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Exam 8: The Efficient Market Hypothesis

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Question 1

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Even if the markets are efficient, professional portfolio management is still important because it provides investors with: I. Low-cost diversification II. A portfolio with a specified risk level III. Better risk-adjusted returns than an index

A) I only
B) I and II only
C) II and III only
D) I, II, and III

E) B) and D)
F) A) and D)

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Question 2

Multiple Choice

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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) semistrong
B) strong
C) weak
D) perfect

E) A) and B)
F) All of the above

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Question 3

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Assume that a company announces unexpectedly high earnings in a particular quarter. In an efficient market one might expect ________.

Insiders are able to profitably trade and earn abnormal returns prior to the announcement of positive news. This is a violation of which form of efficiency?

Value stocks may provide investors with better returns than growth stocks if: I. Value stocks are out of favor with investors. II. Prices of growth stocks include premiums for overly optimistic growth levels. III. Value stocks are likely to generate positive-earnings surprises.

J. M. Keyes put all his money in one stock, and the stock doubled in value in a matter of months. He did this three times in a row with three different stocks. J. M. got his picture on the front page of the Wall Street Journal. However, the paper never mentioned the thousands of investors who made similar bets on other stocks and lost most of their money. This is an example of the ________ problem in deciding how efficient the markets are.

The tendency when the ________ performing stocks in one period are the best performers in the next and the current ________ performers are lagging the market later is called the reversal effect.

The effect of liquidity on stock returns might be related to: I. The small-firm effect II The book-to-market effect III The neglected-firm effect IV. The P/E effect

Which of the following is not a method employed by fundamental analysts?

Which of the following contradicts the proposition that the stock market is weakly efficient?

In their 2010 study, Fama and French used a four-factor model to analyze excess returns on equity mutual funds. They found that the funds ________.

Which of the following would violate the efficient market hypothesis?

One type of passive portfolio management is ________.

McLean and Pontiff (2016) identify more than ________ characteristics associated with abnormal returns.

The ________ effect may explain much of the small-firm anomaly. I. January II. neglected III. liquidity

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

The tendency of poorly performing stocks and well-performing stocks in one period to continue their performance into the next period is called the ________.

You believe that you can earn 2% more on your portfolio if you engage in full-time stock research. However, the additional trading costs and tax liability from active management will cost you about .5%. You have an $800,000 stock portfolio. What is the most you can afford to spend on your research?

Among the important characteristics of market efficiency is (are) that: I. There are no arbitrage opportunities. II. Security prices react quickly to new information. III. Active trading strategies will not consistently outperform passive strategies.

In a 1988 study, Fama and French found that the return on the aggregate stock market was ________ when the dividend yield was higher.