Chapter 08 - The Efficient Market Hypothesis

Chapter 08
The Efficient Market Hypothesis

Multiple Choice Questions

1. Which of the following beliefs woul not preclue charting as a !etho of portfolio
!anage!ent"
#. The !arket is strong for! efficient.
$. The !arket is se!i-strong for! efficient.
C. The !arket is weak for! efficient.
%. &tock prices follow recurring patterns.

'. (n a 1)*+ stuy of stock prices, Maurice -enall foun that .........
#. there were no preictable patterns in stock prices
$. stock prices e/hibite strong serial autocorrelation
C. ay to ay stock prices followe consistent trens
%. funa!ental analysis coul be use to generate abnor!al returns

+. The weak for! of the EMH states that ........ !ust be reflecte in the current stock
price.
#. all past infor!ation incluing security price an 0olu!e ata
$. all publicly a0ailable infor!ation
C. all infor!ation incluing insie infor!ation
%. all costless infor!ation

1. The se!i-strong for! of the EMH states that ........ !ust be reflecte in the current
stock price.
#. all security price an 0olu!e ata
$. all publicly a0ailable infor!ation
C. all infor!ation incluing insie infor!ation
%. all costless infor!ation

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Chapter 08 - The Efficient Market Hypothesis
*. The strong for! of the EMH states that ........ !ust be reflecte in the current stock
price.
#. all security price an 0olu!e ata
$. all publicly a0ailable infor!ation
C. all infor!ation incluing insie infor!ation
%. all costless infor!ation

2. 3ano! price !o0e!ents inicate .........
#. irrational !arkets
$. that prices cannot e4ual funa!ental 0alues
C. that technical analysis to unco0er trens can be 4uite useful
%. that !arkets are functioning efficiently

5. When the !arket risk pre!iu! rises, stock prices will .........
#. rise
$. fall
C. reco0er
%. ha0e e/cess 0olatility

8. The s!all fir! in 6anuary effect is strongest .........
#. early in the !onth
$. in the !ile of the !onth
C. late in the !onth
%. in e0en nu!bere years

). E0ience suggests that there !ay be ....... !o!entu! an ........ re0ersal patterns
in stock price beha0ior.
#. short-run, short-run
$. long-run, long-run
C. long-run, short-run
%. short-run, long run

8-'
Chapter 08 - The Efficient Market Hypothesis
10. 7roponents of the EMH typically a0ocate ...........
#. a conser0ati0e in0est!ent strategy
$. a liberal in0est!ent strategy
C. a passi0e in0est!ent strategy
%. an aggressi0e in0est!ent strategy

11. &tock prices that are stable o0er ti!e ........
#. inicate that prices are useful inicators of true econo!ic 0alue
$. inicate that the !arket is not incorporating new infor!ation into current stock prices
C. ensure that an econo!y allocates its resources efficiently
%. inicates that returns follow a rano! walk process

1'. The tenency when the ...... perfor!ing stocks in one perio are the best perfor!ers in
the ne/t an the current ........ perfor!ers are lagging the !arket later is calle the
re0ersal effect.
#. worst, best
$. worst, worst
C. best, worst
%. best, best

1+. Which of the following is not a !etho e!ploye by followers of technical analysis"
#. Charting
$. 3elati0e strength analysis
C. Earnings forecasting
%. Traing aroun support an resistance le0els

11. Which of the following is not a !etho e!ploye by funa!ental analysts"
#. #naly8ing the 9e:s ne/t interest rate !o0e
$. 3elati0e strength analysis
C. Earnings forecasting
%. Esti!ating the econo!ic growth rate

8-+
Chapter 08 - The Efficient Market Hypothesis
1*. The pri!ary ob;ecti0e of funa!ental analysis is to ientify ...........
#. well run fir!s
$. poorly run fir!s
C. !is-price stocks
%. high 7<E stocks

12. (f you belie0e in the .......... for! of the EMH, you belie0e that stock prices reflect
all publicly a0ailable infor!ation but not infor!ation that is a0ailable only to insiers.
#. se!i-strong
$. strong
C. weak
%. perfect

15. (f you belie0e in the .......... for! of the EMH, you belie0e that stock prices reflect
all rele0ant infor!ation incluing infor!ation that is a0ailable only to insiers.
#. se!i-strong
$. strong
C. weak
%. perfect

18. Most of the stock price response to a corporate earnings or i0ien announce!ent occurs
within .................
#. about +0 secons
$. about 10 !inutes
C. 2 !onths
%. ' years

1). .......... is the return on a stock beyon what woul be preicte fro! !arket
!o0e!ents alone.
#. # nor!al return
$. # subli!inal return
C. #n abnor!al return
%. #n e/cess return

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Chapter 08 - The Efficient Market Hypothesis
'0. =ou belie0e that stock prices reflect all infor!ation that can be eri0e by e/a!ining
!arket traing ata such as the history of past stock prices, traing 0olu!e or short interest
but you o not belie0e stock prices reflect all publicly a0ailable or insie infor!ation. =ou are
a proponent of .............
#. se!i-strong
$. strong
C. weak
%. perfect

'1. =ou are an in0est!ent !anager who is currently !anaging assets worth >2 billion. =ou
belie0e that acti0e !anage!ent of your fun coul generate between an aitional one tenth
of 1? return on the portfolio. (f you want to !ake sure your acti0e strategy as 0alue, how
!uch can you spen on security analysis"
#. >1',000,000
$. >2,000,000
C. >+,000,000
%. >0

''. # !utual fun which atte!pts to hol 4uantities of shares in proportion to their
representation in the !arket is calle a .......... fun.
#. stock
$. ine/
C. hege
%. !oney !arket

'+. Choosing stocks by searching for preictable patterns in stock prices is calle .........
#. funa!ental analysis
$. technical analysis
C. ine/ !anage!ent
%. rano! walk in0esting

8-*
Chapter 08 - The Efficient Market Hypothesis
'1. Which of the following is not an issue that is central to the ebate regaring !arket
efficiency"
#. The !agnitue issue
$. The ta/ loss selling issue
C. The lucky e0ent issue
%. The selection bias issue

'*. Most people woul reaily agree that the stock !arket is not ..........
#. weak for! efficient
$. se!i-strong for! efficient
C. strong for! efficient
%. efficient at all

'2. &!all fir!s ha0e tene to earn abnor!al returns pri!arily in ...........
#. the !onth of 6anuary
$. the !onth 6uly
C. the trough of the business cycle
%. the peak of the business cycle

'5. 9a!a an 9rench ha0e suggeste that !any !arket ano!alies can be e/plaine as
!anifestations of .............
#. regulatory effects
$. high traing costs
C. infor!ation asy!!etry
%. 0arying risk pre!iu!s

