Which of the following most appears 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.

d. Both (c) and (D).

Solution: a

Suppose that after conducting an analysis of past stock prices, you came up with the following
observations. Which would appear to contradict the weak form of the efficient market hypothesis?

A. The average return is significantly higher than the risk-free rate of return.

B. The correlation between the return one week and the return the next week is -0.4.

C. One could have made higher-than-average capital gains by holding shares with low dividend yields.

Solution: b

In the weak form, asset prices fully reflect all market data, which refers to all past price and trading
volume information.

Which of the following statements is (are) true if the efficient market hypothesis holds?

A. It implies perfect forecasting ability.

B. It implies the market is irrational and prices follow a particular pattern.

C. It implies that prices reflect all available information.

Solution: c

Suppose that a lawyer works for a firm that advises corporate firms planning to sue other
corporations for antitrust damages. He finds that he can "beat the market" by short selling the
stock of firms that will be sued. This hypothetical finding would violate the:

A. weak-form hypothesis of market efficiency.

B. semi strong form hypothesis of market efficiency.
C. strong-form hypothesis of market efficiency.
D. none of the hypotheses of market efficiency.
Solution: C
The semistrong form of efficiency focuses on the economic ineffectiveness of the following type of
information:

A. insider information.

B. publicly available information.

C. privileged information.

D. only information provided by the SEC.

Solution: b

If markets are efficient, which of the following investors should achieve superior returns over time?

A. Investors who choose stocks by throwing darts at a list of stocks in the financial pages of a newspaper

B. Analysts who spend considerable time evaluating the best stocks to buy

C. Mutual fund managers who manage other people's money for a living

D. None of the options

Solution: D

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

I) 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.
II) If markets are efficient in the weak form, then prices will adjust immediately to public information.
III) If markets are efficient in the weak form, then prices reflect all information.

Solution: I only

Which of the following statements is(are) true if the strong-form efficient market hypothesis holds?
I) Analysts can easily forecast stock price changes.
II) Financial markets are irrational.
III) Stock returns follow a particular pattern.
IV) Stock prices reflect all available information.

Solution: IV only

If the weak form of market efficiency holds, then:

I) technical analysis is useless;
II) stock prices reflect all information contained in past prices;
III) stock price returns follow a random walk

Solution: I, II, and III

If the efficient market hypothesis holds, investors should expect:
I) to receive a fair price for their security
II) to earn a normal rate of return on their investments
III) to be able to pick stocks that will outperform the market

Solution: I and II only

According to behavioral finance, observed overreaction in securities markets most likely  occurs due to:

A. loss aversion.

B. gambler’s fallacy.

C. disposition effect.

Solution: A is correct. According to loss aversion related arguments in behavioral

theories, investors dislike losses more than they like comparable gains. Thus, such a
behavioral bias can explain observed overreaction in markets.

An observation that stocks with above average price-to-earnings ratios have

consistently underperformed those with below average price-to-earnings ratios least
likely  contradicts which form of the market efficiency?

A. Weak form

B. Strong form

C. Semi-strong form

Solution: B is correct. The observation that stocks with high above-average price-to-
earnings ratios have consistently underperformed those with below-average price-to-
earnings ratios is a cross-sectional anomaly. It is a contradiction to the semi-strong
form of market efficiency and weak-form market efficiency because all the information
used to categorize stocks by their price-to-earnings ratios is publicly available.

Which of the following is the most accurate characterization of momentum anomalies?

Momentum anomalies:

A. relate to long-term price patterns.

B. relate to short-term price patterns.

C. are consistent with weak-form market efficiency.

Solution: Ans: B;

Momentum anomalies relate to short-term price patterns, typically resulting from

investor overreaction in response to the release of unexpected public information.
 If a securities market is efficient, it is most likely  that:

A. security prices would react only to the “unexpected” elements of information.

B. investors would prefer active investment strategies to passive investment strategies.

C. the time frame for price adjustment allows many traders to earn profits with little
risk.

Solution: A;

In an efficient market, prices should be expected to react only to the “unexpected” or

“surprise” element of information releases. Investors process the unexpected
information and revise expectations accordingly.

