Question 1

Which of the following statements is a violation of semi-strong form market efficiency?
I.Executives trade their stock holdings before major announcements.
II.Day traders base their trading decisions on daily, weekly, and monthly trends.

Accepted Answer

The answer of Which of the following statements is a...

Question 2

Melanie has observed that stocks that have earned high returns over the past year tend to earn low returns over the next year.She has also observed that stocks that earned low returns over the past year tended to earn high returns over the next year.This is an example of:

Accepted Answer

Melanie's observations describe a long-term reversal pattern, where past performance inversely predicts future returns. This means that stocks that performed well in the past tend to perform poorly in the future, and vice versa, over long periods.

Question 3

Jane Wong has developed a technical trading rule that has consistently made a risk-adjusted return of 15% per month for the past 10 years.This is evidence of:

Accepted Answer

The consistent abnormal returns suggest that past price information is not fully reflected in current prices, indicating weak form inefficiency.

Question 4

The Andrews Sisters Music Corp has just released its financial statements showing an unexpectedly high earnings number.The stock price of the company does not respond to this information.This observation is consistent with:

Accepted Answer

The answer of The Andrews Sisters Music Corp has just...

Question 5

Empirical support for market efficiency is strongest for:

Accepted Answer

Weak form efficiency, which suggests that past trading information is already reflected in stock prices and that technical analysis cannot consistently outperform the market, has the strongest empirical support among the forms of market efficiency.

Question 6

Which of the following is FALSE? Market efficiency implies:

Accepted Answer

Market efficiency implies that new information disseminates quickly and is instantly reflected in share prices. The prices of securities are considered "right" at any time given their risk profile. However, investors cannot take advantage of temporary time lags in information dissemination as market efficiency suggests that any time lag would be immediately reflected in the prices of securities.

Question 7

Which one of the following is NOT a market anomaly?

Accepted Answer

The answer of Which one of the following is NOT...

Question 8

Jimmy Khan has developed a trading rule where he buys firms with relatively high dividend yields.This trading rule has consistently earned a risk-adjusted return of 15% per month for the past 10 years.This is evidence of:

Accepted Answer

If Jimmy Khan's trading rule has consistently earned a risk-adjusted return of 15% per month for the past 10 years, it suggests that the market is not fully efficient in its semi-strong form. In semi-strong form efficiency, all publicly available information, including historical prices and trading rules, should be reflected in the stock prices. However, if the market is semi-strong inefficient, trading rules like Jimmy's can generate abnormal returns.

Question 9

You purchased shares of a company in the automotive industry a year ago.Over the course of the past year, the economy began to slow down and the company faced declining sales.As a result, the stock price declined over your holding period.Which of the following is true?

Accepted Answer

The efficient market hypothesis (EMH) suggests that all available information is already reflected in stock prices. The decline in stock price due to a slowing economy and declining sales is a reflection of new information being incorporated into the stock price, not a violation of EMH.

Question 10

The announcement of the sudden accidental death of the CEO and principal scientist of a corporation is associated with a 12% decrease in the company's stock price.Which form of market efficiency is contradicted?

Accepted Answer

The answer of The announcement of the sudden accidental death...

Question 11

Technical analysis, which is defined as the analysis of historical trends of prices, is an important field in finance.Which form of efficiency is this field based on?

Accepted Answer

Technical analysis operates under the assumption that all publicly available information is already reflected in stock prices, except for historical price and volume information. It suggests that one can gain an edge in the market by analyzing past price movements, which implies that markets are not efficient at reflecting all past trading information in current prices. This aligns with the concept of weak form inefficiency, where the market is inefficient in reflecting all historical price and volume information in current prices.

Question 12

Semi-strong form efficiency suggests:

Accepted Answer

Semi-strong form efficiency posits that stock prices adjust quickly to new public information, meaning all publicly available information is already reflected in stock prices. It does not assert that prices reflect private or insider information.

Question 13

Michel has developed a trading strategy for the Abitibi-Témiscamingue Market.He has observed that his strategy earns returns that are statistically significantly greater than the market.Should Michel start applying his trading strategy?

Accepted Answer

Statistical significance does not imply economic significance. Michel should assess whether the returns are economically significant before applying the strategy.

Question 14

You have observed that every time Toronto Skaters' Corp.stock falls by 2% in one week, it rises by 8% the next week.What is this observation consistent with?

Accepted Answer

This observation is consistent with weak form market inefficiency because it suggests that past stock prices (in this case, a 2% fall one week followed by an 8% rise the next) can be used to predict future prices, which contradicts the principle of weak form efficiency that asserts past price information is fully reflected in current stock prices and cannot be used to achieve superior gains.

Question 15

If security markets are efficient, then:

Accepted Answer

The efficient market hypothesis states that security prices fully reflect all available information at any point in time. Therefore, the net present value of all securities should already be reflected in their market price, resulting in a net present value of zero. If securities had a consistently positive or negative net present value, it would suggest either systematic over- or undervaluation, which would violate the efficiency assumption.

Question 16

The random walk theory suggests that

Accepted Answer

The random walk theory suggests that stock price changes are random and unpredictable, meaning that past movement or patterns cannot be used to predict future movement. However, this does not mean that all stocks have an expected return of zero or that diversification is pointless.

Question 17

A university professor is researching the impact of non-public information on the marketplace.She finds that investors who do have access to material, non-public information are consistently earning above-average risk-adjusted returns, and that the market price of the targeted securities are partially reflecting the new information.This is a violation of:
I.Strong form market efficiency
II.Semi-strong market efficiency
III.Weak form market efficiency

Accepted Answer

This scenario violates strong form market efficiency, which posits that all information, public and private, is already reflected in stock prices, meaning no one can consistently achieve higher returns.

Question 18

If information does not arrive randomly and the market rapidly and accurately adjusts to any new information, stock prices will

Accepted Answer

If the market rapidly and accurately adjusts to any new information, stock prices will not follow a random walk as they will reflect the impact of new information on the underlying company or economic conditions. Instead, prices will move in a non-random direction as investors adjust their expectations based on the new information.

Question 19

Which of the following is NOT true about the efficient market hypothesis?

Accepted Answer

The efficient market hypothesis does not suggest that market prices do not fluctuate dramatically. In fact, the theory acknowledges that prices can and do fluctuate based on changes in available information or other factors. However, the theory contends that these fluctuations are random and cannot be consistently predicted or exploited for excess returns.

Question 20

Which of the following observations would provide evidence against the weak form of market efficiency?

Accepted Answer

The answer of Which of the following observations would provide...

Quiz 10: Market Efficiency

Which of the following statements is a violation of semi-strong form market efficiency? I.Executives trade their stock holdings before major announcements. II.Day traders base their trading decisions on daily, weekly, and monthly trends.