The Efficient Market Hypothesis

1. Which of the following beliefs would not preclude charting as a method of

portfolio management.

a.
The market is strong form efficient.

b.
The market is semi-strong form efficient.

c.
The market is weak form efficient.

d.
Stock prices follow recurring patterns.

2. In a 1953 study of stock prices, Maurice Kendall found that ________.

a.
there were no predictable patterns in stock prices

b.
stock prices seem to evolve randomly

c.
data provided no way to predict price movements

d.
all of the above

3. The weak form EMH states that ________ must be reflected in the stock price.

a.
all market trading data

b.
all publicly available information

c.
all information including inside information

d.
none of the above

4. The semi-strong form EMH states that ________ must be reflected in the stock
price.

a.
all market trading data

b.
all publicly available information

c.
all information including inside information

d.
none of the above

5. The strong form EMH states that ________ must be reflected in the stock price.

a.
all market trading data

b.
all publicly available information

c.
all information including inside information

d.
none of the above

6. _________ considerations make portfolio management useful even in a perfectly

efficient market.

a.
Diversification

b.

Investor tax

c.
Investor risk profile

d.
all of the above

7. When the market risk premium rises, stock prices will ________.

a.
rise

b.
fall

c.
recover

d.
have excess volatility

8. The small firm in January effect is strongest ________.

a.
early in the month

b.
in the middle of the month

c.
late in the month

d.
in even numbered years.

9. Evidence suggests that there may be _______ momentum and ________ reversal
patterns in stock price behavior.

a.
short-run, short-run

b.
long-run, long-run

c.
long-run, short-run

d.
short-run, long run

10. Proponents of the EMH typically advocate __________.

a.
a conservative investment strategy

b.
a liberal investment strategy

c.
a passive investment strategy

d.
an aggressive investment strategy

11. A chartist is likely to believe in the value of doing __________.

a.
fundamental analysis

b.
technical analysis

c.
both a and b

d.
neither a nor b

12. Which of the following is not a method employed by followers of technical

analysis?

a.
charting

b.
relative strength analysis

c.
earnings forecasting

d.
All of the above are methods employed by technical analysts

13. Which of the following is not a method employed by followers of fundamental

analysis?

a.
analysis of interest rates and other macroeconomic factors

b.
relative strength analysis

c.
earnings forecasting

d.
All of the above are methods employed by fundamental analysts

14. The primary objective of fundamental analysis is to identify __________ firms.

a.
good

b.
bad

c.
mis-priced

d.
well managed

15. If you believe in the __________ form of the EMH, you believe that stock prices
reflect all publicly available information but not information that is available
only to insiders.

a.
semi-strong

b.
strong

c.
weak

d.
any of the above

16. If you believe in the __________ form of the EMH, you believe that stock prices
reflect all relevant information including information that is available only to
insiders.

a.
semi-strong

b.
strong

c.
weak

d.
any of the above

17. The debate over whether markets are efficient will probably never be settled
because of __________.

a.
the lucky event issue

b.
the magnitude issue

c.
the selection bias issue

d.
all of the above

18. __________ is the return on a stock beyond what would be predicted from
market movements alone.

a.
a normal return

b.
a subliminal return

c.
an abnormal return

d.
none of the above

19. 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 or short interest.

a.
semi-strong

b.
strong

c.
weak

d.
any of the above

20. If studies suggest that domestic securities markets are efficient at the semistrong level this implies that all foreign securities markets are efficient at the
_____________ level.

a.
weak

b.
semi-strong

c.
strong

d.
None of the above answers are correct

21. A mutual fund which attempts to hold quantities of shares in proportion to their
representation in the market is called a __________ fund.

a.
stock

b.
index

c.
hedge

d.
money market

22. Pension fund managers typically place more than ______________ of their
equity investments in index funds.

a.
10%

b.
25%

c.
33%

d.
50%

23. Which of the following is not an issue that is central to the debate regarding
market efficiency?

a.
the magnitude issue

b.
the tax loss selling issue

c.
the lucky event issue

d.
the selection bias issue

24. Which of the following have not been considered market anomalies?

a.
the small-firm January effect

b.
the reversal effect

c.
the book-to-market effect

d.
All of the above have been considered market anomalies

25. Small firms have tended to earn abnormal returns primarily in ______________
.

a.
the month of January

b.
the month July

c.
the trough of the business cycle

d.
the peak of the business cycle

26. Fama and French have suggested that many market anomalies can be explained
as manifestations of ____________.

a.
regulatory effects

b.
high trading costs

c.
information asymmetry

d.
time varying risk premiums

27. Proponents of the EMH think technical analysts __________.

a.
should focus on relative strength

b.
should focus on resistance levels

c.
should focus on support levels

d.
are wasting their time

28. Evidence supporting semi-strong form market efficiency suggests that investors
should make their investment choices according to ____________.

