Chapter 8 Key Terms

7. When the market risk premium rises, stock prices will ________. A. rise B. fall C. recover D. have excess volatility

b. fall

1. Which of the following beliefs would not preclude charting as a method of portfolio management? A. The market is strong-form efficient. B. The market is semistrong-form efficient. C. The market is weak-form efficient. D. Stock prices follow recurring patterns.

d. Stock prices follow recurring patterns

6. Random price movements indicate ________. A. irrational markets B. that prices cannot equal fundamental values C . that technical analysis to uncover trends can be quite useful D. that markets are functioning efficiently

d. that markets are functioning efficiently

71. A technical analyst is most likely to be affiliated with which investment philosophy? A. active management B. buy and hold C. passive investment D. index funds

A. active management

69. Growth stocks usually exhibit ______ price-to-book ratios and ______ price-to-earnings ratios. A. low; low B. low; high C. high; low D. high; high

D. high; high

8. The small-firm effect is strongest in which month? A. January B. June C. July D. December

a. January

3. The weak form of the EMH states that ________ must be reflected in the current stock price. A. all past information, including security price and volume data B. all publicly available information C. all information, including inside information D. all costless information

a. all past information, including security and volume data

30. "Buy a stock if its price moves up by 2% more than the Dow Average" is an example of a _________________. A. trading rule B. market anomaly C . fundamental approach D. passive trading strategy

A. Trading rule

68. Value stocks usually exhibit ______ price-to-book ratios and ______ price-to-earnings ratios. A. low; low B. low; high C. high; low D. high; high

A. low; low

83. Most evidence indicates that U.S. stock markets are _______________________. A. reasonably weak-form and semistrong-form efficient B. strong-form efficient C . reasonably weak-form but not semistrong- or strong-form efficient D. neither weak-, semistrong-, nor strong-form efficient

A. reasonably weak-form and semistrong-form efficient

41. Even if the markets are efficient, professional portfolio management is still important because it provides investors with: I. Low-cost diversification II. A portfolio with a specified risk level III. Better risk-adjusted returns than an index A. I only B. I and II only C. II and III only D. I, II, and III

B. I and II only

54. According to the semistrong form of the efficient markets hypothesis, ____________. A. stock prices do not rapidly adjust to new information B. future changes in stock prices cannot be predicted from any information that is publicly available C. corporate insiders should have no better investment performance than other investors even if allowed to trade freely D. arbitrage between futures and cash markets should not produce extraordinary profits

B. future changes in stock prices cannot be predicted from any information that is publicly available

81. Fundamental analysis determines that the price of a firm's stock is too low, given its intrinsic value. The information used in the analysis is available to all market participants, yet the price does not seem to react. The stock does not trade on a major exchange. What concept might explain the ability to produce excess returns on this stock? A. January effect B. neglected-firm effect C. P/E effect D. reversal effect

B. neglected-firm effect

57. Stock market analysts have tended to be ___________ in their recommendations to investors. A. slightly overly optimistic B. overwhelmingly optimistic C. slightly overly pessimistic D. overwhelmingly pessimistic

B. overwhelmingly optimistic

78. The tendency of poorly performing stocks and well-performing stocks in one period to continue their performance into the next period is called the ________________. A. fad effect B. martingale effect C . momentum effect D. reversal effect

C . momentum effect

60. Which of the following contradicts the proposition that the stock market is weakly efficient? A. Over 25% of mutual funds outperform the market on average. B. Insiders earn abnormal trading profits. C. Every January, the stock market earns above-normal returns. D. Applications of technical trading rules fail to earn abnormal returns.

C. Every January, the stock market earns above-normal returns.

61. Which of the following would violate the efficient market hypothesis? A. Intel has consistently generated large profits for years. B. Prices for stocks before stock splits show, on average, consistently positive abnormal ret. C. Investors earn abnormal returns months after a firm announces surprise earnings. D. High-earnings growth stocks fail to generate higher returns for investors than do low earnings growth stocks.

