Homework 6_ Chapter 8

Small stocks underperformed relative to the S&P 500 during the following years: 1965-1984 Never for a period longer than 1 year 1945-1964 1985-2014

1945-1964

Find a false statement about market efficiency. As the financial market is competitive enough and efficient, no research effort can be justified to outperform the market. The financial market history shows that most actively managed mutual funds under-performed index funds. Statisticians can easily detect the margin of superiority added by a professional manager. Skilled mutual fund managers with abnormal performance attract new capital and thus the funds grow in size.

As the financial market is competitive enough and efficient, no research effort can be justified to outperform the market.

True or false: It is often said that the most precious commodity on Wall Street is good advice

F

Which of the following best describes a drawback of implementing portfolio strategies based on analyst consensus recommendations? Overly positive and biased recommendations Frequent changes in analysts' recommendations Heavy trading activity and associated costs

Heavy trading activity and associated costs

Which of the following is not a role of portfolio management in an efficient capital market? Tax consideration Adjusting portfolio based on risk aversion Low cost diversification Identifying mispriced securities

Identifying mispriced securities

Which of the following cannot be used as evidence against the weak form of the efficient market hypothesis? Momentum effect January effect Positive serial correlation in stock returns Reversal effect

January effect

Which of the following are common issues taken with the Efficient Market Hypothesis? Backfill BIas Issue Magnitude Issue Selection Bias Issue Lucky Event Issue Survivorship Bias Issue

Magnitude Issue Selection Bias Issue Lucky Event Issue

_________ effect is the tendency of poorly performing stocks and well-performing stocks in one period to continue that abnormal performance in following periods.

Momentum

Which one of the following cannot be used to test the semi-strong form of the efficient market hypothesis? Price to earnings ratio effect Momentum effect Small-firm and January effect Neglected-firm effect

Momentum effect

Active vs. passive portfolio management: which of the following is related to active investment strategies? Buy and hold Index fund Overvalued stock

Overvalued stock

Find a false statement. If financial markets were inefficient, resources in the economy would be systematically misallocated. Deviations from market efficiency may offer profit opportunities to better-informed traders at the expense of less informed traders. Rational market forecasts in an efficient market will not turn out to be wrong as prices reflect all available information.

Rational market forecasts in an efficient market will not turn out to be wrong as prices reflect all available information. Reason: All available information is still far from complete information.

True or false: Due to the adjustment needed to account for risk when evaluating the success of investment strategies to test market efficiency, the tests are joint tests of market efficiency and the risk adjustment procedure.

T

__________ analysis is to search for predictable patterns in stock prices. This type of analysis will not generate consistent abnormal return if the capital market is at least __________ form efficient.

Technical Weak

In an efficient capital market, _________ among many well-backed, highly paid, aggressive analysts ensures that stocks prices reflect all available information.

competition

Which of the following are typical research determinants within the fundamental analysis framework? dividends prospects earnings prospects the moving average of the stock's historical price expectations of future interest rates the risk level of the firm

dividends prospects earnings prospects expectations of future interest rates the risk level of the firm

What data point would a practitioner of fundamental analysis find most useful to study? stock sell pressure stock buy pressure Tren stat earnings

earnings

If markets are , then a portfolio manager's primary goal is not to beat the market.

efficient

If _______ information can be used to generate _______ returns, the financial market is _________ _________ -form efficient.

insider abnormal semi strong

If additional predictors, such as dividend/price ratio, dividend yield and earnings yield aren't taken as proof that markets are inefficient, then these variables are proxying for variations in the ______ _________ _______ .

market risk premium

The bulk of evidence suggest that the efficient market hypothesis has been proven incorrect, resoundly. markets are competitive enough that only superior information or insight will earn superior risk adjusted returns markets are competitive enough that earning superior risk adjusted returns is impossible markets are inefficient enough that earning superior risk adjusted returns is time consuming but not difficult

markets are competitive enough that only superior information or insight will earn superior risk adjusted returns

In an efficient capital market, only ______ or ________ information will make stock prices move. new, known past, known past, unexpected new, unexpected

new, unexpected

In an efficient capital market, stock prices should follow a(n) ______ walk.

random

If investors could generate abnormal returns consistently by using the _______ of a stock, it would be evidence against the weak form of the efficient market hypothesis. price to earnings ratio insider information resistance level book to market ratio

resistance level

If markets were fundamentally inefficient and securities commonly mispriced, then this implies a systematic misallocation of ________ in the economy.

resources

The ______ effect and the book to market effect have been interpreted as the results of market's ________ to the ________ performance of firms.

reversal overreaction past

In the Fama and French (1993) three-factor model, what are the two additional factors, besides market returns? book-to-market ratio and price/earnings ratio size and price/earnings ratio size and leverage size and book-to-market ratio

size and book-to-market ratio

The primary conclusion of the efficient market hypothesis is the stock with the greatest return to risk ratio is also the most efficient stock. that when markets are efficient, the expected return is the risk-free rate. stock price already reflects available information. the stock with the greatest return potential is also the most efficient stock.

stock price already reflects available information.

One necessary condition for the efficient market hypothesis to exist is stock prices are predictable. stock prices follow a random walk. stock prices follow mean reversion. stock prices adjust slowly to new information allowing time to determine the accuracy of the new information.

stock prices follow a random walk.

If all investors attempted to follow a passive investment strategy, ________. stock prices would fail to reflect new information arbitrage opportunities would quickly disappear the financial market would become more efficient index funds would outperform actively managed funds

stock prices would fail to reflect new information

Since insiders can trade profitably, as documented in studies by Jaffe (1974), Scyhun (1986), Givoly and Plamon (1985) and others, then it is likely that markets are not weak form efficient. semi-strong form efficient. strong form efficient. semi-weak form efficient.

strong form efficient.

If a financial market is weak-form efficient, a stock price already reflects all information on ___________. the previous stock prices the minutes of the firm's board meeting the quality of management the balance sheet composition

the previous stock prices

The efficient market hypothesis has never been widely accepted on Wall Street because it implies that ____________. the search for undervalued securities is wasted effort investors should hold a diversified portfolio there is a selection bias when evaluating fund performance

the search for undervalued securities is wasted effort

Financial economists have found some easily observed variables can be used to predict broad market returns. Which one of the following is not one of the variables? dividend yield earnings yield credit spread total debt ratio

total debt ratio

If a financial market is ________ form efficient, stock prices should already be market trading data, such as price and volume data.

weak