chapter 14

The notion that actual capital markets, such as the NYSE, are fairly priced is called the: A. Efficient Markets Hypothesis (EMH). B. Law of One Price. C. Open Markets Theorem. D. Laissez-Faire Axiom. E. Monopoly Pricing Theorem.

a

Which form of the efficient market hypothesis implies that security prices reflect only information contained in past prices? A. Weak form B. Semistrong form C. Strong form D. Hard form E. Past form

a

A semistrong form efficient market is distinct from a weak form efficient market by: A. incorporating only random movements in the price. B. incorporating all publicly available information in the price. C. incorporating inside information in the price. D. All of these. E. None of these.

b

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: A. moderate form of the efficient market hypothesis. B. semistrong form of the efficient market hypothesis. C. strong form of the efficient market hypothesis. D. weak form of the efficient market hypothesis. E. None of these.

b

The hypothesis that market prices reflect all available information of every kind is called _____ form efficiency. A. open B. strong C. semistrong D. weak E. stable

b

The semistrong form of the efficient market hypothesis states that: A. all information is reflected in the price of securities. B. security prices reflect all publicly available information. C. future prices are predictable. D. Both all information is reflected in the price of securities; and future prices are predictable. E. None of these.

b

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. a predictable amount based on the past prices. B. a component based on new information unrelated to past prices. C. the security's risk. D. the risk free rate. E. None of these.

b

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: A. moderate form of the efficient market hypothesis. B. semistrong form of the efficient market hypothesis. C. strong form of the efficient market hypothesis. D. weak form of the efficient market hypothesis. E. None of these.

c

According to the efficient market hypothesis, financial markets fluctuate daily because they: A. are inefficient. B. slowly react to new information. C. are continually reacting to new information. D. offer tremendous arbitrage opportunities. E. only reflect historical information.

c

If the financial markets are efficient, then investors should expect their investments in those markets to: A. earn extraordinary returns on a routine basis. B. generally have positive net present values. C. generally have zero net present values. D. produce arbitrage opportunities on a routine basis. E. produce negative returns on a routine basis.

c

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: A. rise gradually over the next few days. B. decline gradually over the next few days. C. rise on the same day to the new price. D. stay at the same price, with no net effect. E. drop on the same day to the new price.

c

The hypothesis that market prices reflect all publicly available information is called _____ form efficiency. A. open B. strong C. semistrong D. weak E. stable

c

The market price of a stock moves or fluctuates daily. This fluctuation is: A. inconsistent with the semistrong efficient market hypothesis because prices should be stable. B. inconsistent with the weak form efficient market hypothesis because all past information should be priced in. C . consistent with the semistrong form of the efficient market hypothesis because as new information arrives daily prices will adjust to it. D. consistent with the strong form because prices are controlled by insiders. E. None of these.

c

Under the concept of an efficient market, a random walk in stock prices means that: A. there is no driving force behind price changes. B. technical analysts can predict future price movements to earn excess returns. C. the unexplained portion of price change in one period is unrelated to the unexplained portion of price change in any other period. D . the unexplained portion of price change in one period that cannot be explained by expected return can only be explained by the unexplained portion of price change in a prior period. E. None of these.

c

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: A. moderate form of the efficient market hypothesis. B. semistrong form of the efficient market hypothesis. C. strong form of the efficient market hypothesis. D. weak form of the efficient market hypothesis. E. None of these.

d

If the weak form of efficient markets holds, then: A. technical analysis is useless. B. stock prices reflect all information contained in past prices. C. stock prices follow a random walk. D. All of these. E. None of these.

d

In an efficient market, the price of a security will: A. always rise immediately upon the release of new information with no further price adjustments related to that information. B. react to new information over a two-day period after which time no further price adjustments related to that information will occur. C. rise sharply when new information is first released and then decline to a new stable level by the following day. D. react immediately to new information with no further price adjustments related to that information. E . be slow to react for the first few hours after new information is released allowing time for that information to be reviewed and analyzed.

d

Insider trading does not offer any advantages if the financial markets are: A. weak form efficient. B. semiweak form efficient. C. semistrong form efficient. D. strong form efficient. E. inefficient.

d

The hypothesis that market prices reflect all historical information is called _____ form efficiency. A. open B. strong C. semistrong D. weak E. stable

d

Which of the following would be indicative of inefficient markets? A. Overreaction and reversion B. Delayed response C. Immediate and accurate response D. Both Overreaction and reversion; and Delayed response E. Both Overreaction and reversion; and Immediate and accurate response

d

Which one of the following statements is correct concerning market efficiency? A. Real asset markets are more efficient than financial markets. B. If a market is efficient, arbitrage opportunities should be common. C. In an efficient market, some market participants will have an advantage over others. D. A firm will generally receive a fair price when it sells shares of stock. E. New information will gradually be reflected in a stock's price to avoid any sudden change in the price of the stock.

d

According to theory, studying historical prices in order to identify mispriced stocks will not work in markets that are _____ efficient. I. weak form II. semistrong form III. strong form A. I only B. II only C. I and II only D. II and III only E. I, II, and III

e

An efficient capital market is one in which: A. brokerage commissions are zero. B. taxes are irrelevant. C. securities always offer a positive rate of return to investors. D. security prices are guaranteed by the U.S. Securities and Exchange Commission to be fair. E. security prices reflect available information.

e

An investor discovers that stock prices change drastically as a result of certain events. This finding is a violation of the: A. moderate form of the efficient market hypothesis. B. semistrong form of the efficient market hypothesis. C. strong form of the efficient market hypothesis. D. weak form of the efficient market hypothesis. E. None of these.

e

If a market is strong form efficient, it also implies that: A. semistrong form efficiency holds. B. weak form efficiency holds. C. one cannot earn abnormal returns with inside information. D. Both semistrong form efficiency holds; and one cannot earn abnormal returns with inside information. E. semistrong form efficiency holds; and weak form efficiency holds; and one cannot earn abnormal returns with inside information.

e

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. A. I and III only B. II and IV only C. I, II, and III only D. II, III, and IV only E. I, II, III, and IV

e