Question 1

Financial managers can create value through financing decisions that:
A)reduce costs or increase subsidies.
B)create a new security.
C)increase the product prices.
D)Both A and B.
E)Both A and C.

Accepted Answer

By reducing costs or increasing subsidies, financial managers can improve the financial performance of the organization. Similarly, by creating new securities, they can attract new investors and raise capital at a lower cost. Both of these strategies can create value for the organization. Increasing product prices may not necessarily be a value-creating strategy as it could lead to decreased demand and ultimately lower revenues.

Question 2

Efficient capital markets are financial markets
A)in which there is no excess profit from using available information.
B)in which current market prices reflect the present value of securities.
C)in which current market prices reflect available information.
D)All of the above.
E)None of the above.

Accepted Answer

Efficient capital markets are financial markets in which current market prices reflect all available information, so there is no excess profit from using available information. This means that current market prices represent the present value of securities, which is the value of future cash flows discounted at the appropriate interest rate. Therefore, D, "All of the above," is the correct choice.

Question 3

Which one of the following statements is correct concerning market efficiency?
A)A firm will generally receive a fair price when it sells shares of stock.
B)In an efficient market, some market participants will have an advantage over others.
C)If a market is efficient, arbitrage opportunities should be common.
D)Real asset markets are more efficient than financial markets.
E)New information will gradually be reflected in a stock's price to avoid any sudden change in the price of the stock.

Accepted Answer

In an efficient market, all investors have equal access to information and trading opportunities, and the market price should reflect all available information. Therefore, a fair price should be received when selling shares of stock in an efficient market. Answer B is incorrect because an efficient market implies that no group of investors has an advantage over others. Answer C is also incorrect because an efficient market should eliminate arbitrage opportunities. Answer D is incorrect because real asset markets do not necessarily exhibit greater efficiency than financial markets. Answer E is also incorrect because new information should be reflected in a stock's price immediately rather than gradually.

Question 4

The U.S.Securities and Exchange Commission periodically charges individuals for insider trading and claims those individuals have made unfair profits.Based on this fact,you would tend to argue that the financial markets are at best _____ form efficient.
A)weak
B)semiweak
C)strong
D)perfect
E)semistrong

Accepted Answer

The existence of insider trading suggests that not all information is reflected in stock prices, which aligns with the semistrong form of market efficiency where all publicly available information is reflected in stock prices, but not private information.

Question 5

Insider trading does not offer any advantages if the financial markets are:
A)inefficient.
B)semiweak-form efficient.
C)strong-form efficient.
D)semistrong-form efficient.
E)weak form efficient.

Accepted Answer

Strong-form efficiency implies that all information, including insider information, is already reflected in the current stock prices. Therefore, insider trading provides no advantages in such markets.

Question 6

In an efficient market when a firm makes an announcement of a new product or product enhancement with superior technology providing positive NPV the price of the stock will:
A)stay at the same price, with no net effect.
B)rise on the same day to the new price.
C)decline gradually over the next few days.
D)rise gradually over the next few days.
E)drop on the same day to the new price.

Accepted Answer

In an efficient market, new and positive information about a company is quickly reflected in its stock price. Therefore, if a firm announces a new product or product enhancement with superior technology providing positive net present value (NPV), investors will see this as a positive development for the company and rush to buy its stock, causing the price to rise on the same day to the new price.

Question 7

The notion that actual capital markets,such as the NYSE,are fairly priced is called the:
A)Law of One Price.
B)Efficient Market Hypothesis (EMH).
C)Laissez-Faire Axiom.
D)Open Markets Theorem.
E)Monopoly Pricing Theorem.

Accepted Answer

The Efficient Market Hypothesis (EMH) states that prices of securities in financial markets reflect all publicly available information and are therefore fairly priced. This includes the NYSE and other actual capital markets.

Question 8

Which of the following tend to reinforce the argument that the financial markets are efficient?
I.Information spreads rapidly in today's world.
II.There is tremendous competition in the financial markets.
III.Market prices continually fluctuate.
IV.Market prices react suddenly to unexpected news announcements.
A)I and III only
B)II and IV only
C)I, II, and III only
D)II, III, and IV only
E)I, II, III, and IV

Accepted Answer

The answer of Which of the following tend to reinforce...