'8. 7roponents of the EMH think technical analysts ...........
#. shoul focus on relati0e strength
$. shoul focus on resistance le0els
C. shoul focus on support le0els
%. are wasting their ti!e

8-2
Chapter 08 - The Efficient Market Hypothesis
'). E0ience supporting se!i-strong for! !arket efficiency suggests that in0estors shoul
..........................
#. rely on technical analysis to select securities
$. rely on funa!ental analysis to select securities
C. use a passi0e traing strategy such as purchasing an ine/ fun or an ET9
%. select securities by throwing arts at the financial pages of the newspaper

+0. @$uy a stock if its price !o0es up by '? !ore than the %ow #0erage,@ is an e/a!ple of a
..................
#. filter rule
$. !arket ano!aly
C. funa!ental approach
%. passi0e traing strategy

+1. 6affee foun that stock prices .......... after insiers intensi0ely bought shares an
.......... after insiers intensi0ely sol shares.
#. ecrease, ecrease
$. ecrease, increase
C. increase, ecrease
%. increase, increase

+'. (n a recent stuy, 9a!a an 9rench foun that the return on the aggregate stock !arket
was .......... when the i0ien yiel was higher.
#. higher
$. lower
C. unaffecte
%. !ore skewe

++. 9a!a an 9rench A1))1B an 3einganu! A1)88B foun that fir!s with ..........
!arket<book ratios ha higher stock returns.
#. high
$. low
C. !eiu!
%. paire

8-5
Chapter 08 - The Efficient Market Hypothesis
+1. 6oe bought a stock at >*5 per share. The price pro!ptly fell to >**. 6oe hel on to the
stock until it again reache >*5 an then he sol once he ha eli!inate his loss. (f other
in0estors o the sa!e to establish a traing pattern this woul contraict ........
#. the strong-for! EMH
$. the weak-for! EMH
C. technical analysis
%. the se!istrong-for! EMH

+*. #ccoring to recent research securities !arkets fully a;ust to earnings announce!ents
........
#. instantly
$. in 1 ay
C. in 1 week
%. graually o0er ti!e

+2. When stock returns e/hibit positi0e serial correlation, this !eans that .......... returns
ten to follow ........... returns.
#. positi0eC positi0e
$. positi0eC negati0e
C. negati0eC positi0e
%. positi0eC 8ero

+5. $asu foun that fir!s with high 7<E ratios ...........
#. earne higher a0erage returns than fir!s with low 7<E ratios
$. earne the sa!e a0erage returns as fir!s with low 7<E ratios
C. earne lower a0erage returns than fir!s with low 7<E ratios
%. ha higher i0ien yiels than fir!s with low 7<E ratios

+8. 9una!ental analysis is likely to yiel best results for ........
#. D=&E stocks
$. neglecte stocks
C. stocks that are fre4uently in the news
%. fast growing co!panies

8-8
Chapter 08 - The Efficient Market Hypothesis
+). =ou are looking to in0est in one of three stocks. &tock # has high e/pecte earnings
growth, &tock $ has only !oest e/pecte earnings growth an &tock C is e/pecte to
generate poor earnings growth. Which stock is likely to generate the greatest alpha for you"
#. &tock #
$. &tock $
C. &tock C
%. =ou cannot tell fro! the infor!ation gi0en

10. =ou belie0e that you can earn '? !ore on your portfolio if you engage in full ti!e stock
research. Howe0er, the aitional traing costs an ta/ liability fro! acti0e !anage!ent will
cost you about 0.*?. =ou ha0e a >800,000 stock portfolio. What is the !ost you can affor to
spen on your research"
#. >1,000
$. >8,000
C. >1',000
%. >12,000

11. E0en if the !arkets are efficient, professional portfolio !anage!ent is still i!portant
because it pro0ies in0estors with ..........
(. low cost i0ersification
((. pro0ies a portfolio with a specifie risk le0el
(((. pro0ies better risk a;uste returns than an ine/
#. ( only
$. ( an (( only
C. (( an ((( only
%. (, (( an (((

1'. $an8 foun that, on a0erage, the risk-a;uste returns of s!all fir!s ...........
#. was higher than the risk-a;uste returns of large fir!s
$. was the sa!e as the risk-a;uste returns of large fir!s
C. was lower than the risk-a;uste returns of large fir!s
%. was negati0e

8-)
Chapter 08 - The Efficient Market Hypothesis
1+. (f the E.&. capital !arkets are not infor!ationally efficient .......
#. the !arkets cannot be allocationally efficient
$. then syste!atic risk oes not !atter
C. then no type of analysis can be use to generate abnor!al returns
%. then returns !ust follow a rano! walk

11. @#cti0e in0est!ent !anage!ent !ay generate aitional returns at ti!es of about 0.1?.
Howe0er, the stanar e0iation of the typical well i0ersifie portfolio is about '0?, so it is
0ery ifficult to statistically ientify any increase in perfor!ance.@ E0en if true, this state!ent
is an e/a!ple of the ......... proble! in eciing how efficient the !arkets are.
#. !agnitue
$. selection bias
C. lucky e0ent
%. allocation

1*. %e$ont an Thaler A1)8*B foun that the poorest perfor!ing stocks in one ti!e perio
e/perience .......... perfor!ance in the following perio an the best perfor!ing stocks
in one ti!e perio e/perience .......... perfor!ance in the following ti!e perio.
#. goo, goo
$. goo, poor
C. poor, goo
%. poor, poor

12. 6.M. -eyes put all his !oney in one stock an the stock ouble in 0alue in a !atter of
!onths. He i this three ti!es in a row with three ifferent stocks. 6.M. got his picture on the
front page of the Wall &treet 6ournal. Howe0er the paper ne0er !entione the thousans of
in0estors who !ae si!ilar bets on other stocks an lost !ost of their !oney. This is an
e/a!ple of the ........ proble! in eciing how efficient the !arkets are.
#. !agnitue
$. selection bias
C. lucky e0ent
%. s!all fir!

8-10
Chapter 08 - The Efficient Market Hypothesis
15. Most tests of se!i-strong efficiency are ..........
#. esigne to test whether insie infor!ation can be use to generate abnor!al returns
$. base on technical traing rules
C. unable to generate any e0ience of !arket ano!alies
%. ;oint tests of !arket efficiency an the risk a;ust!ent !easure

18. The ......... effect !ay e/plain !uch of the s!all fir! ano!aly.
(. 6anuary effect
((. neglecte effect
(((. li4uiity effect
#. ( only
$. (( only
C. (( an ((( only
%. (, (( an (((

1). &tuies show that the bi-ask sprea for the least li4ui stocks !ay be as high as .......
#. +?
$. *?
C. )?
%. 1'?

