.

empirical evidence

data collected through direct observation

What data point would a practitioner of fundamental analysis find most useful to study?

earnings

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

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

Because both types of analysis are based on public information, neither should generate

excess profits if markets are operating efficiently.

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

january effect

semi strong tests

market anomalies

If additional predictors, such 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 competitive enough that earning superior risk adjusted returns is impossible markets are inefficient enough that earning superior risk adjusted returns is time consuming but not difficult markets are competitive enough that only superior information or insight will earn superior risk adjusted returns the efficient market hypothesis has been proven incorrect, resoundly.

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

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

momentum effect

One notable exception to use technical analysis is the apparent success of 2 strats, called

momentum for short and intermediate horizons and the reversal effect for the long term

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

new, unexpected

Proponents of the efficient market hypothesis often advocate

passive as opposed to active investment strategies.

Strong efficiency

past, public, and private info is known; not even insiders can influence the market

Weak-form tests deal with

patters in stock market returns

momentum effect is the tendency of

poorly performing stocks and well-performing stocks in one period to continue that abnormal performance in following periods.

Reversal effect is the tendency of

poorly performing stocks and well-performing stocks in one period to experience reversals in the following period.

weak-form efficiency

prices reflect all past market information such as price and volume

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

random

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.

resistance level

If insider information can be used to generate abornmal returns, the financial market is

semi strong form efficient

The primary conclusion of the efficient market hypothesis is

stock price already reflects available information.

One necessary condition for the efficient market hypothesis to exist is

stock prices follow a random walk.

If all investors attempted to follow a passive investment strategy, ________.

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.

_ 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 a financial market is weak-form efficient, a stock price already reflects all information on ___________.

the previous stock prices

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

market anomalies

value vs. growth effect PE effect small firm effect neglected firm effect post-earnings-announcement price drift

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

weak