Question 1

Which one of the following is most apt to be considered insider trading?

Accepted Answer

Insider trading involves a person trading on material non-public information. In this case, Theresa has acted on information she overheard, which was not available to the public and may influence the decision to buy stock. This is most apt to be considered insider trading. A, B, C, and E may not necessarily constitute insider trading as the information was obtained through legitimate means and/or was available to the public.

Question 2

Which one of the following best describes the current understanding of market efficiency?

Accepted Answer

The current understanding of market efficiency is that short-term market movements are difficult, if not impossible, to predict accurately. This is because markets quickly and efficiently incorporate all available information into stock prices, making it challenging for investors to consistently outperform the market.

Question 3

Since the day-of-the-week effect was identified in the early 1980s, the effect has:

Accepted Answer

Over the years, the day-of-the-week effect has diminished somewhat, as markets have become more efficient and automated trading has increased.

Question 4

If the markets are efficient, then asset allocation is __________ and security selection is __________.

Accepted Answer

Even if markets are efficient, asset allocation remains important for managing risk and achieving diversification. However, security selection is less important because it is harder to consistently outperform the market in an efficient market environment.

Question 5

Which day of the week has historically had the highest return?

Accepted Answer

The answer of Which day of the week has historically...

Question 6

Martha is a researcher for DL Medicals (DLM). She tells her boyfriend, Dan, about a patent application for a new drug which is about ready to be approved. This drug reverses the aging process. Dan can be charged with insider trading if he:

Accepted Answer

Dan can be charged with insider trading if he uses the information to make profit or shares the information with others who will use it to make a profit. Providing this information to a friend who will trade the stock and split the profits with Dan is a clear example of insider trading. Thus, option D is the best choice to avoid insider trading charges.

Question 7

Which one of the following relates to the relevant information problem encountered when testing market efficiency?

Accepted Answer

The relevant information problem refers to the difficulty in identifying what undocumented information may have influenced prices on any given day. Option D is the only choice that directly relates to this problem.

Question 8

Which one of the following items is most apt to be considered material non-public information? Assume that none of this information is known publicly

Accepted Answer

The development of a new, efficient and inexpensive alternative fuel by engineers is likely to have a significant impact on the company's future financial performance, making it material non-public information that should not be shared until it is disclosed publicly. Other choices, such as a factory worker resigning, firing a receptionist or a firm's consistent sales growth rate, may not have the same level of impact on the company's financial performance, making them less likely to be considered material non-public information. As for the CFO's knowledge of the firm's future growth rate in dividends, it could be considered material information, but it may not be non-public if the company has disclosed its dividend policy previously.

Question 9

The January effect:

Accepted Answer

The January effect is a phenomenon where small-cap stocks tend to outperform the broader market in January. However, its occurrence has been diminishing and it does not happen every year. Thus, option B is the correct choice. Options A, C, and D are not accurate, while option E is not relevant as it talks about the offsetting of the January effect, which is not true.

Question 10

If the financial markets are efficient, then:

Accepted Answer

If the financial markets are efficient, it means that all available information is already reflected in the prices of securities. Therefore, it is difficult for individual investors to consistently outperform the market by picking individual stocks or timing the market. As a result, holding a diversified, low-cost, passively-managed portfolio is likely to provide the best investment returns.

Question 11

The January effect has often been attributed to:

Accepted Answer

The January effect is often attributed to tax loss selling, as investors may sell losing positions in order to realize tax losses before the end of the calendar year. This selling can temporarily depress stock prices, leading to a potential buying opportunity for investors in the new year.

Question 12

Studies indicate that the Vanguard 500 Index fund tends to:

Accepted Answer

Studies have shown that the Vanguard 500 Index fund tends to outperform most professional money managers, especially over longer periods of time. This is because the index fund has low fees and focuses on passive management rather than actively trying to beat the market, which tends to result in higher fees and less consistent performance.

Question 13

Moving money in and out of the market based on your market expectations is called __________ and tends to lead to returns that are __________ than the overall market return, assuming that the market is efficient.

Accepted Answer

Market timing involves trying to predict short-term movements in the market, which is difficult to do consistently. This can lead to lower returns than the overall market return, assuming that the market is efficient. Asset allocation involves spreading investments across different asset classes, which can lead to higher returns than the overall market return in the long run. Security selection involves picking individual securities, but it may not lead to higher returns than the overall market return due to the difficulty in consistently selecting winners.

Question 14

Which day of the week should you expect, on average, to earn the lowest daily rate of return?

Accepted Answer

Studies have shown that Monday tends to have the lowest daily rates of return in the stock market. This is due in part to lower trading volumes and investor confidence after the weekend break. However, it is important to note that this is just an average and there can always be exceptions to this trend.

Question 15

In an efficient market, market timing tends to lead to:

Accepted Answer

In an efficient market, all available information is already reflected in stock prices, making it difficult to consistently outperform the market through market timing.

Question 16

Jennifer is the CFO of a major chemical firm. She has 35,000 shares of the firm's stock and wishes to sell 50 percent of those shares to diversify her holdings. She follows both her firm's and the OSC's guidelines and proceeds with the sale of 17,500 shares. Within a week of her sale, the price of her firm's stock declines by 40 percent. Jennifer's stock trade is:

Accepted Answer

Jennifer followed both her firm's and the OSC's guidelines for the sale of her shares, which makes her sale of the shares legal. The subsequent decline in the price of the stock does not affect the legality of her trade.

Question 17

Which one of the following is false regarding the January effect?

Accepted Answer

The answer of Which one of the following is false...

Question 18

Martha Stewart in a famous US court case served jail time because she was found guilty of:

Accepted Answer

Martha Stewart was convicted of obstructing justice and lying to investigators about a stock sale, not for insider trading itself.

Question 19

Which one of the following statements is correct?

Accepted Answer

Any trading based on information known to be private is illegal. Insider trading is illegal when a person buys or sells a security while in possession of material, non-public information. This applies not only to company insiders who have access to confidential information through their positions but also to anyone who receives such information and trades on it. Tippers and tippees (those who receive inside information from a tipper) can also be accused of illegal insider trading. Merely overhearing private information is not enough to make trading on it legal.

Question 20

Which one of the following time periods correctly describes an identified calendar anomaly?

Accepted Answer

The "Turn of the Month" effect, where the last day of the month and the first three days of the following month often show higher stock returns, is a well-documented calendar anomaly.

Quiz 8: Stock Price Behaviour and Market Efficiency