*0. The broaest infor!ation set is inclue in the
#. weak for! efficiency argu!ent
$. se!i-strong for! efficiency argu!ent
C. strong for! efficiency argu!ent
%. technical analysis traing !etho

*1. The 9a!a an 9rench e0ience that high book to !arket fir!s outperfor! low book to
!arket fir!s e0en after a;usting for beta !eans ..........
#. high book to !arket fir!s are unerprice
$. low book to !arket fir!s are unerprice
C. either high book to !arket fir!s are unerprice or the book to !arket ratio is a pro/y for
a syste!atic risk factor
%. high book to !arket fir!s ha0e !ore post earnings rift

8-11
Chapter 08 - The Efficient Market Hypothesis
*'. #ccoring to results by &eyhun ...........
#. in0estors cannot usually earn abnor!al returns by following insie traes after knowlege
of the traes are !ae public
$. in0estors can usually earn abnor!al returns by following insie traes after knowlege of
the traes are !ae public
C. in0estors cannot earn abnor!al returns by following insie traes before knowlege of the
traes are !ae public
%. in0estors cannot earn abnor!al returns by traing before insiers

*+. (f the aily returns on the stock !arket are nor!ally istribute with a !ean of 0.0*? an
a stanar e0iation of 1.00?, the probability that the stock !arket woul ha0e a return of
-'+.00? or worse on one particular ay Aas it i on $lack MonayB is appro/i!ately
...........
#. 0.0?
$. 0.1?
C. 1.0?
%. 10.0?

*1. #ccoring to the se!i-strong for! of the efficient !arkets hypothesis .............
#. stock prices o not rapily a;ust to new infor!ation
$. future changes in stock prices cannot be preicte fro! any infor!ation that is publicly
a0ailable
C. corporate insiers shoul ha0e no better in0est!ent perfor!ance than other in0estors e0en
if allowe to trae freely
%. arbitrage between futures an cash !arkets shoul not prouce e/traorinary profits

**. The ter! rano! walk is use in in0est!ents to refer to ...............
#. stock price changes that are rano! but preictable
$. stock prices that respon slowly to both ol an new infor!ation
C. stock price changes that are rano! an unpreictable
%. stock prices changes that follow the pattern of past price changes

8-1'
Chapter 08 - The Efficient Market Hypothesis
*2. (!portant characteristicAsB of !arket efficiency is that ..................
(. there are no arbitrage opportunities
((. security prices react 4uickly to new infor!ation
(((. acti0e traing strategies will not consistently outperfor! passi0e strategies
#. ( only
$. (( only
C. ( an ((( only
%. (, (( an (((

*5. &tock !arket analysts ha0e tene to be ........... in their reco!!enations to
in0estors.
#. slightly o0erly opti!istic
$. o0erwhel!ingly opti!istic
C. slightly o0erly pessi!istic
%. o0erwhel!ingly pessi!istic

*8. #ssu!e that a co!pany announces une/pectely high earnings in a particular 4uarter. (n
an efficient !arket one !ight e/pect ..............
#. an abnor!al price change i!!eiately following the announce!ent
$. an abnor!al price increase before the announce!ent
C. an abnor!al price ecrease after the announce!ent
%. no abnor!al price change before or after the announce!ent

*). # !arket ano!aly refers to ........
#. an e/ogenous shock to the !arket that is sharp but not persistent
$. a price or 0olu!e e0ent that is inconsistent with historical price or 0olu!e trens
C. a traing or pricing structure that interferes with efficient buying an selling of securities
%. price beha0ior that iffers fro! the beha0ior preicte by the efficient !arket hypothesis

8-1+
Chapter 08 - The Efficient Market Hypothesis
20. Which of the following contraicts the proposition that the stock !arket is weakly
efficient"
#. F0er '*? of !utual funs outperfor! the !arket on a0erage.
$. (nsiers earn abnor!al traing profits.
C. E0ery 6anuary, the stock !arket earns abo0e nor!al returns.
%. #pplications of technical traing rules fail to earn abnor!al returns.

21. Which of the following woul 0iolate the efficient !arket hypothesis"
#. (ntel has consistently generate large profits for years.
$. 7rices for stocks before stock splits show on a0erage consistently positi0e abnor!al
returns.
C. Earning abnor!al returns after a fir! announces surprise earnings.
%. High earnings growth stocks fail to generate higher returns for in0estors than low earnings
growth stocks.

2'. Which of the following stock price obser0ations woul appear to contraict the weak for!
of the efficient !arket hypothesis"
#. The a0erage rate of return is significantly greater than 8ero.
$. The correlation between the !arket return one week an the return the following week is
8ero.
C. =ou coul ha0e consistently !ae superior returns by buying stock after a 10? rise in
price an selling after a 10? fall.
%. =ou coul ha0e consistently !ae superior returns by forecasting future earnings
perfor!ance with your new Crystal $all forecast !ethoology.

2+. The se!i-strong for! of the efficient !arket hypothesis i!plies that ............
generate abnor!al returns an ............ generate abnor!al returns.
#. Technical analysis cannotC funa!ental analysis can
$. Technical analysis canC funa!ental analysis can
C. Technical analysis canC funa!ental analysis cannot
%. Technical analysis cannotC funa!ental analysis cannot

8-11
Chapter 08 - The Efficient Market Hypothesis
21. #n i!plication of the efficient !arket hypothesis is that ...........
#. high beta stocks are consistently o0erprice
$. low beta stocks are consistently o0erprice
C. non8ero alphas will 4uickly isappear
%. growth stocks are better buys than 0alue stocks

2*. 9una!ental ine/ing refers to .........
#. in0esting in ine/ stocks in proportion to the stock:s funa!ental 0alue
$. in0esting in ine/ stocks in proportion to the stock:s !arket 0alue
C. in0esting an e4ual ollar a!ount in ine/ stocks
%. in0esting in an e4ual a!ount shares in each of the ine/ stocks

22. Tests of !utual fun perfor!ance inicate that funs with .............. ten to ha0e
poorer perfor!ance.
#. !ore funs in the fa!ily
$. higher e/pense an turno0er ratios
C. lower !anage!ent fees
%. larger asset si8e

25. Galue stocks !ay pro0ie in0estors with better returns than growth stocks if ........
(. 0alue stocks are out of fa0or with in0estors
((. prices of growth stocks inclue pre!iu!s for o0erly opti!istic growth le0els
(((. 0alue stocks are likely to generate positi0e earnings surprises.
#. ( only
$. (( only
C. ( an ((( only
%. (, (( an (((

