Ch 11

1. Patell and Woflson (1984) report that most of the stock-price response to corporate dividend or earnings announcements occurs within of the announcement. A. 10 minutes B. 45 minutes C. 2 hours D. 4 hours E. 2 trading days

A. 10 minutes

1. Which of the following are used by technical analysts to determine proper stock prices? I) Trendlines II) Earnings III) Dividend prospects IV) Expectations of future interest rates V) Resistance levels A. I and V B. I, II, and III C. II, III, and IV D. II, IV, and V E. All of the items are used by fundamental analysts.

A. I and V

1. Music Doctors has a beta of 2.25. The annualized market return yesterday was 12%, and the risk-free rate is currently 4%. You observe that Music Doctors had an annualized return yesterday of 15%. Assuming that markets are efficient, this suggests that A. bad news about Music Doctors was announced yesterday. B. good news about Music Doctors was announced yesterday. C. no news about Music Doctors was announced yesterday. D. interest rates rose yesterday. E. interest rates fell yesterday.

A. bad news about Music Doctors was announced yesterday. expected ret: 0.04+(2.25(0.12-0.04)) = 0.22 actual = 0.15 0.15 < 0.22 --> underperform

1. Chartists practice A. technical analysis. B. fundamental analysis. C. regression analysis. D. insider analysis. E. psychoanalysis.

A. technical analysis.

1. __________ above which it is difficult for the market to rise. A. A book value is a value B. A resistance level is a value C. A support level is a value D. A book value and a resistance level are values E. A book value and a support level are values

B. A resistance level is a value When stock prices have remained stable for a long period, these prices are termed resistance levels; technicians believe it is difficult for the stock prices to penetrate these resistance levels.

1. Studies of stock price reactions to news are called A. reaction studies. B. event studies. C. drift studies. D. reaction studies and event studies. E. event studies and drift studies.

B. event studies.

1. Google has a beta of 1.0. The annualized market return yesterday was 11%, and the risk-free rate is currently 5%. You observe that Google had an annualized return yesterday of 14%. Assuming that markets are efficient, this suggests that A. bad news about Google was announced yesterday. B. good news about Google was announced yesterday. C. no news about Google was announced yesterday. D. interest rates rose yesterday. E. interest rates fell yesterday.

B. good news about Google was announced yesterday. 0.05+1(0.11-0.05) = 0.11 actual 0.14 0.14 > 0.11 --> outperform

1. One of the most commonly heard components of technical analysis is the notion of a resistance level, which refers to A. price levels below which it is unlikely for them to fall. B. price levels above which it is difficult for stock prices to rise. C. stock performance over a recent period to performance of the market or other stocks in thesame industry. D. the present discounted value of all the payments a stockholder will receive from each shareof stock. E. the future value of all the payments a stockholder will receive from each share of stock.

B. price levels above which it is difficult for stock prices to rise.

1. If you believe in the _____ form of the EMH, you believe that stock prices only 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. A. semistrong B. strong C. weak D. All of the options are correct. E. None of the options are correct.

C. weak weak EMH assumes prices include info from technical analysis (but not fundamental)

1. In an efficient market the correlation coefficient between stock returns for two nonoverlapping time periods should be A. positive and large. B. positive and small. C. zero. D. negative and small. E. negative and large.

C. zero. In an efficient market there should be no serial correlation between returns from non-overlapping periods.

1. The main difference between the three forms of market efficiency is that A. the definition of efficiency differs. B. the definition of excess return differs. C. the definition of prices differs. D. the definition of information differs. E. they were discovered by different people.

D. the definition of information differs. what info is used in market's pricing of securities (and thus how/if can arbitrage)

1. In an efficient market, A. security prices react quickly to new information. B. security prices are seldom far above or below their justified levels. C. security analysis will not enable investors to realize superior returns consistently. D. one cannot make money. E. security prices react quickly to new information, security prices are seldom far above or below their justified levels, and security analysis will not enable investors to realize superior returns consistently.

E. security prices react quickly to new information, security prices are seldom far above or below their justified levels, and security analysis will not enable investors to realize superior returns consistently.

1. If you believe in the _______ form of the EMH, you believe that stock prices reflect all relevant information, including historical stock prices and current public information about the firm, but not information that is available only to insiders. A. semistrong B. strong C. weak D. All of the options are correct. E. None of the options are correct.

semi-strong

1. A common strategy for passive management is A. creating an index fund. B. creating a small firm fund. C. creating an investment club. D. creating an index fund and creating an investment club. E. creating a small firm fund and creating an investment club.

A. creating an index fund. The index fund is, by definition, passively managed. The other investment alternatives may or may not be managed passively.