a.

technical analysis

b.
fundamental analysis

c.
indexing

d.
the recommendation of a broker

29. A rule for buying or selling stocks according to recent price movements is called
__________.

a.
a filter rule

b.
a market anomaly

c.
an enigma

d.
none of the above

30. Jaffee found that stock prices __________ after insiders intensively bought
shares and__________ after insiders intensively sold shares.

a.
decreased, decreased

b.
decreased, increased

c.
increased, decreased

d.
increased, increased

31. In a recent study, Fama and French found that the return on the aggregate stock
market was __________ when the dividend yield was higher.

a.
higher

b.
lower

c.
unaffected

d.
more skewed

32. Fama and French (1991) and Reinganum (1988) found that firms with
__________ market/book ratios had higher stock returns.

a.
high

b.
low

c.
medium

d.
both a and b

33. Jegadeesh and Titman (1993) found that __________ exhibiting recent superior
performance tend to continue to do well, while the performance of ___________
is highly unpredictable.

a.
individual stocks; portfolios of stocks

b.
individual stocks; portfolios of options

c.
portfolios of options; individual stocks

d.
portfolios of bonds; portfolios of stocks

34. Bernard and Thomas (1989) find evidence that securities markets adjust to
earnings announcements within _______ .

a.
1 day

b.
1 week

c.
1 month

d.
more than 2 months

35. When stock returns exhibit positive serial correlation, this means that
__________ returns tend to follow ___________ returns.

a.
positive; positive

b.
positive ; negative

c.
negative; positive

d.
None of the above

36. Basu found that firms with high P/E ratios __________.

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

b.
earned the same average returns as firms with low P/E ratios

c.
earned lower average returns than firms with low P/E ratios

d.
had higher dividend yields than firms with low P/E ratios

37. Jensen (1969) found that approximately __________ of mutual funds with
positive alphas in one year had positive alphas in the subsequent year.

a.

25%

b.
50%

c.
60%

d.
67%

38. According to a study by Black (1971), stocks classified as "best buys" by Value
Line earn abnormal returns of __________.

a.
0%

b.
1%

c.
5%

d.
10%

39. Alexander, Fama and Blume found that exploiting filter rules could __________.

a.
generate abnormal returns 3% above transaction costs

b.
generate abnormal returns 2% above transaction costs

c.
generate abnormal returns 1% above transaction costs

d.
not generate abnormal returns above transaction costs

40. Jensen (1969) estimated alphas in each of 10 years for 115 mutual funds and
found that__________ of the alphas were positive.

a.
20%

b.
30%

c.
40%

d.
50%

41. In examining mutual performance from 1965 to 1984, Ippolito found the average
alpha was __________, which __________ statistically significant from zero.

a.
-0.83%, was

b.
-0.83%, was not

c.
0.83%, was

d.
0.83%, was not

42. Banz found that, on average, the risk-adjusted returns of small firms
__________.

a.
was higher than the risk-adjusted returns of large firms

b.
was the same as the risk-adjusted returns of large firms

c.
was lower than the risk-adjusted returns of large firms

d.
was negative

43. Researchers have found that most of the small firm effect occurs __________.

a.
during the spring months

b.
during the summer months

c.
in December

d.
in January

44. Tippi and Deseino (1992) examined the use of neural networks to develop
trading rules and found they could earn an annualized return of __________
with a standard deviation of return of __________ by following such a strategy.

a.
50%, 15%

b.
50%, 20%

c.
100%, 15%

d.
100%, 20%

45. DeBondt and Thaler (1985) found that the poorest performing stocks in one time
period experienced __________ performance in the following period and the best
performing stocks in one time period experienced __________ performance in
the following time period.

a.
good, good

b.
good, poor

c.
poor, good

d.
poor, poor

46. According to a study by French (1980), the mean return on the S&P 500
portfolio on __________ between July 1962 and December 1978 was negative.

a.

Mondays

b.
Tuesdays

c.
Wednesdays

d.
Fridays

47. Kendall (1953) examined stock prices over time, and found __________.

a.
stock prices followed a jump process

b.
stock prices moved up and down with defense spending

c.
stock prices were higher when Republican presidents were in office

d.
no predictable pattern in stock prices

48. Given the results of Jensen's study (1969), you would expect approximately
__________ of 10,000 funds to have positive alphas for 10 straight years.

a.
0

b.
1

c.
10

d.
100

49. A series of experiments by Kahneman and Tversky indicate that people ___ .

a.
Give too little weight to recent experience compared to prior beliefs when
making forecasts

b.
Tend to make forecasts that are too extreme given the uncertaintly
inherent in their information

c.
Both A) and B)

d.