28. Galue stocks usually e/hibit ... price-to-book ratios an ... price-to-earnings ratios.
#. low, low
$. low, high
C. high, low
%. high, high

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Chapter 08 - The Efficient Market Hypothesis
2). Hrowth stocks usually e/hibit ... price-to-book ratios an ... price-to-earnings ratios.
#. low, low
$. low, high
C. high, low
%. high, high

50. # ay trae with an a0erage stock holing perio of uner 8 !inutes !ight be !ost
closely associate with which traing philosophy"
#. EMH
$. 9una!ental analysis
C. &trong for! !arket efficiency
%. Technical analysis

51. # technical analyst is !ost likely to be affiliate with which in0est!ent philosophy"
#. #cti0e !anage!ent
$. $uy an hol
C. 7assi0e in0est!ent
%. (ne/ funs

5'. &o!eone who in0ests in the Ganguar (ne/ *00 !utual fun coul !ost accurately be
escribe as using what approach"
#. #cti0e !anage!ent
$. #rbitrage
C. 9una!ental analysis
%. 7assi0e in0est!ent

5+. E0ience by $lake, Elton an Hruber inicates that on a0erage acti0ely !anage bon
funs
#. outperfor! passi0e fi/e-inco!e ine/es ...........
$. uner perfor! passi0e fi/e-inco!e ine/es by a wie !argin
C. perfor! as well as passi0e fi/e-inco!e ine/es
%. uner perfor! passi0e fi/e-inco!e ine/es by an a!ount e4ual to fun e/penses

8-12
Chapter 08 - The Efficient Market Hypothesis
51. (nsiers are able to profitably trae an earn abnor!al returns prior to the announce!ent
of positi0e news. This is a 0iolation of which for! of efficiency"
#. Weak for! efficiency
$. &e!i-strong for! efficiency
C. &trong for! efficiency
%. Technical analysis

5*. (n an efficient !arket an for an in0estor that belie0es in a passi0e approach to in0esting,
what is the pri!ary uty of a portfolio !anager"
#. #ccounting for results
$. %i0ersification
C. (entifying uner0alue stocks
%. Do nee for a portfolio !anager

52. Which of the following is not a topic relate to the ebate o0er !arket efficiency"
#. (7F results
$. Iucky e0ent issue
C. Magnitue issue
%. &election bias

55. Which 9ielity Magellan portfolio !anager is often reference as an e/ception to the
general conclusion of efficient !arkets"
#. 6eff Ginik
$. 7eter Iynch
C. 3obert &tansky
%. Willia! Hayes

58. The tenency of poorly perfor!ing stocks an well perfor!ing stocks in one perio to
continue their perfor!ance into the ne/t perio is calle the .................
#. fa effect
$. !artingale effect
C. !o!entu! effect
%. re0ersal effect

8-15
Chapter 08 - The Efficient Market Hypothesis
5). Which of the following is not a concept relate to e/plaining abnor!al e/cess stock
returns"
#. 6anuary effect
$. Deglecte fir! effect
C. 7<E effect
%. 7referre stock effect

80. The lack of ae4uate traing 0olu!e in stock that !ay ulti!ately lea to its ability to
prouce e/cess returns is referre to as the .....................
#. 6anuary effect
$. li4uiity effect
C. neglecte fir! effect
%. 7<E effect

81. 9una!ental analysis eter!ines that the price of a fir!:s stock is too low, gi0en its
intrinsic 0alue. The infor!ation use in the analysis is a0ailable to all !arket participants, yet
the price oes not see! to react. The stock oes not trae on a !a;or e/change. What concept
!ight e/plain the ability to prouce e/cess returns on this stock"
#. 6anuary effect
$. Deglecte fir! effect
C. 7<E effect
%. 3e0ersal effect

8'. When testing !utual fun perfor!ance o0er ti!e one !ust be careful of ...........,
which !eans that a certain percentage of poorer perfor!ing funs fail o0er ti!e which !akes
the perfor!ance of re!aining funs see! !ore consistent o0er ti!e.
#. sur0i0orship bias
$. lucky e0ent bias
C. !agnitue bias
%. !ean re0ersion bias

8-18
Chapter 08 - The Efficient Market Hypothesis
8+. Most e0ience inicates that E.&. stock !arkets are ........................
#. reasonably weak for! an se!i-strong for! efficient
$. strong for! efficient
C. reasonably weak for! but not se!i- or strong for! efficient
%. neither weak for!, se!i- or strong for! efficient

81. Which of the following state!ents is<are correct"
#. (f a !arket is weak for! efficient it is also se!i- an strong for! efficient
$. (f a !arket is se!i-strong efficient it is also strong for! efficient
C. (f a !arket is strong for! efficient it is also se!i-strong but not weak for! efficient
%. (f a !arket is strong for! efficient it is also se!i- an weak for! efficient

8*. #ccoring to Markowit8 an other proponents of !oern portfolio theory which of the
following acti0ities woul not be e/pecte to prouce any benefits"
#. %i0ersification
$. (n0esting in Treasury bills
C. (n0esting in stocks of utility co!panies
%. Engaging in acti0e portfolio !anage!ent to enhance returns

82. #ccoring to results by &eyhun the !ain reason why in0estors cannot earn e/cess returns
by following insie traes after they beco!e public is ...............
#. risk pre!iu!
$. transaction costs
C. the &EC late isclosure rule
%. the stock re0ersal effect

Chapter 08 The Efficient Market Hypothesis #nswer -ey


Multiple Choice Questions

8-1)
Chapter 08 - The Efficient Market Hypothesis
1. Which of the following beliefs woul not preclue charting as a !etho of portfolio
!anage!ent"
#. The !arket is strong for! efficient.
$. The !arket is se!i-strong for! efficient.
C. The !arket is weak for! efficient.
D. &tock prices follow recurring patterns.