Question 9

Financial markets fluctuate daily because they:
A)are inefficient.
B)are continually reacting to new information.
C)slowly react to new information.
D)only reflect historical information.
E)offer tremendous arbitrage opportunities.

Accepted Answer

Financial markets are continually reacting to new information, such as economic data releases, corporate earnings reports, geopolitical events, and more. This information is quickly incorporated into the prices of securities, leading to daily fluctuations in the market. Therefore, option B is the best choice. Options A, C, D, and E are incorrect because they do not accurately describe the reasons for daily market fluctuations.

Question 10

An efficient capital market is one in which:
A)brokerage commissions are zero.
B)taxes are irrelevant.
C)securities always offer a positive rate of return to investors.
D)security prices are guaranteed by the U.S.Securities and Exchange Commission to be fair.
E)security prices reflect available information.

Accepted Answer

An efficient capital market is one in which security prices reflect all available information. This means that all market participants have access to the same information, and securities are traded at their true value, which makes it difficult or impossible to consistently outperform the market. The other choices are not necessarily indicative of an efficient capital market - brokerage commissions and taxes can affect the overall cost of trading for investors, securities may not always offer a positive rate of return, and security prices are not guaranteed to be fair by the SEC.

Question 11

If the financial markets are efficient,then investors should expect their investments in those markets to:
A)earn extraordinary returns on a routine basis.
B)generally have zero net present values.
C)generally have positive net present values.
D)produce arbitrage opportunities on a routine basis.
E)produce negative returns on a routine basis.

Accepted Answer

The concept of market efficiency suggests that all available information and expectations are reflected in the current market prices of securities. Thus, investors should expect their investments to have zero net present values, in the sense that the expected returns should be proportional to the risk involved in the investment. This means that investments may generate positive or negative returns, but these returns should be consistent with the overall level of risk in the market. Extraordinary returns or arbitrage opportunities, which imply that securities are mispriced, would suggest that the market is not efficient.

Question 12

According to theory,studying historical prices in order to identify mispriced stocks will not work in markets that are _____ efficient. I.weak-form
II)semistrong-form
III)strong-form
A)I only
B)II only
C)I and II only
D)II and III only
E)I, II, and III

Accepted Answer

The answer of According to theory,studying historical prices in order...

Question 13

Individuals that continually monitor the financial markets seeking mispriced securities:
A)tend to make substantial profits on a daily basis.
B)are never able to find a security that is temporarily mispriced.
C)tend to make the markets more efficient.
D)are always quite successful using only well-known public information as their basis of evaluation.
E)are always quite successful using only historical price information as their basis of evaluation.

Accepted Answer

Continual monitoring of financial markets and seeking mispriced securities tends to make the markets more efficient over time. When mispricings are discovered, they are quickly corrected, ensuring that market prices are more accurate reflections of a security's true value. While this approach may still result in profits for investors, the focus is on contributing to market efficiency rather than solely making profits from temporary pricing discrepancies.

Question 14

The hypothesis that market prices reflect all publicly available information is called _____ form efficiency.
A)open
B)strong
C)semistrong
D)weak
E)stable

Accepted Answer

The hypothesis which claims that market prices reflect all publicly available information is called semistrong form efficiency. Weak form efficiency requires that market prices reflect only historical price data, and strong form efficiency requires that market prices reflect all types of information (including private information). Open and stable are not relevant terms in the context of market efficiency.

Question 15

In an efficient market,the price of a security will:
A)always rise immediately upon the release of new information with no further price adjustments related to that information.
B)react to new information over a two-day period after which time no further price adjustments related to that information will occur.
C)rise sharply when new information is first released and then decline to a new stable level by the following day.
D)react immediately to new information with no further price adjustments related to that information.
E)be slow to react for the first few hours after new information is released allowing time for that information to be reviewed and analyzed.

Accepted Answer

In an efficient market, the price of a security will react immediately to new information with no further price adjustments related to that information. This is because all available information is already reflected in the current market price.

