FIN 303 Chapter 13

The higher returns from value stocks could be due to ___.

1. differences in risk 2. biases in commercial databases

Markets are more likely to be weak form efficient than semi-strong form efficient because ___.

1. easy profits would lead everyone to trade on historical information 2. historical stock price information is easy to get

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

True

If markets are efficient, prices impound _____ available information.

all

Strong-form market efficiency states that the market incorporates all information into stock prices. Strong-form efficiency implies that:

an insider or corporate officer cannot outperform the market by trading on inside information

Studies have shown that stock and commodity market prices:

follow a random walk

Investors consistently ___________ the odds that the future will turn out as they say.

overestimate

A market is said to be ______ form efficient if prices incorporate all information, both public and private.

strong

The statement that stock prices follow a random walk implies that:

successive price changes are independent of each other

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

Past

Match each information type to the form of market efficiency that identifies that type of information as being quickly and accurately reflected in stock prices.

Publicly available information

Arbitrage strategies may involve too much _____ to eliminate market efficiencies.

Risk

True or false: In an efficient market, investors will not pay others for what they can do equally well themselves. True false question.

True False Reason: They receive no benefit beyond doing it themselves and therefore will not pay for it. Correct Answer True

In order to test the semistrong form of the efficient-market hypothesis, researchers have mostly relied on the:

measurement of how rapidly security prices adjust to different news items

A market is said to be ______ form efficient if prices incorporate all publicly available information.

semistrong

The different forms of market efficiency are:

semistrong form strong form weak form

In order to test the strong form of market efficiency, researchers have examined the:

1. performance of pension funds 2. recommendations of professional security analysts 3. performance of mutual funds

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

All information, both public and private

Which of the following is a correct statement of weak-form efficiency?

If markets are efficient in the weak form, then it is impossible to make consistently superior profits by using trading rules based on past returns.

The study of behavioral finance has best helped explain which of the following investor behaviors?

Investors are generally too slow to update their beliefs in the face of new evidence.

Which of the following is a statement of semistrong form efficiency?

Stock prices will adjust immediately to public information.

True or False: The occasions where stock prices move wildly above their true value before eventually falling back to their original level, is known as a bubble.

True

True or false: If markets are efficient in the weak form, then it is impossible to make consistently superior profits by using trading rules based on past returns. True false question.

True False Reason: If markets are efficient in the weak form, then it is impossible to make consistently superior profits by using trading rules based on past returns. Correct Answer True

True or false: Market prices can tell us about the investors' opinions future prospects of a firm.

True False Reason: If we can read the entrails of prices we can gain information about investor opinions. Correct Answer True

Investors do not buy stocks for their unique qualities but for the prospect of ________. Therefore demand for an individual stock is highly elastic.

a fair return for the risk

For most stocks, a scatter plot chart of stock returns versus stock returns on the prior trading day will appear as:

a shotgun pattern centered close to the origin

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

agency

If you can beat the market by _____ then you are violating weak form efficiency.

analyzing historical price patterns

Investors do not buy stocks for their unique qualities but for the prospect of a fair return for the risk. Therefore demand for an individual stock is highly ________.

elastic

One argument against efficient markets is that stocks with high earnings-to-price ratios (value stocks) have ______ returns than stocks with low earnings-to-price ratios (growth stocks).

higher

The following are anomalies countering the efficient market hypothesis EXCEPT:

trading rules based on patterns the earnings announcement puzzle the small-firm effect the new-issue puzzle Correct Answer trading rules based on patterns

The overwhelming evidence on mutual funds is that, on average, they:

underperform broad-based indexes after fees

In Market Efficiency, where all prices incorporate all information contained in past prices, is called _____________.

weak efficiency

Markets are more likely to be weak form efficient than semi-strong form efficient because ___.

historical stock price information is easy to get easy profits would lead everyone to trade on historical information

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

immediately

It is said that in efficient markets we should trust market prices because they _________________.

include all available information about the value of a security

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

information

Generally, a firm is able to find positive-NPV opportunities among its:

investment decisions

The semistrong form of efficiency focuses on the economic ineffectiveness of the following type of information:

publicly available information

In an efficient market, investors _______ others for what they can do equally well themselves.

will not pay

Financing decisions differ from investment decisions because: (Select all that apply.)

1. it is more difficult to find positive-NPV financing strategies than positive-NPV investment strategies. 2. markets for financial assets are generally more competitive than real asset markets. 3. financing decisions are easier to reverse.