C. Investors earn abnormal returns months after a firm announces surprise earnings.

62. Which of the following stock price observations would appear to contradict the weak form of the efficient market hypothesis? A. The average rate of return is significantly greater than zero. B. The correlation between the market return one week and the return the following week is zero. C. You could have consistently made superior returns by buying stock after a 10% rise in price and selling after a 10% fall. D. You could have consistently made superior returns by forecasting future earnings performance with your new Crystal Ball forecast methodology.

C. You could have consistently made superior returns by buying stock after a 10% rise in price and selling after a 10% fall.

74. Insiders are able to profitably trade and earn abnormal returns prior to the announcement of positive news. This is a violation of which form of efficiency? A. weak-form efficiency B. semistrong-form efficiency C. strong-form efficiency D. technical analysis

C. strong-form efficiency

29. Evidence supporting semistrong-form market efficiency suggests that investors should _________________________. A. rely on technical analysis to select securities B. rely on fundamental analysis to select securities C. use a passive trading strategy such as purchasing an index fund or an ETF D. select securities by throwing darts at the financial pages of the newspaper

C. use a passive trading strategy such as purchasing an index fund or an ETF

48. The _________ effect may explain much of the small-firm anomaly. I. January II. neglected III. liquidity A. I only B. II only C. II and III only D. I, II, and III

D. I, II, and III

56. Among the important characteristics of market efficiency is (are) that: I. There are no arbitrage opportunities. II. Security prices react quickly to new information. III. Active trading strategies will not consistently outperform passive strategies.

D. I, II, and III

84. Which of the following statements is (are) correct? A . If a market is weak-form efficient, it is also semistrong- and strong-form efficient. B. If a market is semistrong-form efficient, it is also strong-form efficient. C. If a market is strong-form efficient, it is also semistrong- but not weak-form efficient. D. If a market is strong-form efficient, it is also semistrong- and weak-form efficient.

D. If a market is strong-form efficient, it is also semistrong- and weak-form efficient.

46. J. M. Keyes put all his money in one stock, and the stock doubled in value in a matter of months. He did this three times in a row with three different stocks. J. M. got his picture on the front page of the Wall Street Journal. However, the paper never mentioned the thousands of investors who made similar bets on other stocks and lost most of their money. This is an example of the ________ problem in deciding how efficient the markets are. A. magnitude B. selection bias C. lucky event D. small firm

D. Small firm

63. The semistrong-form of the efficient market hypothesis implies that _____ _generate abnormal returns and ______ generate abnormal returns. A. technical analysis cannot; fundamental analysis can B. technical analysis can; fundamental analysis can C. technical analysis can; fundamental analysis cannot D. technical analysis cannot; fundamental analysis cannot

D. technical analysis cannot; fundamental analysis cannot

4. The semistrong form of the EMH states that ________ must be reflected in the current stock price. A. all security price and volume data B. all publicly available information C. all information, including inside information D. all costless information

b. all publicly available information

22. A mutual fund that attempts to hold quantities of shares in proportion to their representation in the market is called an __________ fund. A. stock B. index C. hedge D. money market

b. index

23. Choosing stocks by searching for predictable patterns in stock prices is called ________. A. fundamental analysis B. technical analysis C . index management D. random-walk investing

b. technical analysis

10. Proponents of the EMH typically advocate __________. A. a conservative investment strategy B. a liberal investment strategy C. a passive investment strategy D. an aggressive investment strategy

c. a passive investment strategy

5. The strong form of the EMH states that ________ must be reflected in the current stock price. A. all security price and volume data B. all publicly available information C. all information, including inside information D. all costless information

c. all information, including inside information

20. You believe that stock prices reflect all information that can be derived by examining market trading data such as the history of past stock prices, trading volume, or short interest, but you do not believe stock prices reflect all publicly available and inside information. You are a proponent of the ____________ form of the EMH. A. semistrong B. strong C. weak D. perfect

c. weak