Difficulty: Medium

'. (n a 1)*+ stuy of stock prices, Maurice -enall foun that .........
A. there were no preictable patterns in stock prices
$. stock prices e/hibite strong serial autocorrelation
C. ay to ay stock prices followe consistent trens
%. funa!ental analysis coul be use to generate abnor!al returns

Difficulty: Easy

+. The weak for! of the EMH states that ........ !ust be reflecte in the current stock
price.
A. all past infor!ation incluing security price an 0olu!e ata
$. all publicly a0ailable infor!ation
C. all infor!ation incluing insie infor!ation
%. all costless infor!ation

Difficulty: Easy

1. The se!i-strong for! of the EMH states that ........ !ust be reflecte in the current
stock price.
#. all security price an 0olu!e ata
B. all publicly a0ailable infor!ation
C. all infor!ation incluing insie infor!ation
%. all costless infor!ation

Difficulty: Easy

8-'0
Chapter 08 - The Efficient Market Hypothesis
*. The strong for! of the EMH states that ........ !ust be reflecte in the current stock
price.
#. all security price an 0olu!e ata
$. all publicly a0ailable infor!ation
C. all infor!ation incluing insie infor!ation
%. all costless infor!ation

Difficulty: Easy

2. 3ano! price !o0e!ents inicate .........
#. irrational !arkets
$. that prices cannot e4ual funa!ental 0alues
C. that technical analysis to unco0er trens can be 4uite useful
D. that !arkets are functioning efficiently

Difficulty: Medium

5. When the !arket risk pre!iu! rises, stock prices will .........
#. rise
B. fall
C. reco0er
%. ha0e e/cess 0olatility

Difficulty: Medium

8. The s!all fir! in 6anuary effect is strongest .........
A. early in the !onth
$. in the !ile of the !onth
C. late in the !onth
%. in e0en nu!bere years

Difficulty: Medium

8-'1
Chapter 08 - The Efficient Market Hypothesis
). E0ience suggests that there !ay be ....... !o!entu! an ........ re0ersal patterns
in stock price beha0ior.
#. short-run, short-run
$. long-run, long-run
C. long-run, short-run
D. short-run, long run

Difficulty: Medium

10. 7roponents of the EMH typically a0ocate ...........
#. a conser0ati0e in0est!ent strategy
$. a liberal in0est!ent strategy
C. a passi0e in0est!ent strategy
%. an aggressi0e in0est!ent strategy

Difficulty: Easy

11. &tock prices that are stable o0er ti!e ........
#. inicate that prices are useful inicators of true econo!ic 0alue
B. inicate that the !arket is not incorporating new infor!ation into current stock prices
C. ensure that an econo!y allocates its resources efficiently
%. inicates that returns follow a rano! walk process

Difficulty: Hard

1'. The tenency when the ...... perfor!ing stocks in one perio are the best perfor!ers in
the ne/t an the current ........ perfor!ers are lagging the !arket later is calle the
re0ersal effect.
A. worst, best
$. worst, worst
C. best, worst
%. best, best

Difficulty: Medium

8-''
Chapter 08 - The Efficient Market Hypothesis
1+. Which of the following is not a !etho e!ploye by followers of technical analysis"
#. Charting
$. 3elati0e strength analysis
C. Earnings forecasting
%. Traing aroun support an resistance le0els

Difficulty: Easy

11. Which of the following is not a !etho e!ploye by funa!ental analysts"
#. #naly8ing the 9e:s ne/t interest rate !o0e
B. 3elati0e strength analysis
C. Earnings forecasting
%. Esti!ating the econo!ic growth rate

Difficulty: Easy

1*. The pri!ary ob;ecti0e of funa!ental analysis is to ientify ...........
#. well run fir!s
$. poorly run fir!s
C. !is-price stocks
%. high 7<E stocks

Difficulty: Easy

12. (f you belie0e in the .......... for! of the EMH, you belie0e that stock prices reflect
all publicly a0ailable infor!ation but not infor!ation that is a0ailable only to insiers.
A. se!i-strong
$. strong
C. weak
%. perfect

Difficulty: Easy

8-'+
Chapter 08 - The Efficient Market Hypothesis
15. (f you belie0e in the .......... for! of the EMH, you belie0e that stock prices reflect
all rele0ant infor!ation incluing infor!ation that is a0ailable only to insiers.
#. se!i-strong
B. strong
C. weak
%. perfect

Difficulty: Easy

18. Most of the stock price response to a corporate earnings or i0ien announce!ent occurs
within .................
#. about +0 secons
B. about 10 !inutes
C. 2 !onths
%. ' years

Difficulty: Medium

1). .......... is the return on a stock beyon what woul be preicte fro! !arket
!o0e!ents alone.
#. # nor!al return
$. # subli!inal return
C. #n abnor!al return
%. #n e/cess return

Difficulty: Easy

8-'1
Chapter 08 - The Efficient Market Hypothesis
'0. =ou belie0e that stock prices reflect all infor!ation that can be eri0e by e/a!ining
!arket traing ata such as the history of past stock prices, traing 0olu!e or short interest
but you o not belie0e stock prices reflect all publicly a0ailable or insie infor!ation. =ou are
a proponent of .............
#. se!i-strong
$. strong
C. weak
%. perfect

Difficulty: Easy

'1. =ou are an in0est!ent !anager who is currently !anaging assets worth >2 billion. =ou
belie0e that acti0e !anage!ent of your fun coul generate between an aitional one tenth
of 1? return on the portfolio. (f you want to !ake sure your acti0e strategy as 0alue, how
!uch can you spen on security analysis"
#. >1',000,000
B. >2,000,000
C. >+,000,000
%. >0
A0.001BA>2 billionB J >2,000,000

Difficulty: Easy

''. # !utual fun which atte!pts to hol 4uantities of shares in proportion to their
representation in the !arket is calle a .......... fun.
#. stock
B. ine/
C. hege
%. !oney !arket

Difficulty: Easy

8-'*
Chapter 08 - The Efficient Market Hypothesis
'+. Choosing stocks by searching for preictable patterns in stock prices is calle .........
#. funa!ental analysis
B. technical analysis
C. ine/ !anage!ent
%. rano! walk in0esting

Difficulty: Easy

'1. Which of the following is not an issue that is central to the ebate regaring !arket
efficiency"
#. The !agnitue issue
B. The ta/ loss selling issue
C. The lucky e0ent issue
%. The selection bias issue

Difficulty: Easy

'*. Most people woul reaily agree that the stock !arket is not ..........
#. weak for! efficient
$. se!i-strong for! efficient
C. strong for! efficient
%. efficient at all

Difficulty: Easy

'2. &!all fir!s ha0e tene to earn abnor!al returns pri!arily in ...........
A. the !onth of 6anuary
$. the !onth 6uly
C. the trough of the business cycle
%. the peak of the business cycle

Difficulty: Easy

8-'2
Chapter 08 - The Efficient Market Hypothesis
'5. 9a!a an 9rench ha0e suggeste that !any !arket ano!alies can be e/plaine as
!anifestations of .............
#. regulatory effects
$. high traing costs
C. infor!ation asy!!etry
D. 0arying risk pre!iu!s

Difficulty: Medium

'8. 7roponents of the EMH think technical analysts ...........
#. shoul focus on relati0e strength
$. shoul focus on resistance le0els
C. shoul focus on support le0els
D. are wasting their ti!e

Difficulty: Easy

'). E0ience supporting se!i-strong for! !arket efficiency suggests that in0estors shoul
..........................
#. rely on technical analysis to select securities
$. rely on funa!ental analysis to select securities
C. use a passi0e traing strategy such as purchasing an ine/ fun or an ET9
%. select securities by throwing arts at the financial pages of the newspaper