None of the above

50. In a study of investment behavior of men and women, Barber and Odean find
___ .

a.
that men trade more actively than women

b.
that married men trade far more actively than single men

c.
that high trading activity is predictive of high investment performance

d.
all of the above

51. Psychological regret theory ____ .

a.
contends that people have more regret (blame themselves more) when a
decision that turned out badly was more unconventional

b.
is consistent with the firm size anomaly

c.

is consistent with the book-to-market anomaly

d.
all of the above

52. Mental accounting is a form of framing which is consistent with ___ .

a.
taking a very risky position with one investment account and a very
conservative position with another investment account

b.
investors' irrational preference for stocks with high cash dividends

c.
a tendency to ride losing stock positions for too long

d.
all of the above

53. If the daily returns on the stock market are normally distributed with a mean of
0.05% and a standard deviation of 1.00%, the probability that the stock market
would have a return of -23.00% or worse on one particular day (as it did on
Black Monday) is approximately __________.

a.
0.0%

b.
0.1%

c.
1.0%

d.
10.0%

54. According to the semi-strong form of the efficient markets hypothesis

____________.

a.
stock prices do not rapidly adjust to new information

b.
future changes in stock prices cannot be predicted from any information
that is publicly available

c.
corporate insiders should have no better investment performance than other
investors

d.
arbitrage between futures and cash markets should not produce extraordinary
profits

55. The term random walk is used in investments to refer to ______________.

a.
stock price changes that are random but predictable

b.
stock prices that respond slowly to both old and new information

c.
stock price changes that are random and unpredictable

d.
stock prices changes that follow the pattern of past price changes

56. An important characteristic of market efficiency is that _________________.

a.
there are no arbitrage opportunities

b.
security prices react quickly to new information

c.
Active trading strategies will not consistently outperform passive strategies

d.
all of the above

57. In a fully efficient market, consistent weak portfolio performance would most
likely be due to ________________.

a.
picking bad stocks consistently

b.
expenses incurred in trading and management of the portfolio

c.
picking good stocks erratically

d.
None of the above answers is correct

58. Assume that a company announces unexpectedly high earnings in a particular

quarter. In an efficient market one might expect _____________.

a.
an abnormal price change immediately following the announcement

b.
an abnormal price increase before the announcement

c.
an abnormal price decrease after the announcement

d.
no abnormal price change before or after the announcement

59. A market anomaly refers to ____ .

a.
an exogenous shock to the market that is sharp but not persistent

b.
a price or volume event that is inconsistent with historical price or volume
trends

c.
a trading or pricing structure that interferes with efficient buying and selling
of securities

d.
price behavior that differs from the behavior predicted by the efficient
market hypothesis

60. 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 above normal returns.

d.
None of the above would contradict weak form market efficiency

61. Which of following would violate the efficient market hypothesis?

a.
A successful firm like Intel has consistently generated large profits for years.

b.
Prices for stocks before stock splits show on average consistently positive
abnormal returns.

c.
Both A) and B)

d.
None of the above

62. Which of the following stock price observations would appear to contradict the
weak form of the efficient market hypothesis?

a.

The average rate of return is significantly greater than zero.

b.
The correlation between the market return one week and the return the
following week is zero

c.
You could have made superior returns by buying stock after a 10% rise
in price and selling after a 10% fall.

d.
All of the above

63. The semi-strong form of the efficient market hypothesis contradicts __________.

a.
technical analysis, but supports fundamental analysis as valid

b.
fundamental analysis, but supports technical analysis as valid

c.
both fundamental analysis and technical analysis

d.
technical analysis, but is silent on the possibility of successful fundamental
analysis

64. According to the efficient market hypothesis, __________.

a.
high beta stocks are consistently overpriced

b.
low beta stocks are consistently overpriced

c.
negative alphas on stocks will quickly disappear

d.
None of the above answers is correct

65. A finding that __________ would provide evidence against the semi-strong form
of the efficient market theory.

a.
about 70% of mutual funds outperform the market in any year

b.
stocks of small firms tend to generate positive abnormal returns

c.
low P/E stocks tend to have positive abnormal returns

d.

More than one of the above answers is correct

66. Growth stocks usually exhibit ___ .

a.
low current yield

b.
high price-to-book ratios

c.
high price-to-earnings ratios

d.
all of the above

67. Value stocks usually exhibit ___ .

a.
low price-to-book ratios

b.
low price-to-earnings ratios

c.
above average dividend yield

d.
all of the above

68. Value stocks usually exhibit ___ price-to-book ratios and ___ price-to-earnings
ratios.

a.
low, low

b.
low, high

c.
high, low

d.
high, high

69. Growth stocks usually exhibit ___ price-to-book ratios and ___ price-to-earnings
ratios.

a.
low, low

b.
low, high

c.
high, low

d.
high, high