1. The weather report says that a devastating and unexpected freeze is expected to hit Floridatonight during the peak of the citrus harvest. In an efficient market, one would expect the price of Florida Orange's stock to A. drop immediately. B. unable to determine. C. increase immediately. D. gradually decline for the next several weeks. E. gradually increase for the next several weeks.

A. drop immediately.

1. When Maurice Kendall examined the patterns of stock returns in 1953, he concluded that the stock market was _________. Now, these random price movements are believed to be _________ . A. inefficient; the effect of a well-functioning market B. efficient; the effect of an inefficient market C. inefficient; the effect of an inefficient market D. efficient; the effect of a well-functioning market E. irrational; even more irrational than before

A. inefficient; the effect of a well-functioning market Random price changes were originally thought to be driven by irrationality. Now, financial economists believe random price changes occur because markets are informationally efficient.

1. On November 22, the stock price of WalMart was $69.50, and the retailer stock index was 600.30. On November 25, the stock price of WalMart was $70.25, and the retailer stock index was 605.20. Consider the ratio of WalMart to the retailer index on November 22 and November 25. WalMart is the retail industry, and technical analysts who follow relative strength would advise the stock. A. outperforming; buying B. outperforming; selling C. underperforming; buying D. underperforming; selling E. equally performing; neither buying nor selling

A. outperforming; buying

1. Matthews Corporation has a beta of 1.2. The annualized market return yesterday was 13%, and the risk-free rate is currently 5%. You observe that Matthews had an annualized return yesterday of 17%. Assuming that markets are efficient, this suggests that A. bad news about Matthews was announced yesterday. B. good news about Matthews was announced yesterday. C. no news about Matthews was announced yesterday. D. interest rates rose yesterday. E. interest rates fell yesterday.

B. good news about Matthews was announced yesterday.

1. Womack focuses on changes in analysts' recommendations and finds that A. positive changes are associated with decreased increased stock prices of about 5%, and positive changes result in average price decreases of 11%. B. positive changes are associated with increased stock prices of about 5%, and negative changes result in average price decreases of 11%. C. positive changes are associated with increased stock prices of about 11%, and negative changes result in average price decreases of 5%. D. negative changes are associated with increased stock prices of about 5%, and positive changes result in average price decreases of 11%. E. negative changes are associated with increased stock prices of about 11%, and positive changes result in average price decreases of 5%.

B. positive changes are associated with increased stock prices of about 5%, and negative changes result in average price decreases of 11%

1. The stock market follows a A. nonrandom walk. B. random walk C. predictable pattern that can be exploited. D. nonrandom walk and predictable pattern that can be exploited. E. submartingale and predictable pattern that can be exploited.

B. random walk (and a submartingale)

1. If you believe in the ______ form of the EMH, you believe that stock prices reflect all available information, including information that is available only to insiders. A. semistrong B. strong C. weak D. All of the options are correct. E. None of the options are correct.

B. strong

1. When Maurice Kendall first examined stock price patterns in 1953, he found that A. certain patterns tended to repeat within the business cycle. B. there were no predictable patterns in stock prices. C. stocks whose prices had increased consistently for one week tended to have a net decreasethe following week. D. stocks whose prices had increased consistently for one week tended to have a net increasethe following week. E. the direction of change in stock prices was unpredictable, but the amount of change followed a distinct pattern.

B. there were no predictable patterns in stock prices.

1. __________ below which it is difficult for the market to fall. A. An intrinsic value is a value B. A resistance level is a value C. A support level is a value D. An intrinsic value and a resistance level are values E. A resistance level and a support level are values

C. A support level is a value When stock prices have remained stable for a long period, these prices are termed support levels; technicians believe it is difficult for the stock prices to penetrate these support levels.

1. Which of the following are investment superstars who have consistently shown superior performance? I) Warren Buffet II) Phoebe Buffet III) Peter Lynch IV) Merrill Lynch V) Jimmy Buffet A. I, III, and IV B. II, III, and IV C. I and III D. III and IV E. I, III, IV, and V

C. I and III Warren Buffet manages Berkshire Hathaway and Peter Lynch managed Fidelity's Magellan Fund.

1. Which of the following are used by fundamental analysts to determine proper stockprices? I) Trendlines II) Earnings III) Dividend prospects IV) Expectations of future interest rates V) Resistance levels A. I, IV, and V B. I, II, and III C. II, III, and IV D. II, IV, and V E. All of the items are used by fundamental analysts.

C. II, III, and IV not trendlines or resistance levels (technical)

1. Proponents of the EMH typically advocate A. buying individual stocks on margin and trading frequently. B. investing in hedge funds. C. a passive investment strategy. D. buying individual stocks on margin, trading frequently, and investing in hedge funds. E. investing in hedge funds and a passive investment strategy.

