Quiz 1 Review

Informational efficiency in financial markets results in stock prices being:

fairer.

Technical analysis

identify trends

Fundamental Analysis

research stock value using NPV and other cash flow measurements

Three forms of market efficiency

weak form, semi-strong form, strong form

A small business received a five-year $1,000,000 loan at a subsidized rate of 3% per year. The firm will pay 3% annual interest payment each year and the principal at the end of five years. If market interest rates on similar loans are 6% per year, what is the NPV of the loan? (Ignore taxes.)

+$126,371 NPV = +1,000,000 - [((30,000/1.06) + ... + (30,000/(1.06^5)) + (1,000,000/(1.06^5))] = 126,371.

The semistrong form of efficiency focuses on the economic ineffectiveness of the following type of information: A. insider information. B. publicly available information. C. privileged information. D. only information provided by the SEC.

B. publicly available information.

An abnormal stock return is calculated as the: A. return on the stock minus the expected stock return. B. return on the stock minus the return on the market. C. return on the stock for the current period minus the return on the stock for the previous period. D. return on the stock minus the return on a comparable firm.

B. return on the stock minus the return on the market.

Suppose that 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 firms that will be sued. This hypothetical finding would violate the: A. weak-form hypothesis of market efficiency. B. semistrong form hypothesis of market efficiency. C. strong-form hypothesis of market efficiency. D. none of the hypotheses of market efficiency.

C. strong-form hypothesis of market efficiency.

If markets are efficient, which of the following investors should achieve superior returns over time? A. Investors who choose stocks by throwing darts at a list of stocks in the financial pages of a newspaper B. Analysts who spend considerable time evaluating the best stocks to buy C. Mutual fund managers who manage other people's money for a living D. None of the options

D. None of the options

If the efficient market hypothesis holds, investors should expect: I) to receive a fair price for their security II) to earn a normal rate of return on their investments III) to be able to pick stocks that will outperform the market

I and II only

The statement that stock prices follow a random walk implies that: I) successive price changes are independent of each other; II) successive price changes are positively related; III) successive price changes are negatively related; IV) the autocorrelation coefficient is either +1.0 or -1.0

I only

Which of the following is a statement of weak-form efficiency? I) If markets are efficient in the weak form, then it is impossible to make consistently superior profits by using trading rules based on past returns. II) If markets are efficient in the weak form, then prices will adjust immediately to public information. III) If markets are efficient in the weak form, then prices reflect all information.

I only

Financing decisions differ from investment decisions because: I) financing decisions are easier to reverse; II) markets for financial assets are generally more competitive than real asset markets; III) generally, financing decisions have NPVs very close to zero

I, II, and III

If the weak form of market efficiency holds, then: I) technical analysis is useless; II) stock prices reflect all information contained in past prices; III) stock price returns follow a random walk

I, II, and III

Which of the following statements is(are) true if the strong-form efficient market hypothesis holds? I) Analysts can easily forecast stock price changes. II) Financial markets are irrational. III) Stock returns follow a particular pattern. IV) Stock prices reflect all available information.

IV only

Confirmaion bias

More weight is given to information that agrees with a preexisting opinion. Confirmation bias exists when a person tends to spend too much time trying to prove themselves correct rather than searching for information that might prove them wrong.

If capital markets are efficient, then the sale or purchase of any security at the prevailing market price is generally:

a zero-NPV transaction.