Question 1

_________ below which it is difficult for the market to fall.

Accepted Answer

A support level is the price level below which it is difficult for the market to fall, as demand for the stock increases at that price point. An intrinsic value is the estimated true value of a security based on fundamental analysis, while a resistance level is the opposite of a support level and represents a price level above which it is difficult for the market to rise. Therefore, option C is the correct choice as it directly relates to the given statement.

Question 2

The difference between a random walk and a submartingale is the expected price change in a random walk is ______ and the expected price change for a submartingale is ______.

Accepted Answer

In a random walk, the expected price change is zero, indicating that future movements are equally likely to be up or down, independent of past movements. For a submartingale, the expected price change is positive, suggesting that future values are expected to be higher, on average, than current values.

Question 3

_________ above which it is difficult for the market to rise.

Accepted Answer

A resistance level is a price point above which it is difficult for the market to rise, as it tends to face selling pressure at that level. Book value and support level are also important concepts in trading, but they do not refer specifically to a level that hinders market movement in the same way that a resistance level does.

Question 4

If you believe in the _________ form of the EMH,you believe that stock prices reflect all available information,including information that is available only to insiders.

Accepted Answer

The strong form of the EMH states that all information, including insider information, is fully reflected in the current stock price. This is the strongest version of the theory and implies that it is impossible to consistently outperform the market. The semistrong form incorporates all publicly available information, while the weak form only includes historical price and volume data.

Question 5

A common strategy for passive management is ____________.

Accepted Answer

Creating an index fund is a common strategy for passive management as it involves simply tracking a market index rather than actively choosing investments. This approach typically involves lower costs and a more hands-off approach to investing. Creating a small firm fund or investment club would involve more active management and decision-making.

Question 6

If you believe in the _______ form of the EMH,you believe that stock prices only reflect all information that can be derived by examining market trading data such as the history of past stock prices,trading volume or short interest.

Accepted Answer

The weak form of EMH indicates that stock prices already reflect all information that can be derived by examining market trading data such as the history of past stock prices, trading volume, or short interest. The semistrong and strong forms of EMH suggest that stock prices reflect all publicly available information and all information, including private information, respectively. Therefore, option C is the correct answer.

Question 7

The debate over whether markets are efficient will probably never be resolved because of ________.

Accepted Answer

The debate over whether markets are efficient will probably never be resolved because of several issues, including the lucky event issue, the magnitude issue, and the selection bias issue. These issues make it challenging to conclusively prove or disprove market efficiency. Therefore, all the options are correct.

Question 8

If you believe in the ________ form of the EMH,you believe that stock prices reflect all relevant information including historical stock prices and current public information about the firm,but not information that is available only to insiders.

Accepted Answer

The semistrong form of the EMH states that stock prices reflect all publicly available information, including historical stock prices and current public information about the firm, but not information that is available only to insiders. The strong form of the EMH would include insider information, while the weak form would only include historical stock prices.

Question 9

__________ focus more on past price movements of a firm's stock than on the underlying determinants of future profitability.

Accepted Answer

Technical analysts focus on analyzing past price movements and trends to predict future price movements, rather than analyzing a firm's fundamentals or financial statements.

Question 10

Proponents of the EMH typically advocate

Accepted Answer

Proponents of the EMH believe that markets are efficient and that information is quickly and accurately incorporated into stock prices. Thus, they advocate for a passive investment strategy, such as investing in index funds or ETFs, rather than trying to beat the market through individual stock selection or active trading. Investing in hedge funds, as option B suggests, is not necessarily aligned with the EMH as these funds often engage in active trading in order to generate alpha. Option A, buying individual stocks on margin and trading frequently, is also not aligned with the EMH as it assumes that market inefficiencies can be exploited through active trading. Therefore, option C, a passive investment strategy, is the best choice.

Question 11

If you believe in the reversal effect,you should

Accepted Answer

The answer of If you believe in the reversal effect,you...

Question 12

___________ the return on a stock beyond what would be predicted from market movements alone.

Accepted Answer

An abnormal return is described as the return on a stock that exceeds what would typically result from market movements.

Question 13

Arbel (1985)found that.

Accepted Answer

Arbel (1985) found that the January effect was highest for neglected firms, which are firms that receive little attention from analysts and investors. The other options are not mentioned in the study.

Question 14

The stock market follows a __________.

Accepted Answer

The answer of The stock market follows a __________.
...

Question 15

Researchers have found that most of the small firm effect occurs

Accepted Answer

The small firm effect, which refers to the tendency of stocks of small firms to have higher returns than larger firms, has been found to occur mostly in January. This phenomenon is also known as the January effect.

Question 16

When Maurice Kendall examined the patterns of stock returns in 1953 he concluded that the stock market was __________.Now,these random price movements are believed to be _________.

Accepted Answer

Maurice Kendall's examination led him to conclude that stock market movements were seemingly random, which suggested the market was efficient, as prices reflected all known information. This randomness is now often interpreted as a sign of a well-functioning market, where prices adjust quickly to new information.

Question 17

Basu (1977,1983)found that firms with low P/E ratios

Accepted Answer

Basu (1977, 1983) found that firms with low P/E ratios earned higher average returns than firms with high P/E ratios.

Question 18

Basu (1977,1983)found that firms with high P/E ratios

Accepted Answer

Basu found that firms with high P/E ratios earned lower average returns than firms with low P/E ratios, indicating that low P/E stocks tend to outperform high P/E stocks.

Question 19

Proponents of the EMH typically advocate

Accepted Answer

Proponents of the Efficient Market Hypothesis typically advocate for investing in an index fund, which follows the market as a whole and therefore operates passively. This belief is rooted in the idea that markets are efficient and consistently reflect all publicly available information, making it difficult for active traders to consistently outperform the market.

Question 20

A hybrid strategy is one where the investor

Accepted Answer

A hybrid strategy involves combining passive investing with active management. Maintaining a passive core and augmenting the position with an actively managed portfolio is an example of a hybrid strategy. This approach can help achieve a balance between low-cost, diversified exposure to the market and the potential benefits of active management. Options A, B, and C are not necessarily examples of a hybrid strategy.

Quiz 11: The Efficient Market Hypothesis

_________ below which it is difficult for the market to fall.

The difference between a random walk and a submartingale is the expected price change in a random walk is and the expected price change for a submartingale is .

_________ above which it is difficult for the market to rise.

If you believe in the _________ form of the EMH,you believe that stock prices reflect all available information,including information that is available only to insiders.

A common strategy for passive management is ____________.

If you believe in the _______ form of the EMH,you believe that stock prices only reflect all information that can be derived by examining market trading data such as the history of past stock prices,trading volume or short interest.

The debate over whether markets are efficient will probably never be resolved because of ________.

If you believe in the ________ form of the EMH,you believe that stock prices reflect all relevant information including historical stock prices and current public information about the firm,but not information that is available only to insiders.

__________ focus more on past price movements of a firm's stock than on the underlying determinants of future profitability.

Proponents of the EMH typically advocate

If you believe in the reversal effect,you should

___________ the return on a stock beyond what would be predicted from market movements alone.

Arbel (1985) found that.

The stock market follows a __________.

Researchers have found that most of the small firm effect occurs

When Maurice Kendall examined the patterns of stock returns in 1953 he concluded that the stock market was __.Now,these random price movements are believed to be _.

Basu (1977,1983) found that firms with low P/E ratios

Basu (1977,1983) found that firms with high P/E ratios

Proponents of the EMH typically advocate

A hybrid strategy is one where the investor