C. a passive investment strategy.

1. If you believe in the reversal effect, you should A. buy bonds in this period if you held stocks in the last period. B. buy stocks in this period if you held bonds in the last period. C. buy stocks this period that performed poorly last period. D. go short. E. buy stocks this period that performed poorly last period and go short.

C. buy stocks this period that performed poorly last period. The reversal effect states that stocks that do well in one period tend to perform poorly in the subsequent period, and vice versa.

1. A support level is the price range at which a technical analyst would expect the A. supply of a stock to increase dramatically. B. supply of a stock to decrease substantially. C. demand for a stock to increase substantially. D. demand for a stock to decrease substantially. E. price of a stock to fall.

C. demand for a stock to increase substantially. low price -- high demand A support level is considered to be a level below that the price of the stock is unlikely to fall and is believed to be determined by market psychology.

1. An event study describes a technique of empirical financial research that A. enables an observer to assess the impact of a particular event on a firm's risk. B. enables an observer to assess the impact of a particular event on a firm's standard deviation. C. enables an observer to assess the impact of a particular event on a firm's stock price. D. enables an observer to assess the impact of a firm's return on risk of the market. E. enables an observer to assess the impact of a firm's return on the market return.

C. enables an observer to assess the impact of a particular event on a firm's stock price

1. Two basic assumptions of technical analysis are that security prices adjust A. rapidly to new information, and market prices are determined by the interaction of supply and demand. B. rapidly to new information, and liquidity is provided by security dealers. C. gradually to new information, and market prices are determined by the interaction of supply and demand. D. gradually to new information, and liquidity is provided by security dealers. E. rapidly to information and to the actions of insiders.

C. gradually to new information, and market prices are determined by the interaction of supply and demand.

1. Nicholas Manufacturing just announced yesterday that its fourth quarter earnings will be 10% higher than last year's fourth quarter. Nicholas had an abnormal return of -1.2% yesterday. This suggests that A. the market is not efficient. B. Nicholas' stock will probably rise in value tomorrow. C. investors expected the earnings increase to be larger than what was actually announced. D. investors expected the earnings increase to be smaller than what was actually announced. E. earnings are expected to decrease next quarter.

C. investors expected the earnings increase to be larger than what was actually announced.

1. QQAG just announced yesterday that its fourth quarter earnings will be 35% higher than last year's fourth quarter. You observe that QQAG had an abnormal return of -1.7% yesterday. This suggests that A. the market is not efficient. B. QQAG stock will probably rise in value tomorrow. C. investors expected the earnings increase to be larger than what was actually announced. D. investors expected the earnings increase to be smaller than what was actually announced. E. earnings are expected to decrease next quarter.

C. investors expected the earnings increase to be larger than what was actually announced.

1. Music Doctors just announced yesterday that its first quarter sales were 35% higher thanlast year's first quarter. You observe that Music Doctors had an abnormal return of -2% yesterday. This suggests that A. the market is not efficient. B. Music Doctors stock will probably rise in value tomorrow. C. investors expected the sales increase to be larger than what was actually announced. D. investors expected the sales increase to be smaller than what was actually announced. E. earnings are expected to decrease next quarter.

C. investors expected the sales increase to be larger than what was actually announced. The negative abnormal return suggests that investors expected the sales increase to be larger than what was actually announced.

1. QQAG has a beta of 1.7. The annualized market return yesterday was 13%, and the risk- free rate is currently 3%. You observe that QQAG had an annualized return yesterday of 20%.Assuming that markets are efficient, this suggests that A. bad news about QQAG was announced yesterday. B. good news about QQAG was announced yesterday. C. no significant news about QQAG was announced yesterday. D. interest rates rose yesterday. E. interest rates fell yesterday.

C. no significant news about QQAG was announced yesterday. expected: 0.03 + 1.7(0.13-0.03) = 0.2 actual: 0.2 0.2 = 0.2 --> no news

1. Patell and Wolfson show that most of the stock price response to corporate dividend or earnings announcements occurs A. within 10 hours of the announcement. B. within 10 days of the announcement. C. within 10 minutes of the announcement. D. within 10 seconds of the announcement. E. within 60 minutes of the announcement.

C. within 10 minutes of the announcement.

1. ____________ focus more on past price movements of a firm's stock than on the underlying determinants of future profitability. A. Credit analysts B. Fundamental analysts C. Systems analysts D. Technical analysts

D. Technical analysts (random walk analyzers) Technicians attempt to predict future stock prices based on historical stock prices.

1. Studies of mutual fund performance A. indicate that one should not randomly select a mutual fund. B. indicate that historical performance is not necessarily indicative of future performance. C. indicate that professional management of the fund insures above market returns. D. indicate that one should not randomly select a mutual fund and indicate that historical performance in not necessarily indicative of future performance. E. indicate that historical performance in not necessarily indicative of future performance and indicate that professional management of the fund insures above market returns.

