FIN 3710: Chapter 8 [Final Review]

If the daily returns on the stock market are normally distributed with a mean of 0.05% and a standard deviation of 1.00%, the probability that the stock market would have a return of -23.00% or worse on one particular day (as it did on Black Monday) is approximately __________.

A. 0.0%

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

Assume that a company announces unexpectedly high earnings in a particular quarter. In an efficient market one might expect _____________.

A. an abnormal price change immediately following the announcement

The small firm in January effect is strongest ________.

A. early in the month

"Buy a stock if its price moves up by 2% more than the Dow Average," is an example of a _________________.

A. filter rule

In a recent study, Fama and French found that the return on the aggregate stock market was __________ when the dividend yield was higher

A. higher

"Active investment management may generate additional returns at times of about 0.1%. However, the standard deviation of the typical well diversified portfolio is about 20%, so it is very difficult to statistically identify any increase in performance." Even if true, this statement is an example of the _________ problem in deciding how efficient the markets are.

A. magnitude

When stock returns exhibit positive serial correlation, this means that __________ returns tend to follow ___________ returns.

A. positive; positive

If you believe in the __________ form of the EMH, you believe that stock prices reflect all publicly available information but not information that is available only to insiders.

A. semi-strong

If the U.S. capital markets are not informationally efficient ______.

A. the markets cannot be allocationally efficient

Small firms have tended to earn abnormal returns primarily in __________.

A. the month of January

In a 1953 study of stock prices, Maurice Kendall found that ________.

A. there were no predictable patterns in stock prices

Banz found that, on average, the risk-adjusted returns of small firms __________.

A. was higher than the risk-adjusted returns of large firms

The tendency when the ______ performing stocks in one period are the best performers in the next and the current ________ performers are lagging the market later is called the reversal effect.

A. worst, best

According to results by Seyhun __________.

A.investors cannot usually earn abnormal returns by following inside trades after knowledge of the trades are made public

You are an investment manager who is currently managing assets worth $6 billion. You believe that active management of your fund could generate between an additional one tenth of 1% return on the portfolio. If you want to make sure your active strategy adds value, how much can you spend on security analysis?

B. $6,000,000

Studies show that the bid-ask spread for the least liquid stocks may be as high as ______.

B. 5%

Even if the markets are efficient, professional portfolio management is still important because it provides investors with _________. I. low cost diversification II. provides a portfolio with a specified risk level III. provides better risk adjusted returns than an index

B. I and II only

Which of the following is not a method employed by fundamental analysts?

B. Relative strength analysis

Which of the following is not an issue that is central to the debate regarding market efficiency?

B. The tax loss selling issue

Most of the stock price response to a corporate earnings or dividend announcement occurs within ________________.

B. about 10 minutes

The semi-strong form of the EMH states that ________ must be reflected in the current stock price.

B. all publicly available information

When the market risk premium rises, stock prices will ________.

B. fall

According to the semi-strong form of the efficient markets hypothesis ____________.

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

DeBondt and Thaler (1985) found that the poorest performing stocks in one time period experienced __________ performance in the following period and the best performing stocks in one time period experienced __________ performance in the following time period.

B. good, poor

A mutual fund which attempts to hold quantities of shares in proportion to their representation in the market is called a __________ fund.

B. index

Stock prices that are stable over time _______.

B. indicate that the market is not incorporating new information into current stock prices

Fama and French (1991) and Reinganum (1988) found that firms with __________ market/book ratios had higher stock returns.

B. low

Fundamental analysis is likely to yield best results for _______.

B. neglected stocks

Stock market analysts have tended to be ___________ in their recommendations to investors.

B. overwhelmingly optimistic

If you believe in the __________ form of the EMH, you believe that stock prices reflect all relevant information including information that is available only to insiders.

B. strong

Choosing stocks by searching for predictable patterns in stock prices is called ________.

B. technical analysis

Joe bought a stock at $57 per share. The price promptly fell to $55. Joe held on to the stock until it again reached $57 and then he sold once he had eliminated his loss. If other investors do the same to establish a trading pattern this would contradict _______.

B. the weak-form EMH

You believe that you can earn 2% more on your portfolio if you engage in full time stock research. However, the additional trading costs and tax liability from active management will cost you about 0.5%. You have a $800,000 stock portfolio. What is the most you can afford to spend on your research?

C. $12,000

__________ is the return on a stock beyond what would be predicted from market movements alone.

C. An abnormal return

Which of the following would violate the efficient market hypothesis?

C. Earning abnormal returns after a firm announces surprise earnings.

Which of the following is not a method employed by followers of technical analysis?

C. Earnings forecasting

Which of the following contradicts the proposition that the stock market is weakly efficient?

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

Proponents of the EMH typically advocate __________.

C. a passive investment strategy

The strong form of the EMH states that ________ must be reflected in the current stock price.

C. all information including inside information

Basu found that firms with high P/E ratios __________.

C. earned lower average returns than firms with low P/E ratios

Jaffee found that stock prices __________ after insiders intensively bought shares and __________ after insiders intensively sold shares.

C. increased, decreased

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.

C. lucky event

The primary objective of fundamental analysis is to identify __________.

C. mis-priced stocks

The term random walk is used in investments to refer to ______________.

C. stock price changes that are random and unpredictable

The broadest information set is included in the

C. strong form efficiency argument

Most people would readily agree that the stock market is not _________.

C. strong form efficient

Evidence supporting semi-strong form market efficiency suggests that investors should _________________________.

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

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 or inside information. You are a proponent of ____________.

C. weak

The Fama and French evidence that high book to market firms outperform low book to market firms even after adjusting for beta means _________.

C.either high book to market firms are underpriced or the book to market ratio is a proxy for a systematic risk factor

Important characteristic(s) of market efficiency is 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

The _________ effect may explain much of the small firm anomaly. I. January effect II. neglected effect III. liquidity effect

D. I, II and III

Which of the following beliefs would not preclude charting as a method of portfolio management?

D. Stock prices follow recurring patterns.

You are looking to invest in one of three stocks. Stock A has high expected earnings growth, Stock B has only modest expected earnings growth and Stock C is expected to generate poor earnings growth. Which stock is likely to generate the greatest alpha for you?

D. You cannot tell from the information given

Proponents of the EMH think technical analysts __________.

D. are wasting their time

According to recent research securities markets fully adjust to earnings announcements _______.

D. gradually over time

Most tests of semi-strong efficiency are _________.

D. joint tests of market efficiency and the risk adjustment measure

A market anomaly refers to _______.

D. price behavior that differs from the behavior predicted by the efficient market hypothesis

Evidence suggests that there may be _______ momentum and ________ reversal patterns in stock price behavior.

D. short-run, long run

Random price movements indicate ________.

D. that markets are functioning efficiently

Fama and French have suggested that many market anomalies can be explained as manifestations of ____________.

D. varying risk premiums