A financial analyst utilizing his analytical expertise and up-to-date information buys a
company’s stock. His close friends, who lack information or expertise, imitate the
financial analyst’s action and buy the stock. Which of the following statements
concerning this behavioral bias is most accurate?

A. It improves market efficiency.

B. It is identical to representativeness.

C. It is inconsistent with rational behavior.

Solution: A;

This behavioral bias is an example of an information cascade wherein the transmission

of information is from those participants who act first and whose decisions influence the
decisions of others. The behavior of informed traders acting first and uninformed
traders imitating the informed traders is consistent with rationality. The imitation
trading by the uninformed traders helps the market incorporate relevant information
and improves market efficiency.

  In an efficient market, fundamental analysis most likely  requires that the analyst
must:

A. extrapolate historical data to estimate future values and take investment decisions.

B. do a superior job of estimating the relevant variables and predict earnings surprises.

C. use trading rules for detecting the price movements that lead to new equilibrium
prices.
Solution  B;

To take advantage of the long-run price movements in an efficient capital market the
analyst must do a superior job of estimating the relevant variables and predict earnings
surprises.

Which of the following statements most accurately describes the weak-form Efficient

Market Hypothesis (EMH)? The weak-form EMH assumes that current security prices:

A. fully reflect all information from public and private sources.

B. fully reflect all security market information, including transactions by exchange

specialists.

C. adjust rapidly to the release of all public information; that is, security prices fully
reflect all public information.
Solution B;

The weak-form EMH assumes that current stock prices fully reflect all security market
information, including transactions by exchange specialists.

Which of the following is least likely  included in the assumptions of an informationally

efficient securities market?

A. A large number of profit-maximizing participants analyze and value securities.

B. New information regarding securities comes to the market in a predictable manner.

C. Profit-maximizing investors adjust security prices rapidly to reflect the effect of new
information.

Solution  B;

The assumption that the new information comes to the market in a predictable manner
is an inaccurate statement. The correct assumption is that the new information comes
to the market in a random fashion.

 The best characterization of the strong-form of efficient market hypothesis (EMH) with

respect to the information set is that it encompasses:

A. both weak-form and semistrong-form hypotheses.

B. neither weak-form nor semistrong-form hypothesis.

C. the semistrong-form but not the weak-form hypothesis.

Solution A;

The difference among the three forms of the EMH revolves around the information set
included in each. The weak form includes public market information, the semistrong
form includes all public information, and the strong form includes all public and private
information. The strong form EMH encompasses both the weak-from and the
semistrong form EMH.

what is the result of the widespread usage of the Internet with regards to efficient markets

a.t makes information cheaper and more accessible thus making markets more efficient.

b.t is sub*ect to new regulation thus marking markets less efficient.

c.t increases the olatility of security prices thus making markets less efficient.

d.t increases competition among brokers thus making markets more efficient.

(a, moderate

In an efficient market, the change in a company's share price is most likely the result of:
A. insiders' private information.
B. the previous day's change in stock price.
C. new information coming into the market.

C. new information coming into the market.

With respect to efficient market theory, when a market allows short selling, the efficiency of the market
is most likely to:
A. increase.
B. decrease.

A. increase

Which of the following regulations will most likely contribute to market efficiency? Regulatory
restrictions on:
A. short selling.
B. foreign traders.
C. insiders trading with nonpublic information.

C. insiders trading with nonpublic information.

 If markets are efficient, the difference between the intrinsic value and market value of a company's
security is:
A. negative.
B. zero.
C. positive.

B. zero.

 The intrinsic value of an undervalued asset is:

A. less than the asset's market value.
B. greater than the asset's market value.
C. the value at which the asset can currently be bought or sold

B. greater than the asset's market value.

If markets are semi-strong-form efficient, then passive portfolio management strategies are most likely
to:
A. earn abnormal returns.
B. outperform active trading strategies.
C. underperform active trading strategies.

B. outperform active trading strategies: Costs associated with active trading strategies would be difficult
to recover; thus, such active trading strategies would have difficulty outperforming passive strategies on
a consistent after-cost basis.