FIN 430 Chapter 8 Assignment/Poll Questions

I. There are no arbitrage opportunities II. Security prices react quickly to new information III. Active trading strategies will not consistently outperform passive strategies

Among the important characteristics of market efficiency is (are) that:

Technical analysis

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

technical analysis

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

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

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

high; high

Growth stocks usually exhibit ___ price-to-book ratios and ___ price-to-earnings ratios.

An abnormal price change to occur at the time of the announcement

If a firm announces an unexpected large cash dividend, the EMH would predict which of the following price changes at the announcement? No price change An abnormal price change to occur at the time of the announcement A gradual price change to occur for several weeks after the announcement

A superior risk-return trade-off

In an efficient market, professional portfolio management can offer all of the following benefits except which of the following?

the weak-form EMH

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 it once he had eliminated his loss. If other investors do the same to establish a trading pattern, this would contradict _______.

a. Consistent b. Violation c. Consistent d. Violation e. Violation

Note whether the following phenomena would be consistent with or a violation of the efficient market hypothesis. a. Nearly half of all professionally managed mutual funds are able to outperform the S&P 500 in a typical year. b. Money managers that outperform the market (on a risk-adjusted basis) in one year are likely to outperform in the following year. c. Stock prices tend to be predictably more volatile in January than in other months. d. Stock prices of companies that announce increased earnings in January tend to outperform the market in February. e. Stocks that perform well in one week perform poorly in the following week.

that markets are functioning efficiently

Random price movements indicate ________.

all publicly available information

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

technical analysis cannot; fundamental analysis cannot

The semistrong-form of the efficient market hypothesis implies that ___ generate abnormal returns and ___ generate abnormal returns.

Public and private

The strong form EMH asserts that stock prices fully reflect which of the following types of information? Market Market and public Public and private

all information, including inside information

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

worst; best

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.

all past information, including security price and volume data

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

To achieve complete diversification of the portfolio

Under the EMH, the major effort of the portfolio manager should be:

All information is cost free and available to everyone at the same time period

Which of the following is least likely an assumption behind the semi strong form of the EMH? In regard to timing, news announcements are independent of each other period All information is cost free and available to everyone at the same time period Investors adjust their expectations rapidly when confronted with new information

earnings forecasting

Which of the following is not a method employed by followers of technical analysis? charting relative strength analysis earnings forecasting trading around support and resistance levels

relative strength analysis

Which of the following is not a method employed by fundamental analysts? analyzing the Fed's next interest rate move relative strength analysis earnings forecasting estimating the economic growth rate

Low P/E stocks tend to have positive abnormal returns.

Which of the following observations would provide evidence against the semistrong form of the efficient market theory?

It implies that prices reflect all available information.

Which of the following statements are true if the efficient market hypothesis holds?

Strong-form

Which version of the efficient market hypothesis focuses on the most inclusive set of information?