Difficulty: Easy

+0. @$uy a stock if its price !o0es up by '? !ore than the %ow #0erage,@ is an e/a!ple of a
..................
A. filter rule
$. !arket ano!aly
C. funa!ental approach
%. passi0e traing strategy

Difficulty: Easy

8-'5
Chapter 08 - The Efficient Market Hypothesis
+1. 6affee foun that stock prices .......... after insiers intensi0ely bought shares an
.......... after insiers intensi0ely sol shares.
#. ecrease, ecrease
$. ecrease, increase
C. increase, ecrease
%. increase, increase

Difficulty: Medium

+'. (n a recent stuy, 9a!a an 9rench foun that the return on the aggregate stock !arket
was .......... when the i0ien yiel was higher.
A. higher
$. lower
C. unaffecte
%. !ore skewe

Difficulty: Medium

++. 9a!a an 9rench A1))1B an 3einganu! A1)88B foun that fir!s with ..........
!arket<book ratios ha higher stock returns.
#. high
B. low
C. !eiu!
%. paire

Difficulty: Medium

+1. 6oe bought a stock at >*5 per share. The price pro!ptly fell to >**. 6oe hel on to the
stock until it again reache >*5 an then he sol once he ha eli!inate his loss. (f other
in0estors o the sa!e to establish a traing pattern this woul contraict ........
#. the strong-for! EMH
B. the weak-for! EMH
C. technical analysis
%. the se!istrong-for! EMH

Difficulty: Medium

8-'8
Chapter 08 - The Efficient Market Hypothesis
+*. #ccoring to recent research securities !arkets fully a;ust to earnings announce!ents
........
#. instantly
$. in 1 ay
C. in 1 week
D. graually o0er ti!e

Difficulty: Medium

+2. When stock returns e/hibit positi0e serial correlation, this !eans that .......... returns
ten to follow ........... returns.
A. positi0eC positi0e
$. positi0eC negati0e
C. negati0eC positi0e
%. positi0eC 8ero

Difficulty: Easy

+5. $asu foun that fir!s with high 7<E ratios ...........
#. earne higher a0erage returns than fir!s with low 7<E ratios
$. earne the sa!e a0erage returns as fir!s with low 7<E ratios
C. earne lower a0erage returns than fir!s with low 7<E ratios
%. ha higher i0ien yiels than fir!s with low 7<E ratios

Difficulty: Medium

+8. 9una!ental analysis is likely to yiel best results for ........
#. D=&E stocks
B. neglecte stocks
C. stocks that are fre4uently in the news
%. fast growing co!panies

Difficulty: Medium

8-')
Chapter 08 - The Efficient Market Hypothesis
+). =ou are looking to in0est in one of three stocks. &tock # has high e/pecte earnings
growth, &tock $ has only !oest e/pecte earnings growth an &tock C is e/pecte to
generate poor earnings growth. Which stock is likely to generate the greatest alpha for you"
#. &tock #
$. &tock $
C. &tock C
D. =ou cannot tell fro! the infor!ation gi0en

Difficulty: Medium

10. =ou belie0e that you can earn '? !ore on your portfolio if you engage in full ti!e stock
research. Howe0er, the aitional traing costs an ta/ liability fro! acti0e !anage!ent will
cost you about 0.*?. =ou ha0e a >800,000 stock portfolio. What is the !ost you can affor to
spen on your research"
#. >1,000
$. >8,000
C. >1',000
%. >12,000
A0.0' - 0.00*BA>800,000B J >1',000

Difficulty: Medium

11. E0en if the !arkets are efficient, professional portfolio !anage!ent is still i!portant
because it pro0ies in0estors with ..........
(. low cost i0ersification
((. pro0ies a portfolio with a specifie risk le0el
(((. pro0ies better risk a;uste returns than an ine/
#. ( only
B. ( an (( only
C. (( an ((( only
%. (, (( an (((

Difficulty: Medium

8-+0
Chapter 08 - The Efficient Market Hypothesis
1'. $an8 foun that, on a0erage, the risk-a;uste returns of s!all fir!s ...........
A. was higher than the risk-a;uste returns of large fir!s
$. was the sa!e as the risk-a;uste returns of large fir!s
C. was lower than the risk-a;uste returns of large fir!s
%. was negati0e

Difficulty: Medium

1+. (f the E.&. capital !arkets are not infor!ationally efficient .......
A. the !arkets cannot be allocationally efficient
$. then syste!atic risk oes not !atter
C. then no type of analysis can be use to generate abnor!al returns
%. then returns !ust follow a rano! walk

Difficulty: Medium

11. @#cti0e in0est!ent !anage!ent !ay generate aitional returns at ti!es of about 0.1?.
Howe0er, the stanar e0iation of the typical well i0ersifie portfolio is about '0?, so it is
0ery ifficult to statistically ientify any increase in perfor!ance.@ E0en if true, this state!ent
is an e/a!ple of the ......... proble! in eciing how efficient the !arkets are.
A. !agnitue
$. selection bias
C. lucky e0ent
%. allocation

Difficulty: Medium

1*. %e$ont an Thaler A1)8*B foun that the poorest perfor!ing stocks in one ti!e perio
e/perience .......... perfor!ance in the following perio an the best perfor!ing stocks
in one ti!e perio e/perience .......... perfor!ance in the following ti!e perio.
#. goo, goo
B. goo, poor
C. poor, goo
%. poor, poor

Difficulty: Medium

8-+1
Chapter 08 - The Efficient Market Hypothesis
12. 6.M. -eyes put all his !oney in one stock an the stock ouble in 0alue in a !atter of
!onths. He i this three ti!es in a row with three ifferent stocks. 6.M. got his picture on the
front page of the Wall &treet 6ournal. Howe0er the paper ne0er !entione the thousans of
in0estors who !ae si!ilar bets on other stocks an lost !ost of their !oney. This is an
e/a!ple of the ........ proble! in eciing how efficient the !arkets are.
#. !agnitue
$. selection bias
C. lucky e0ent
%. s!all fir!

Difficulty: Medium

15. Most tests of se!i-strong efficiency are ..........
#. esigne to test whether insie infor!ation can be use to generate abnor!al returns
$. base on technical traing rules
C. unable to generate any e0ience of !arket ano!alies
D. ;oint tests of !arket efficiency an the risk a;ust!ent !easure

Difficulty: Medium

18. The ......... effect !ay e/plain !uch of the s!all fir! ano!aly.
(. 6anuary effect
((. neglecte effect
(((. li4uiity effect
#. ( only
$. (( only
C. (( an ((( only
D. (, (( an (((

Difficulty: Medium

8-+'
Chapter 08 - The Efficient Market Hypothesis
1). &tuies show that the bi-ask sprea for the least li4ui stocks !ay be as high as .......
#. +?
B. *?
C. )?
%. 1'?

