Question 1

If the financial markets were regulated such that the markets maintained strong-form efficiency,then:
A)insider trading laws would be unnecessary.
B)all investors would earn equivalent rates of return.
C)risk premiums would vanish.
D)all investors would become arbitrage traders.
E)securities would tend to be continually underpriced.

Accepted Answer

Strong-form efficiency means that all information, both public and private, is already reflected in the market prices. Therefore, insider trading would have no advantage and be unnecessary.

Question 2

Dennison Lumber announced last week that its unpopular CEO had resigned.In response to this announcement,the firm's stock price increased from $17 a share to $23 a share.The following day the price declined to $21 a share and has remained constant at that level.This is an example of a(n):
A)over-reaction and correction.
B)underpricing.
C)delayed reaction.
D)pre-activity action.
E)efficient market reaction.

Accepted Answer

This is an example of an over-reaction and correction, where the stock price increases in response to the news of the CEO's resignation, but then corrects itself in the following day(s) as the market adjusts to the news. This is a common pattern in efficient markets.

Question 3

Which of the following are ineffective strategies for producing excess returns if the market is semistrong-form efficient?
I.graphing past prices searching for patterns
II.watching the daily market movements
III.studying the latest analyst's reports
IV.analyzing a firm's financial statements
A)I and III only
B)I 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 are ineffective strategies...

Question 4

Amy uses two approaches to trading stocks.First,she trades on what she believes is a repetitive pattern as seen in Delta Co's historical prices.Secondly,she analyzes the financial statements of The Atwater Co.to compute changes in the return on equity as a predictor of future stock prices for that firm.She trades based on both strategies.Amy earns excess profits on her return on equity strategy but not on her historical prices strategy.This suggests that the market is at least _____ efficient but less than _____ efficient.
A)weak-form; mild-form
B)mild-form; semistrong-form
C)weak-form; semistrong-form
D)semistrong-form; full-form
E)semistrong-form; strong-form

Accepted Answer

Amy's success in using fundamental analysis to predict changes in return on equity and future stock prices at The Atwater Co. suggests that the market is not completely efficient in incorporating all publicly available information, indicating that it is not strong-form efficient. However, her lack of success in trading based on historical prices of Delta Co. suggests that the market is efficient in terms of utilizing past price information, indicating that it is at least weak-form efficient. Therefore, the market must be at least weak-form efficient but less than semistrong-form efficient, making option C the correct answer.

Question 5

You are the chief financial officer of Donnelly Industries.On multiple occasions,you have engaged in insider trading but have never been able to earn any abnormal returns.Which form of market efficiency most likely exists given your situation?
A)mild-form
B)weak-form
C)historical-form
D)semi-strong form
E)strong-form

Accepted Answer

The strong-form of market efficiency suggests that all information, including insider information, is already reflected in stock prices, preventing any abnormal returns from insider trading.

Question 6

Which one of the following statements is correct?
A)Company insiders are not permitted to trade their employer's securities.
B)Only tippers can be accused of illegal insider trading.
C)Tippees are permitted to trade securities based on information they know is private.
D)Trading on private information which you just happen to overhear is legal.
E)Any trading based on information known to be private is illegal.

Accepted Answer

Insider trading refers to the buying or selling of a security based on information that is not available to the general public. It is illegal for company insiders, such as executives or board members, to trade their employer's securities based on non-public information. Tippees, or those who receive insider information from tippers, can also be held liable for insider trading. It is not legal to trade on any private information, whether it was overheard or obtained through other means. Therefore, the correct statement is that any trading based on information known to be private is illegal.

Question 7

Research on semistrong-form efficient markets indicates which one of the following is correct?
A)Identifying a stock with repetitive price movements is generally the best method of active investing.
B)Future returns on large company stocks tend to closely follow past pricing patterns.
C)Buying and holding a broad market index is one of the best investment strategies.
D)Predicting future stock prices is relatively easy for academic researchers.
E)Trading costs have little, if any, impact on investment returns.

Accepted Answer

Semistrong-form efficient markets suggest that all publicly available information is reflected in stock prices. As a result, trying to identify repetitive price movements or predict future stock prices is unlikely to lead to better investment returns. However, buying and holding a broad market index is a strategy that takes advantage of the overall growth of the market, rather than attempting to outperform it through individual stock selection. This is supported by research on efficient markets.