D. indicate that one should not randomly select a mutual fund and indicate that historical performance in not necessarily indicative of future performance.

1. LJP Corporation just announced yesterday that it would undertake an international joint venture. You observe that LJP had an abnormal return of 3% yesterday. This suggests that A. the market is not efficient. B. LJP stock will probably rise in value again tomorrow. C. investors view the international joint venture as bad news. D. investors view the international joint venture as good news. E. earnings are expected to decrease next quarter.

D. investors view the international joint venture as good news

1. If stock prices follow a random walk, A. it implies that investors are irrational. B. it means that the market cannot be efficient. C. price levels are not random. D. price changes are random. E. price movements are predictable

D. price changes are random.

1. The weak form of the efficient-market hypothesis contradicts A. technical analysis but supports fundamental analysis as valid. B. fundamental analysis but supports technical analysis as valid. C. both fundamental analysis and technical analysis. D. technical analysis but is silent on the possibility of successful fundamental analysis.

D. technical analysis but is silent on the possibility of successful fundamental analysis.

1. The Food and Drug Administration (FDA) just announced yesterday that they would approve a new cancer-fighting drug from King. You observe that King had an abnormal return of 0% yesterday. This suggests that A. the market is not efficient. B. King stock will probably rise in value tomorrow. C. King stock will probably fall in value tomorrow. D. the approval was already anticipated by the market.

D. the approval was already anticipated by the market.

1. The abnormal return due to an event is estimated as the difference between A. the stock's actual return and stock's expected return. B. the stock's actual return and the risk-free rate. C. the stock's expected return and a benchmark. D. the stock's actual return and a benchmark. E. the stock's actual return and the return on the t-bill.

D. the stock's actual return and a benchmark. Ri = a + b*rMt + et where rMt= market's rate of return in period t et = firm specific return a= average return in a period with 0 market return

1. A market decline of 23% on a day when there is no significant macroeconomic event ______ consistent with the EMH because _______ . A. would be; it was a clear response to macroeconomic news B. would be; it was not a clear response to macroeconomic news C. would not be; it was a clear response to macroeconomic news D. would not be; it was not a clear response to macroeconomic news

D. would not be; it was not a clear response to macroeconomic news

1. Work by Amihud and Mendelson (1986, 1991) A. argues that investors will demand a rate of return premium to invest in less liquid stocks. B. may help explain the small firm effect. C. may be related to the neglected firm effect. D. may help explain the small firm effect and may be related to the neglected firm effect. E. All of the options are correct.

E. All of the options are correct.

1. Proponents of the EMH think technical analysts A. should focus on relative strength. B. should focus on resistance levels. C. should focus on support levels. D. should focus on financial statements. E. are wasting their time.

E. are wasting their time. Technical analysts attempt to predict future stock prices from historic stock prices; proponents of EMH believe that stock price changes are random variables.

1. The weak form of the efficient-market hypothesis asserts that A. stock prices do not rapidly adjust to new information contained in past prices or past data. B. future changes in stock prices cannot be predicted from past prices. C. technicians cannot expect to outperform the market. D. stock prices do not rapidly adjust to new information contained in past prices or past data,and future changes in stock prices cannot be predicted from past prices. E. future changes in stock prices cannot be predicted from past prices, and technicians cannot expect to outperform the market.

E. future changes in stock prices cannot be predicted from past prices, and technicians cannot expect to outperform the market.

1. According to proponents of the efficient-market hypothesis, the best strategy for a small investor with a portfolio worth $40,000 is probably to A. perform fundamental analysis. B. exploit market anomalies. C. invest in Treasury securities. D. invest in derivative securities. E. invest in mutual funds.

E. invest in mutual funds.

1. Proponents of the EMH typically advocate A. an active trading strategy. B. investing in an index fund. C. a passive investment strategy. D. an active trading strategy and investing in an index fund. E. investing in an index fund and a passive investment strategy.

E. investing in an index fund and a passive investment strategy. Believers of market efficiency advocate passive investment strategies, and an investment in an index fund is one of the most practical passive investment strategies, especially for small investors.

1. A finding that ___________ would provide evidence against the semistrong form of the efficient-market theory. A. low P/E stocks tend to have positive abnormal returns B. trend analysis is worthless in determining stock prices C. one can consistently outperform the market by adopting the contrarian approach exemplified by the reversals phenomenon D. low P/E stocks tend to have positive abnormal returns and trend analysis is worthless in determining stock prices E. low P/E stocks tend to have positive abnormal returns and one can consistently outperform the market by adopting the contrarian approach exemplified by the reversals phenomenon

E. low P/E stocks tend to have positive abnormal returns and one can consistently outperform the market by adopting the contrarian approach exemplified by the reversals phenomenon