Summer Seminar Quiz 2

**The small-firm effect provides evidence against market efficiency

TRUE

If a stock's returns follow a random walk pattern, then one should expect to calculate a statistically insignificant autocorrelation coefficient, calculated between each successive day's stock return

True

If capital markets are completely efficient, then the purchase or sale of any security at the prevailing market price is never a positive-NPV transaction.

True

In a completely competitive market, security prices follow a random walk.

True

The collections of evidence against market efficiency are referred to as "puzzles" or anomalies.

True

When a firm announces a dividend change, or publishes its latest earnings, the major part of any price adjustment usually takes place within a few minutes of the announcement.

True

An actual abnormal stock return is defined as the:

return on the stock minus the return that should have been earned given its riskiness.

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:

strong-form hypothesis of market efficiency.

Predictable cycles in stock price movements:

tend to self-destruct as soon as investors recognize them;

**Behavioral finance and technical analysis are basically the same theory

FALSE

If the abnormal return for a stock during the first week is +5% and +3% during the second week, what is the compounded abnormal return for the two-week period?

(1 + 5%) *(1 + 3%) - 1 = 8.15%

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

A zero- NPV Transaction

Generally, a firm can find positive-NPV opportunities among its:

Capital Investment Decisions

Weak-form efficiency implies that past stock returns:

Do not matter

For a corporation, financing decisions are typically harder to reverse than investment decisions

FALSE

In an efficient market, information is costless

FALSE

The weak form of efficient market theory implies that technical analysis is valuable

FALSE

Informational efficiency in financial markets results in stock prices being

Fairer

A majority of research supports the theory that past stock movements can predict future asset prices

False

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

The statement that stock prices follow a random walk implies that: I) the correlation coefficient between successive price changes (autocorrelation) is not significantly different from zero; II) successive price changes are positively related; III) successive price changes are negatively related IV) the autocorrelation coefficient is positive

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

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

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, 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 returns follow a random walk

I, II, III

The semistrong form of the efficient markets hypothesis has been tested by measuring how rapidly security prices react to various news items like: I) earnings announcements; II) dividend announcements; III) news of takeovers; IV) macroeconomic information

I, II, III, IV

**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

The study of behavioral finance has best helped explain which of the following investor behaviors?

Investors are generally too slow to update their beliefs in the face of new evidence.

**If markets are efficient, which of the following investors should achieve superior returns over time?

None of the options

The semistrong form of efficiency focuses on the economic ineffectiveness of the following type of information:

Publicly available information

State the semistrong form of market efficiency and its implications.

Security prices reflect all publicly available information. If markets are efficient in this sense, then prices will adjust immediately to public announcements.

State the strong form of market efficiency

Security prices reflect all the information that is available to the investors.

State the weak form of market efficiency and its implications.

Security prices reflect the information contained in the record of past prices. This implies that prices will follow a random walk. It is impossible to make consistently superior profits by studying past returns.

Behavioral finance deals with the idea that individual investors have built-in biases and misconceptions that can drive prices away from fair values

TRUE

If stock returns follow a random walk pattern, then knowing the history of stock returns is not useful for predicting future stock returns

TRUE

Stock price cycles or patterns tend to self-destruct as soon as investors recognize them through:

Trading by Investors

) In an efficient market, investors will not pay others what they can do equally well themselves.

True

For most stocks, a scatter plot chart of stock returns versus stock returns on the prior trading day will appear as:

a shotgun pattern centered close to the origin

Strong-form market efficiency states that the market incorporates all information into stock prices. Strong-form efficiency implies that:

an insider or corporate officer cannot outperform the market by trading on the inside information

List the six lessons of market efficiency.

• markets have no memory • trust market prices • read the entrails • there are no financial illusions • the do-it yourself alternative • seen one stock, seen them all