Online Quiz for Efficient Market Hypothesis

Question: The weather report says that a devastating flood is expected in Queensland this
weekend, during the peak of the citrus harvest. In an efficient market one would expect
Queensland Oranges share price to
Correct Answer:

drop immediately.

Question: Alpha Manufacturing just announced yesterday that its 4th quarter earnings will be
10% higher than last year's 4th quarter. You observe that Alpha had an abnormal return of
-1.2% yesterday. This suggests that
Selected
Answer:
Correct
Answer:
Response
Feedback:

the market is not efficient.

investors expected the earnings increase to be larger than what was
actually announced.
Anticipated earnings changes are impounded into a security's price as soon as
expectations are formed. Therefore a negative market response indicates that
the earnings surprise was negative, that is, the increase was less than
anticipated.

Question: In an efficient market, __________.

Selected Answer:

security prices react quickly to new information

Correct Answer:

A, B, and C

Response
Feedback:

A, B, and C are true; however, even in an efficient market one should be able
to earn the appropriate risk-adjusted rate of return.

Question: The Food and Drug Administration (FDA) just announced yesterday that they would
approve a new cancer-fighting drug from GlaxoSmithKline. You observe that GlaxoSmithKline
had an abnormal return of 0% yesterday. This suggests that
Selected Answer:

the market is not efficient.

Correct Answer:

the approval was already anticipated by the market

Response Feedback:

The approval was already anticipated by the market

Question: __________ focus more on past price movements of a firm's stock than on the
underlying fundamentals of future profitability.
Correct Answer:

Technical analysts

Question: Which of the following are used by fundamental analysts to determine the fair
value of a stock?
I) moving averages
II) earnings
III) dividend prospects
IV) interest rates
Selected Answer:

All of the items are used by fundamental analysts.

Correct Answer:

II, III, and IV

Response
Feedback:

Analysts look at fundamental factors such as earnings, dividend prospects,

interest rates, and risk of the firm. The information is used to determine the
present value of future cash flows to stockholders. Technical analysts use
moving averages.

Question: Basu (1977, 1983) found that firms with low P/E ratios

Correct Answer:

earned higher average returns than firms with high P/E ratios.

Question: Cumulative abnormal returns (CAR)

Correct Answer:
ABandC

Question: The weak form of the efficient market hypothesis contradicts

Correct
Answer:

technical analysis, but is silent on the possibility of successful

fundamental analysis.

Question: Google has a beta of 1.0. The annualized market return yesterday was 11%, and
the risk-free rate is currently 5%. You observe that Google had an annualized return yesterday
of 14%. Assuming that markets are efficient, this suggests that

Correct Answer:

good news about Google was announced yesterday.

Question: The weak form of the efficient market hypothesis asserts that

Correct Answer:
BandC

Question: Studies of negative earnings surprises have shown that there is

Correct Answer:
bothAandCaretrue.

Question: If you believe in the ________ form of the EMH, you believe that stock prices reflect
all relevant information including historical stock prices and current public information about
the firm, but not information that is available only to insiders.

Correct Answer:

semi-strong

Question: If you believe in the _______ form of the EMH, you believe that stock prices reflect
all information that can be derived by examining market trading data such as the history of
past stock prices, trading volume and short interest (i.e., trading volume attributed to short
selling).

Correct Answer:

weak

Question: The Food and Drug Administration (FDA) just announced yesterday that they
would approve a new cancer-fighting drug from GlaxoSmithKline. You observe that
GlaxoSmithKline had an abnormal return of 0% yesterday. This suggests that
Selected Answer:

the market is not efficient.

Correct Answer:

the approval was already anticipated by the market

Response Feedback:

The approval was already anticipated by the market

Question 2

0 out of 0.2 points

Ifyoubelieveinthe_________formoftheEMH,youbelievethatyoucanuse
informationthatisavailableonlytoinsiderstoearnabnormalreturns.

Answer
Selected Answer:
strong

Correct Answer:
noneoftheabove