FINA 3331 Ch. 12

Which of the following is the best definition of "behavioral finance?"

Behavioral finance studies how investor biases and emotions affect stock prices.

Which of the following is an investment strategy that relies on the "overreaction hypothesis?"

Contrarian

What is the most important determinant of stock price in and efficient market?

Information about past events and beliefs about future events

What is meant by the "disposition effect?"

Investors are more likely to sell winners than losers

Which is NOT an investor trading bias?

Mean reversion

Research suggests company insiders earn abnormal returns on their stock transactions. What does this research mean for the efficient market hypothesis (EMH)?

Profitable insider trading contradicts only the strong form of the EMH

What is meant by the expression stock prices follow a "random walk?"

Stock price changes do not depend statistically on prior price changes.

Which statement regarding Warren Buffett's wager with Protege Funds is most accurate?

The index fund is outperforming the hedge funds, this supporting market efficiency

Research suggests that low P/E stocks outperform high P/E stocks. Why is this finding an anomaly?

The low P/E effect contradicts the Efficient Market Hypothesis

The momentum effect indicates that stocks with the:

best short-term past performance will continue to perform well

A test which investigated whether publicly available financial accounting information can be used to generate abnormal returns is a direct test of:

semi-strong form market efficiency

The January effect can be largely attributed to the exceptional performance of:

small stocks in January

According to the strong form of the efficient market hypothesis, which investors should expect to earn abnormal returns?

No investors

Using technical analysis to consistently earn abnormal returns is consistent with which form of the Efficient Market Hypothesis?

None

Which of the following best describes the so-called size effect?

On average, small cap stocks earn abnormal returns

What is meant by the statement that an efficient marker prices securities "correctly?"

Riskier securities are priced to yield higher returns

Which observation is the most consistent with the EMH?

The random walk

Data mining refers to the search for security return patterns by:

applying various investment techniques to a set of return data

In tests of market efficiency, CAR refers to:

cumulative abnormal return

In an efficient market, the expected abnormal return on a security is:

equal to zero

A characteristic of an efficient market is that:

investors are price takers

An efficient market requires that:

investors react quickly and fully to new information

The value effect suggests that investors can earn abnormal returns by holding stocks with:

low price multiples

The overconfidence bias tends to encourage investors to:

trade too much

The SUE effect suggests that superior performance is associated:

with stocks that have beat their earnings estimate