Corporate Finance Chapter 12 Smartbook

What is confirmation bias?

It is the tendency to seek and interpret information that verifies existing beliefs.

Predictable cycles in stock price movements:

tend to self-destruct as soon as investors recognize them

Stock price cycles or patterns tend to self-destruct as soon as investors recognize them through:

trading by investors

True or False: Weak form efficiency considers trading strategies that use information based solely on past stock prices.

true

If the market changes and stock prices instantly and fully reflect new information, which time path does such a change exhibit?

An efficient market reaction

______ occurs, if the stock market changes, and stock prices adjust instantly, and the stock fully reflects all new information.

An efficient market reaction

True or false If the market is strong-form efficient, insiders are able to make money.

False Insiders cannot make money because, according to this theory, all information, including private insider information, is already reflected in the price of a security, meaning no one can gain an advantage by acting on insider knowledge.

A market is said to be semistrong efficient if prices incorporate which type of information?

publicly available information

Agents may have different incentives than investors leading to ______ problems.

agency

Agents may have different incentives than investors leading to __________ problems.

agency

Strong-form efficiency defines available information as _______.

both private and publicly held information

According to the weak-form efficiency, a recent price rise ______.

does not imply that the equity is overvalued

If behavioralists are correct about limits to arbitrage activity, then the absence of profit opportunities does not necessarily imply that markets are

efficient

If behavioralists are correct about limits to arbitrage activity, then the absence of profit opportunities does not necessarily imply that markets are ____.

efficient

In an efficient market, firms should expect to receive ______ value for securities they sell.

fair

True or false: Behavioral finance deals with the idea that individual investors have no biases or misconceptions that can drive prices away from fair values.

false

An efficient market is one in which any change in available information will be reflected in the company's stock price ___.

immediately

To test semistrong market efficiency, we can compare actively managed mutual funds with ______.

index funds

An efficient market is one that fully reflects all available ______.

information

The concept of limits to arbitrage _______.

is an argument for the behavioral finance theory

Whether analyzing a real or a financial asset we will use ____________ to make the best decision.

net present value

According to the random walk theory, if the prices have been going up for the last 10 days, on the 11th day the prices will:

not necessarily go up

According to the random walk theory, if the prices have been going up for the last 20 days, on the 21th day the prices will:

not necessarily go up

Weak form efficiency considers trading strategies that use information based solely on ______ stock prices.

past

The weak form of the market efficiency incorporates ______.

past prices information

Confirmation bias occurs when:

people favor information that confirms their preconceived beliefs.

True or false: Behavioral finance deals with the idea that individual investors have built-in biases and misconceptions that can drive prices away from fair values.

true Reason: People are not 100% rational 100% of the time and behavioral finance studies this.