Question 16

If you excel in analyzing the future outlook of firms,you would prefer that the financial markets be ____ form efficient so that you can have an advantage in the marketplace.
A)strong
B)semiweak
C)semistrong
D)weak
E)perfect

Accepted Answer

If a financial market is weak form efficient, it means that all past market data is already reflected in the current market prices, and thus, no advantage can be gained from analyzing past trends or information. This would force the analysts to focus on other factors and make informed predictions based on other sources of information. Therefore, a weak form efficient market would be preferred in this scenario.

Question 17

If the efficient market hypothesis holds,investors should expect:
A)to always be able to pick stocks that will outperform the market averages.
B)to receive a fair price for their securities.
C)to earn only a normal return.
D)Both A and B.
E)Both B and C.

Accepted Answer

The efficient market hypothesis states that all information regarding a security is already reflected in its price. Therefore, investors cannot consistently pick stocks that will outperform the market averages as any available information has already been factored into stock prices. Investors can expect to receive a fair price for their securities in an efficient market, but they can only earn a normal return as they cannot outperform the market averages. The best choice is E, as it correctly identifies the two expectations that investors can have in an efficient market: receiving a fair price for their securities and earning only a normal return.

Question 18

Your best friend works in the finance office of the Delta Corporation.You are aware that this friend trades Delta stock based on information he overhears in the office.You know that this information is not known to the general public.Your friend continually brags to you about the profits he earns trading Delta stock.Based on this information,you would tend to argue that the financial markets are at best _____ form efficient.
A)weak
B)semiweak
C)semistrong
D)strong
E)perfect

Accepted Answer

The scenario describes insider trading, which involves trading on material nonpublic information. In a semistrong form efficient market, all publicly available information is reflected in stock prices, meaning that insider trading should not be profitable since the market would have already priced in the nonpublic information. Therefore, the fact that the friend is earning profits by trading on nonpublic information suggests that the market is not semistrong form efficient.

Question 19

The hypothesis that market prices reflect all historical information is called _____ form efficiency.
A)open
B)strong
C)semistrong
D)weak
E)stable

Accepted Answer

The answer of The hypothesis that market prices reflect all...

Question 20

The hypothesis that market prices reflect all available information of every kind is called _____ form efficiency.
A)stable
B)weak
C)semistrong
D)strong
E)open

Accepted Answer

The hypothesis that market prices reflect all available information of every kind is called strong form efficiency. Strong form efficiency means that all information, whether public or private, is already reflected in the stock price. This would imply that insider trading is not possible because all information is already reflected in the stock price.

Quiz 13: Efficient Capital Markets and Behavioral Challenges

Financial managers can create value through financing decisions that:

Efficient capital markets are financial markets

Which one of the following statements is correct concerning market efficiency?

The U.S.Securities and Exchange Commission periodically charges individuals for insider trading and claims those individuals have made unfair profits.Based on this fact,you would tend to argue that the financial markets are at best _____ form efficient.

Insider trading does not offer any advantages if the financial markets are:

In an efficient market when a firm makes an announcement of a new product or product enhancement with superior technology providing positive NPV the price of the stock will:

The notion that actual capital markets,such as the NYSE,are fairly priced is called the:

Financial markets fluctuate daily because they:

An efficient capital market is one in which:

If the financial markets are efficient,then investors should expect their investments in those markets to:

According to theory,studying historical prices in order to identify mispriced stocks will not work in markets that are _____ efficient. I.weak-form II) semistrong-form III) strong-form

Individuals that continually monitor the financial markets seeking mispriced securities:

The hypothesis that market prices reflect all publicly available information is called _____ form efficiency.

In an efficient market,the price of a security will:

If you excel in analyzing the future outlook of firms,you would prefer that the financial markets be ____ form efficient so that you can have an advantage in the marketplace.

If the efficient market hypothesis holds,investors should expect:

The hypothesis that market prices reflect all historical information is called _____ form efficiency.

The hypothesis that market prices reflect all available information of every kind is called _____ form efficiency.