Chapter 8

You know that firm XYZ is very poorly run. On a scale of 1 (worst) to 10 (best), you would give it a score of 3. The market consensus evaluation is that the management score is only 2. Should you buy or sell the stock?

Buy

Nearly half of all professionally managed mutual funds are able to outperform the S&P 500 in a typical year. a) Consistent with EMH b) Violation of EMH

a) Consistent with EMH

Stock prices tend to be predictably more volatile in January than in other months. a) Consistent b) Violation

a) Consistent with EMH

Which version of the EMH focuses on the most inclusive set of information? a) Strong-form b) Semistrong-form c) Weak-form

a) Strong-form

Which of the following statements is true if the EMH holds? a) It implies that future events can be forecast with perfect accuracy. b) It implies that prices reflect all available information. c) It implies that security prices change for no discernible reason. d) It implies that prices do not fluctuate.

b) It implies that prices reflect all available information

Suppose you find that prices of stocks before large dividend increases show on average consistently positive abnormal returns. Is this a violation of the EMH? a) Yes b) No

b) No

Money managers that outperform the market (on a risk-adjusted basis) in one year are likely to outperform in the following year. a) Consistent with EMH b) Violation of EMH

b) Violation of EMH

Stock prices of companies that announce increased earnings in January tend to outperform the market in February. a) Consistent b) Violation

b) Violation of EMH

Stocks that perform well in one week perform poorly in the following week. a) Consistent b) Violation

b) Violation of EMH

Which of the following would most appear to contradict the proposition that the stock market is weakly efficient? a) Over 25% of mutual funds outperform the market on average. b) Insiders earn abnormal trading profits. c) Every January, the stock market earns abnormal returns.

c) Every January, the stock market earns abnormal returns

Which of the following observations would provide evidence against the semistrong form of the efficient market theory? a) Mutual fund managers do not on average make superior returns. b) You cannot make superior profits by buying (or selling) stocks after the announcement of an abnormal rise in dividends. c) Low P/E stocks tend to have positive abnormal returns. d) In any year approximately 50% of mutual funds outperform the market.

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

Suppose that, after conducting an analysis of past stock prices, you come up with the following observations. Which would appear to contradict the weak form of the efficient market hypothesis? a) The average rate of return is significantly greater than zero. b) The correlation between the return during a given week and the return during the following week is zero. c) One could have made superior returns by buying stock after a 10% rise in price and selling after a 10% fall. d) One could have made higher-than-average capital gains by holding stocks with low dividend yields.

c) One could have made superior returns by buying stock after a 10% rise in price and selling after a 10% fall.

Which of the following sources of market inefficiency would be most easily exploited? a) A stock price drops suddenly due to a large block sale by an institution. b) A stock is overpriced because traders are restricted from short sales. c) Stocks are overvalued because investors are exuberant over increased productivity in the economy.

c) Stocks are overvalued because investors are exuberant over increased productivity in the economy

In an efficient market, professional portfolio management can offer all of the following benefits except which of the following? a) Low-cost diversification. b) A targeted risk level. c) Low-cost record keeping. d) A superior risk-return trade-off.

d) A superior risk-return trade-off