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Chapter 14 - Efficient Capital Markets and Behavioral Challenges
15. The U.S. Securities and Exchange Commission periodically charges individuals for insider trading and claims those individuals have made unfair profits. Based on this fact, you would tend to argue that the financial markets are at best _____ form efficient. A. weak B. semiweak C. semistrong D. strong E. perfect
16. Individuals that continually monitor the financial markets seeking mispriced securities: A. tend to make substantial profits on a daily basis. B. tend to make the markets more efficient.
C. are never able to find a security that is temporarily mispriced.
D. are always quite successful using only well-known public information as their basis of evaluation.
E. are always quite successful using only historical price information as their basis of evaluation.
17. Efficient capital markets are financial markets:
A. in which current market prices reflect available information.
B. in which current market prices reflect the present value of securities. C. in which there is no excess profit from using available information. D. All of the above. E. None of the above.
18. If the efficient market hypothesis holds, investors should expect: A. to earn only a normal return.
B. to receive a fair price for their securities.
C. to always be able to pick stocks that will outperform the market averages. D. Both A and B. E. Both B and C.
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Chapter 14 - Efficient Capital Markets and Behavioral Challenges
19. Financial managers can create value through financing decisions that: A. reduce costs or increase subsidies. B. increase the product prices. C. create a new security. D. Both A and B. E. Both A and C.
20. In an efficient market when a firm makes an announcement of a new product or product enhancement with superior technology providing positive NPV, the price of the stock will: A. rise gradually over the next few days. B. decline gradually over the next few days. C. rise on the same day to the new price. D. stay at the same price, with no net effect. E. drop on the same day to the new price.
21. An investor discovers that for a certain group of stocks, large positive price changes are always followed by large negative price changes. This finding is a violation of the: A. moderate form of the efficient market hypothesis. B. semistrong form of the efficient market hypothesis. C. strong form of the efficient market hypothesis. D. weak form of the efficient market hypothesis. E. None of the above.
22. Which of the following would be indicative of inefficient markets? A. Overreaction and reversion B. Delayed response
C. Immediate and accurate response D. Both A and B. E. Both A and C.
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Chapter 14 - Efficient Capital Markets and Behavioral Challenges
23. When the stock price follows a random walk, the price today is said to be equal to the prior period price plus the expected return for the period with any remaining difference to the actual return due to:
A. a predictable amount based on the past prices.
B. a component based on new information unrelated to past prices. C. the security's risk. D. the risk free rate. E. None of the above.
24. Which form of the efficient market hypothesis implies that security prices reflect only information contained in past prices? A. Weak form
B. Semistrong form C. Strong form D. Hard form E. Past form
25. If the weak form of efficient markets holds, then: A. technical analysis is useless.
B. stock prices reflect all information contained in past prices. C. stock prices follow a random walk. D. All of the above. E. None of the above.
26. Under the concept of an efficient market, a random walk in stock prices means that: A. there is no driving force behind price changes.
B. technical analysts can predict future price movements to earn excess returns.
C. the unexplained portion of price change in one period is unrelated to the unexplained portion of price change in any other period.
D. the unexplained portion of price change in one period that can not be explained by expected return can only be explained by the unexplained portion of price change in a prior period. E. None of the above.
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Chapter 14 - Efficient Capital Markets and Behavioral Challenges
27. A semistrong form efficient market is distinct from a weak form efficient market by: A. incorporating only random movements in the price.
B. incorporating all publicly available information in the price. C. incorporating inside information in the price. D. All of the above. E. None of the above.
28. If a market is strong form efficient, it also implies that: A. semistrong form efficiency holds. B. weak form efficiency holds.
C. one cannot earn abnormal returns with inside information. D. Both A and C. E. A, B and C.
29. An investor discovers that predictions about weather patterns published years in advance and found in the Farmer's Almanac are amazingly accurate. In fact, these predictions enable the investor to predict the health of the farm economy and therefore certain security prices. This finding is a violation of the:
A. moderate form of the efficient market hypothesis. B. semistrong form of the efficient market hypothesis. C. strong form of the efficient market hypothesis. D. weak form of the efficient market hypothesis. E. None of the above.
30. A lawyer works for a firm that advises corporate firms planning to sue other corporations for antitrust damages. He finds that he can \firm that will be sued. This finding is a violation of the: A. moderate form of the efficient market hypothesis. B. semistrong form of the efficient market hypothesis. C. strong form of the efficient market hypothesis. D. weak form of the efficient market hypothesis. E. None of the above.
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