Question 8

Last week,New Plastics announced that it had developed a new plastic container that is stronger and more durable,yet easier to recycle.In response to this announcement,the firm's stock price rose from $21 a share to a high of $27 a share and has remained at that level.This is an example of a(n):
A)over-reaction and correction.
B)post-activity reaction.
C)delayed reaction.
D)pre-activity action.
E)efficient market reaction.

Accepted Answer

The efficient market reaction refers to the immediate adjustment of the stock price in response to new information, which is exactly what happened in this scenario. The stock price increased in response to the announcement of the new product, and remained at a higher level, indicating that the market quickly incorporated this new information into the stock price.

Question 9

Which one of the following would best reveal how stock prices react when competitive firms merge?
A)financial analysis
B)field testing
C)risk analysis
D)event study
E)market survey

Accepted Answer

An event study would best reveal how stock prices react when competitive firms merge. An event study is a statistical analysis that examines the impact of a specific event, such as a merger, on the value of a company's stock. This type of study allows analysts to isolate the impact of the merger from other factors that may be influencing the stock price, providing a more accurate picture of how the market is reacting to the news.

Question 10

Which form of market efficiency exists if the market is efficient only in regard to historical information?
A)mild-form
B)weak-form
C)historical-form
D)semistrong-form
E)strong-form

Accepted Answer

The weak-form of market efficiency exists if the market is efficient only in regard to historical information. This means that past prices and trends are already reflected in the current prices and can be used to predict future prices, but insider information or other private information cannot be used to gain an advantage.

Question 11

Which of the following sources of information are used by informed traders?
I.financial statements
II.inside information
III.internet reports
IV.analysts reports
A)I and IV only
B)II and III only
C)III and IV only
D)I, III, and IV only
E)I, II, III, and IV

Accepted Answer

Informed traders are individuals who have access to more information about a security than the general public. They use this information to make trading decisions that can lead to profits. Informed traders typically rely on a combination of sources to gain an edge, including financial statements, analysts reports, and internet reports. Inside information is not a legitimate source of information and is illegal to use for trading purposes. Therefore, the best choice is D since it includes the sources that informed traders can legally use.

Question 12

Which one of the following involves the study of a firm's stock price for the few days surrounding a news announcement?
A)web survey
B)market analysis
C)event study
D)auditing review
E)trend study

Accepted Answer

Event study involves analyzing a firm's stock price for a specific event, such as a news announcement, to determine its impact.

Question 13

Which of the following will lead to excess profits in a semistrong-form efficient market?
I.private financial information
II.historical price trends
III.financial analysts reports
IV.unreleased merger plans
A)I only
B)I and IV only
C)II and III only
D)I, II, and III only
E)I, III, and IV only

Accepted Answer

In a semistrong-form efficient market, all publicly available information is already reflected in the security prices. However, private information such as unreleased merger plans can provide an advantage to investors who possess it. Therefore, (I) and (IV) would lead to excess profits, while (II) and (III) would not as they are already reflected in the stock prices.

Question 14

If the market is semistrong-form efficient,then which one of the following statements is true?
A)Neither technical nor fundamental analysis leads to abnormal profits.
B)Technical analysts have the ability to earn excess profits but fundamental analysts cannot.
C)Fundamental analysts can earn excess profits but technical analysts cannot.
D)Both technical and fundamental analysts earn excess profits based on their research.
E)No answer can be determined as the form of market efficiency is unrelated to abnormal, or excess returns.

Accepted Answer

In a semistrong-form efficient market, all publicly available information is already reflected in asset prices. Therefore, neither technical nor fundamental analysis can provide excess returns to investors.

Question 15

If you believe that stock market prices follow a random walk,then:
A)historical price information provides no benefit in predicting future prices.
B)there is no financial benefit from investing in the stock market.
C)having inside information will not lead to excess profits.
D)studying past price movements will lead to excess profits.
E)you also believe the market is strong-form efficient.