Difficulty: Hard

*0. The broaest infor!ation set is inclue in the
#. weak for! efficiency argu!ent
$. se!i-strong for! efficiency argu!ent
C. strong for! efficiency argu!ent
%. technical analysis traing !etho

Difficulty: Easy

*1. The 9a!a an 9rench e0ience that high book to !arket fir!s outperfor! low book to
!arket fir!s e0en after a;usting for beta !eans ..........
#. high book to !arket fir!s are unerprice
$. low book to !arket fir!s are unerprice
C. either high book to !arket fir!s are unerprice or the book to !arket ratio is a pro/y for
a syste!atic risk factor
%. high book to !arket fir!s ha0e !ore post earnings rift

Difficulty: Medium

*'. #ccoring to results by &eyhun ...........
A. in0estors cannot usually earn abnor!al returns by following insie traes after knowlege
of the traes are !ae public
$. in0estors can usually earn abnor!al returns by following insie traes after knowlege of
the traes are !ae public
C. in0estors cannot earn abnor!al returns by following insie traes before knowlege of the
traes are !ae public
%. in0estors cannot earn abnor!al returns by traing before insiers

Difficulty: Hard

8-++
Chapter 08 - The Efficient Market Hypothesis
*+. (f the aily returns on the stock !arket are nor!ally istribute with a !ean of 0.0*? an
a stanar e0iation of 1.00?, the probability that the stock !arket woul ha0e a return of
-'+.00? or worse on one particular ay Aas it i on $lack MonayB is appro/i!ately
...........
A. 0.0?
$. 0.1?
C. 1.0?
%. 10.0?
7rob J 1 - DKA.'+00 - .000*B<.01L 0

Difficulty: Medium

*1. #ccoring to the se!i-strong for! of the efficient !arkets hypothesis .............
#. stock prices o not rapily a;ust to new infor!ation
B. future changes in stock prices cannot be preicte fro! any infor!ation that is publicly
a0ailable
C. corporate insiers shoul ha0e no better in0est!ent perfor!ance than other in0estors e0en
if allowe to trae freely
%. arbitrage between futures an cash !arkets shoul not prouce e/traorinary profits

Difficulty: Easy

**. The ter! rano! walk is use in in0est!ents to refer to ...............
#. stock price changes that are rano! but preictable
$. stock prices that respon slowly to both ol an new infor!ation
C. stock price changes that are rano! an unpreictable
%. stock prices changes that follow the pattern of past price changes

Difficulty: Easy

8-+1
Chapter 08 - The Efficient Market Hypothesis
*2. (!portant characteristicAsB of !arket efficiency is that ..................
(. there are no arbitrage opportunities
((. security prices react 4uickly to new infor!ation
(((. acti0e traing strategies will not consistently outperfor! passi0e strategies
#. ( only
$. (( only
C. ( an ((( only
D. (, (( an (((

Difficulty: Easy

*5. &tock !arket analysts ha0e tene to be ........... in their reco!!enations to
in0estors.
#. slightly o0erly opti!istic
B. o0erwhel!ingly opti!istic
C. slightly o0erly pessi!istic
%. o0erwhel!ingly pessi!istic

Difficulty: Medium

*8. #ssu!e that a co!pany announces une/pectely high earnings in a particular 4uarter. (n
an efficient !arket one !ight e/pect ..............
A. an abnor!al price change i!!eiately following the announce!ent
$. an abnor!al price increase before the announce!ent
C. an abnor!al price ecrease after the announce!ent
%. no abnor!al price change before or after the announce!ent

Difficulty: Easy

*). # !arket ano!aly refers to ........
#. an e/ogenous shock to the !arket that is sharp but not persistent
$. a price or 0olu!e e0ent that is inconsistent with historical price or 0olu!e trens
C. a traing or pricing structure that interferes with efficient buying an selling of securities
D. price beha0ior that iffers fro! the beha0ior preicte by the efficient !arket hypothesis

Difficulty: Medium

8-+*
Chapter 08 - The Efficient Market Hypothesis
20. Which of the following contraicts the proposition that the stock !arket is weakly
efficient"
#. F0er '*? of !utual funs outperfor! the !arket on a0erage.
$. (nsiers earn abnor!al traing profits.
C. E0ery 6anuary, the stock !arket earns abo0e nor!al returns.
%. #pplications of technical traing rules fail to earn abnor!al returns.

Difficulty: Medium

21. Which of the following woul 0iolate the efficient !arket hypothesis"
#. (ntel has consistently generate large profits for years.
$. 7rices for stocks before stock splits show on a0erage consistently positi0e abnor!al
returns.
C. Earning abnor!al returns after a fir! announces surprise earnings.
%. High earnings growth stocks fail to generate higher returns for in0estors than low earnings
growth stocks.

Difficulty: Medium

2'. Which of the following stock price obser0ations woul appear to contraict the weak for!
of the efficient !arket hypothesis"
#. The a0erage rate of return is significantly greater than 8ero.
$. The correlation between the !arket return one week an the return the following week is
8ero.
C. =ou coul ha0e consistently !ae superior returns by buying stock after a 10? rise in
price an selling after a 10? fall.
%. =ou coul ha0e consistently !ae superior returns by forecasting future earnings
perfor!ance with your new Crystal $all forecast !ethoology.

Difficulty: Medium

8-+2
Chapter 08 - The Efficient Market Hypothesis
2+. The se!i-strong for! of the efficient !arket hypothesis i!plies that ............
generate abnor!al returns an ............ generate abnor!al returns.
#. Technical analysis cannotC funa!ental analysis can
$. Technical analysis canC funa!ental analysis can
C. Technical analysis canC funa!ental analysis cannot
D. Technical analysis cannotC funa!ental analysis cannot

Difficulty: Medium

21. #n i!plication of the efficient !arket hypothesis is that ...........
#. high beta stocks are consistently o0erprice
$. low beta stocks are consistently o0erprice
C. non8ero alphas will 4uickly isappear
%. growth stocks are better buys than 0alue stocks

Difficulty: Medium

2*. 9una!ental ine/ing refers to .........
A. in0esting in ine/ stocks in proportion to the stock:s funa!ental 0alue
$. in0esting in ine/ stocks in proportion to the stock:s !arket 0alue
C. in0esting an e4ual ollar a!ount in ine/ stocks
%. in0esting in an e4ual a!ount shares in each of the ine/ stocks

