Deck 14: Value-Based Management

Question 1

Following the theory of the "efficient market hypothesis" all of the following are true EXCEPT

A) securities are typically in equilibrium, meaning they are fairly priced and their expected returns equal their required returns.
B) since stocks are fully and fairly price, it follows that investors should not waste their time trying to find and capitalize on miss- priced (under- or over- valued) securities.
C) insider trading scandals have proven that stocks are not fully and fairly priced; as a result, it would be worthwhile for investors should spend time searching for mispriced (over- or under- valued) stocks.
D) at any point in time, security prices fully reflect all public information available about the firm and its securities, and these prices react swiftly to new information.

Answer 1

C

Question 2

In an efficient market, stock prices adjust quickly to new public information.

Answer 2

True

Question 3

It has been found that the share values of firms whose shares are traded publicly in an efficient marketplace is

A) generally positively affected by diversification, because of the reduction in risk.
B) generally not affected by diversification, unless greater returns are expected.
C) generally negatively affected by diversification, because of the increase in risk.
D) generally negatively affected by diversification, because of the increase in the required rate of return.

Answer 3

B

Question 4

Which two of the following are implications of the efficient market hypothesis (EMH) for companies?

A) Large quantities of new shares can be sold without moving the price.
B) Signals from price movements should be taken seriously.
C) The timing of security issues must be fine- tuned.

Question 5

Which three of the following accurately describe insider trading?

A) It is likely to be profitable.
B) It is trading on privileged information.
C) It is any trading in shares of the company by its employees.
D) It is illegal.

Question 6

Which of the following best describes 'strong- form efficiency'?

A) All relevant information, including that which is privately held, is reflected in the share price.
B) Share prices fully reflect information available only to certain shareholders.
C) Share prices fully reflect all the relevant, publicly available information.
D) Share prices fully reflect all information contained in past price movements.

Question 7

Which three of the following are implications of the efficient market hypothesis (EMH) for companies?

A) Large quantities of new shares can be sold without moving the price.
B) Signals from price movements should be taken seriously.
C) The timing of security issues must be fine- tuned.
D) Focus on substance, not on short- term appearances

Question 8

Which three of the following are benefits of an efficient market?

A) It encourages share buying.
B) It helps to allocate resources.
C) Share prices are based on partial information.
D) It gives correct signals to company managers.

Question 9

Economically rational buyers and sellers use their assessment of an asset's risk and return to determine its value. Relative to this concept, which of the following is true?

A) To a seller the asset's value represents the maximum sale price.
B) To a buyer the asset's value represents the minimum price that he or she would pay to acquire it.
C) The interaction of buyers and sellers can result in a value that differs from the stock's true value.
D) To a buyer the asset's value represents the maximum price that he or she would pay to acquire it.

Question 10

Which of the following best describes 'strong- form efficiency'?

A) All relevant information, including that which is privately held, is reflected in the share price.
B) Share prices fully reflect all the relevant, publicly available information.
C) Share prices fully reflect information available only to certain shareholders.
D) Share prices fully reflect all information contained in past price movements.

Question 11

According to the efficient market theory,

A) prices of actively traded stocks can only be under- valued in an efficient market.
B) prices of actively traded stocks can be under- or over- valued in an efficient market, and bear searching out.
C) prices of actively traded stocks do not differ from their true values in an efficient market.
D) prices of actively traded stocks can only be over- valued in an efficient market.

Question 12

Which two options best describe how new information is incorporated into share prices in an efficient market?

A) Rapidly
B) Rationally
C) Through official channels
D) Gradually

Question 13

Which of the following best describes the term 'weak- form efficiency'?

A) Share prices fully reflect all information contained in past price movements.
B) Share prices fully reflect all the relevant, publicly available information.
C) All relevant information, including that which is privately held, is reflected in the share price.
D) Share prices fully reflect information available only to certain shareholders.

Question 14

Efficient market hypothesis is the theory describing the behavior of an assumed "perfect" market in which securities are typically in equilibrium, security prices fully reflect all public information available and react swiftly to new information, and, because stocks are fairly priced, investors need not waste time looking for mispriced securities.

Question 15

If the expected return is less than the required return, investors will sell the asset, because it is not expected to earn a return commensurate with its risk.

Question 16

In an inefficient market, stock prices adjust quickly to new public information.

Question 17

What is X in the formula X = Share price ? Earnings per share

A) Price- earning ratio
B) Dividend cover
C) Dividend yield
D) Share dividend

Question 18

If expected return is less than required return on an asset, rational investors will

A) buy the asset, since price is expected to increase.
B) sell the asset, which will drive the price up and cause the expected return to reach the level of the required return.
C) sell the asset, which will drive the price down and cause the expected return to reach the level of the required return.
D) buy the asset, which will drive the price up and cause expected return to reach the level of the required return.

Question 19

Which of the following is an implication of the efficient market hypothesis (EMH) for investors?

A) For the vast majority of people public information cannot be used to earn abnormal returns.
B) Investors need to press for a greater volume of timely information.
C) Effective EMH will always ensure higher levels of dividend for alert investors.
D) The perception of a fair game market could be improved by more constraints and deterrents placed on insider dealers.

Question 20

If the expected return is above the required return on an asset, rational investors will

A) buy the asset, which will drive the price up and cause expected return to reach the level of the required return.
B) sell the asset, which will drive the price up and cause the expected return to reach the level of the required return.
C) sell the asset, which will drive the price down and cause the expected return to reach the level of the required return.
D) sell the asset, since price is expected to decrease.

Question 21

Rational investors purchase a stock when they believe that it is undervalued and sell when they feel that it is overvalued.

Question 22

If a market is truly efficient, investors should not waste their time trying to find and capitalise on mispriced securities.

Question 23

In an inefficient market, securities are typically in equilibrium, which means that they are fairly priced and that their expected returns equal their required returns.

Question 24

In an efficient market, the expected return and the required return are equal.

Question 25

If the expected return were above the required return, investors would buy the asset, driving its price up and its expected return down.

Question 26

In an efficient market, securities are typically in equilibrium, which means that they are fairly priced and that their expected returns equal their required returns.

Question 27

To a buyer, an asset's value represents the minimum price that he or she would pay to acquire it.

Question 28

Behavioral finance is a growing body of research that focuses on investor behavior and its impact on investment decisions and stock prices.

Question 29

An efficient market is a market that allocates funds to their most productive use as a result of competition among wealth- maximizing investors.

Question 30

If a market is truly efficient, investors should not waste their time trying to find and capitalise on mispriced securities.