Accepted Answer

If stock market prices follow a random walk, then past price movements provide no benefit in predicting future prices because they are totally random and unpredictable. Therefore, historical price information provides no benefit in predicting future prices.

Question 16

In an efficient market,daily abnormal returns:
A)are very volatile.
B)reflect news within the past week.
C)reflect news since the prior trading day.
D)remain constant.
E)do not exist.

Accepted Answer

In an efficient market, daily abnormal returns reflect news that has come to light since the prior trading day. This is because new information is quickly incorporated into the market's price, leaving little room for abnormal returns.

Question 17

Two weeks ago Ace Electronics announced that it had developed a new chip design which was being considered by major companies for use in future smart phone development.At the close of trading the day before the announcement,Ace common stock closed at $20.On the day following the announcement,Ace closed at $21.Two days after the announcement the stock closed at $22.50.Four days after the announcement the stock traded at $23.Last week,Ace stock traded at $26,a level it has maintained since then.This is an example of a(n):
A)over-reaction and correction.
B)underpricing.
C)delayed reaction.
D)pre-activity action.
E)efficient market reaction.

Accepted Answer

The stock price gradually increased over time after the announcement, indicating a delayed reaction to the news rather than an immediate adjustment to the new information.

Question 18

Which one of the following best describes the type(s)of information included in a strong-form efficient market?
A)historical
B)historical and public
C)private and public
D)current and public
E)historical and private

Accepted Answer

In a strong form efficient market, all information, including both public and private (or insider) information, is already reflected in stock prices. This means that no one can consistently achieve higher returns by trading on any information, whether it is publicly available or privately held.

Question 19

How should cumulative abnormal returns react in an efficient market?
A)relatively constant, sharp break, relatively constant
B)relatively constant with no breaks
C)steadily increasing
D)steadily decreasing
E)remain constant at zero

Accepted Answer

The answer of How should cumulative abnormal returns react in...

Question 20

You analyze a firm's financial statements and invest based upon the results of this analysis.Which form of market efficiency must exist if you are able to earn excess profits on these investments?
A)weak-form
B)historical-form
C)semi-strong form
D)full-form
E)mild-form

Accepted Answer

The answer of You analyze a firm's financial statements and...

Quiz 7: Stock Price Behavior and Market Efficiency

If the financial markets were regulated such that the markets maintained strong-form efficiency,then:

Dennison Lumber announced last week that its unpopular CEO had resigned.In response to this announcement,the firm's stock price increased from $17 a share to $23 a share.The following day the price declined to $21 a share and has remained constant at that level.This is an example of a(n) :

Which of the following are ineffective strategies for producing excess returns if the market is semistrong-form efficient? I.graphing past prices searching for patterns II.watching the daily market movements III.studying the latest analyst's reports IV.analyzing a firm's financial statements

You are the chief financial officer of Donnelly Industries.On multiple occasions,you have engaged in insider trading but have never been able to earn any abnormal returns.Which form of market efficiency most likely exists given your situation?

Which one of the following statements is correct?

Research on semistrong-form efficient markets indicates which one of the following is correct?

Last week,New Plastics announced that it had developed a new plastic container that is stronger and more durable,yet easier to recycle.In response to this announcement,the firm's stock price rose from $21 a share to a high of $27 a share and has remained at that level.This is an example of a(n) :

Which one of the following would best reveal how stock prices react when competitive firms merge?

Which form of market efficiency exists if the market is efficient only in regard to historical information?

Which of the following sources of information are used by informed traders? I.financial statements II.inside information III.internet reports IV.analysts reports

Which one of the following involves the study of a firm's stock price for the few days surrounding a news announcement?

Which of the following will lead to excess profits in a semistrong-form efficient market? I.private financial information II.historical price trends III.financial analysts reports IV.unreleased merger plans

If the market is semistrong-form efficient,then which one of the following statements is true?

If you believe that stock market prices follow a random walk,then:

In an efficient market,daily abnormal returns:

Which one of the following best describes the type(s) of information included in a strong-form efficient market?

How should cumulative abnormal returns react in an efficient market?

You analyze a firm's financial statements and invest based upon the results of this analysis.Which form of market efficiency must exist if you are able to earn excess profits on these investments?