Difficulty: Medium

22. Tests of !utual fun perfor!ance inicate that funs with .............. ten to ha0e
poorer perfor!ance.
#. !ore funs in the fa!ily
B. higher e/pense an turno0er ratios
C. lower !anage!ent fees
%. larger asset si8e

Difficulty: Easy

8-+5
Chapter 08 - The Efficient Market Hypothesis
25. Galue stocks !ay pro0ie in0estors with better returns than growth stocks if ........
(. 0alue stocks are out of fa0or with in0estors
((. prices of growth stocks inclue pre!iu!s for o0erly opti!istic growth le0els
(((. 0alue stocks are likely to generate positi0e earnings surprises.
#. ( only
$. (( only
C. ( an ((( only
D. (, (( an (((

Difficulty: Medium

28. Galue stocks usually e/hibit ... price-to-book ratios an ... price-to-earnings ratios.
A. low, low
$. low, high
C. high, low
%. high, high

Difficulty: Medium

2). Hrowth stocks usually e/hibit ... price-to-book ratios an ... price-to-earnings ratios.
#. low, low
$. low, high
C. high, low
D. high, high

Difficulty: Medium

50. # ay trae with an a0erage stock holing perio of uner 8 !inutes !ight be !ost
closely associate with which traing philosophy"
#. EMH
$. 9una!ental analysis
C. &trong for! !arket efficiency
D. Technical analysis

Difficulty: Easy

8-+8
Chapter 08 - The Efficient Market Hypothesis
51. # technical analyst is !ost likely to be affiliate with which in0est!ent philosophy"
A. #cti0e !anage!ent
$. $uy an hol
C. 7assi0e in0est!ent
%. (ne/ funs

Difficulty: Easy

5'. &o!eone who in0ests in the Ganguar (ne/ *00 !utual fun coul !ost accurately be
escribe as using what approach"
#. #cti0e !anage!ent
$. #rbitrage
C. 9una!ental analysis
D. 7assi0e in0est!ent

Difficulty: Easy

5+. E0ience by $lake, Elton an Hruber inicates that on a0erage acti0ely !anage bon
funs
#. outperfor! passi0e fi/e-inco!e ine/es ...........
$. uner perfor! passi0e fi/e-inco!e ine/es by a wie !argin
C. perfor! as well as passi0e fi/e-inco!e ine/es
D. uner perfor! passi0e fi/e-inco!e ine/es by an a!ount e4ual to fun e/penses

Difficulty: Medium

51. (nsiers are able to profitably trae an earn abnor!al returns prior to the announce!ent
of positi0e news. This is a 0iolation of which for! of efficiency"
#. Weak for! efficiency
$. &e!i-strong for! efficiency
C. &trong for! efficiency
%. Technical analysis

Difficulty: Medium

8-+)
Chapter 08 - The Efficient Market Hypothesis
5*. (n an efficient !arket an for an in0estor that belie0es in a passi0e approach to in0esting,
what is the pri!ary uty of a portfolio !anager"
#. #ccounting for results
B. %i0ersification
C. (entifying uner0alue stocks
%. Do nee for a portfolio !anager

Difficulty: Medium

52. Which of the following is not a topic relate to the ebate o0er !arket efficiency"
A. (7F results
$. Iucky e0ent issue
C. Magnitue issue
%. &election bias

Difficulty: Medium

55. Which 9ielity Magellan portfolio !anager is often reference as an e/ception to the
general conclusion of efficient !arkets"
#. 6eff Ginik
B. 7eter Iynch
C. 3obert &tansky
%. Willia! Hayes

Difficulty: Medium

58. The tenency of poorly perfor!ing stocks an well perfor!ing stocks in one perio to
continue their perfor!ance into the ne/t perio is calle the .................
#. fa effect
$. !artingale effect
C. !o!entu! effect
%. re0ersal effect

Difficulty: Medium

8-10
Chapter 08 - The Efficient Market Hypothesis
5). Which of the following is not a concept relate to e/plaining abnor!al e/cess stock
returns"
#. 6anuary effect
$. Deglecte fir! effect
C. 7<E effect
D. 7referre stock effect

Difficulty: Easy

80. The lack of ae4uate traing 0olu!e in stock that !ay ulti!ately lea to its ability to
prouce e/cess returns is referre to as the .....................
#. 6anuary effect
B. li4uiity effect
C. neglecte fir! effect
%. 7<E effect

Difficulty: Easy

81. 9una!ental analysis eter!ines that the price of a fir!:s stock is too low, gi0en its
intrinsic 0alue. The infor!ation use in the analysis is a0ailable to all !arket participants, yet
the price oes not see! to react. The stock oes not trae on a !a;or e/change. What concept
!ight e/plain the ability to prouce e/cess returns on this stock"
#. 6anuary effect
B. Deglecte fir! effect
C. 7<E effect
%. 3e0ersal effect

Difficulty: Medium

8-11
Chapter 08 - The Efficient Market Hypothesis
8'. When testing !utual fun perfor!ance o0er ti!e one !ust be careful of ...........,
which !eans that a certain percentage of poorer perfor!ing funs fail o0er ti!e which !akes
the perfor!ance of re!aining funs see! !ore consistent o0er ti!e.
A. sur0i0orship bias
$. lucky e0ent bias
C. !agnitue bias
%. !ean re0ersion bias

Difficulty: Medium

8+. Most e0ience inicates that E.&. stock !arkets are ........................
A. reasonably weak for! an se!i-strong for! efficient
$. strong for! efficient
C. reasonably weak for! but not se!i- or strong for! efficient
%. neither weak for!, se!i- or strong for! efficient

Difficulty: Medium

81. Which of the following state!ents is<are correct"
#. (f a !arket is weak for! efficient it is also se!i- an strong for! efficient
$. (f a !arket is se!i-strong efficient it is also strong for! efficient
C. (f a !arket is strong for! efficient it is also se!i-strong but not weak for! efficient
D. (f a !arket is strong for! efficient it is also se!i- an weak for! efficient

Difficulty: Medium

8*. #ccoring to Markowit8 an other proponents of !oern portfolio theory which of the
following acti0ities woul not be e/pecte to prouce any benefits"
#. %i0ersification
$. (n0esting in Treasury bills
C. (n0esting in stocks of utility co!panies
D. Engaging in acti0e portfolio !anage!ent to enhance returns

Difficulty: Easy

8-1'
Chapter 08 - The Efficient Market Hypothesis
82. #ccoring to results by &eyhun the !ain reason why in0estors cannot earn e/cess returns
by following insie traes after they beco!e public is ...............
A. risk pre!iu!
$. transaction costs
C. the &EC late isclosure rule
%. the stock re0ersal effect

Difficulty: Hard

8-1+