Question 1

Stock market events in 1929,1987,and 2008 are most apt to be used as examples in support of which one of these theories?

Accepted Answer

The stock market events in 1929, 1987, and 2008 are often cited as examples of bubble theory, which suggests that asset prices can become detached from their intrinsic values due to speculation and irrational exuberance, resulting in a market bubble that eventually bursts.

Question 2

Drawing conclusions from too small of a sampling describes the behavioral characteristic of:

Accepted Answer

Representativeness refers to the tendency to make judgments and draw conclusions based on the degree to which an event or sample is representative of the larger population. Drawing conclusions from too small of a sampling is an example of making a representative judgment based on limited information.

Question 3

The Kolasinski and Li study of earnings surprises showed that:

Accepted Answer

The answer of The Kolasinski and Li study of earnings...

Question 4

Explain why in an efficient market all investments have an expected NPV of zero.

Accepted Answer

The answer of Explain why in an efficient market all...

Question 5

One reason why the efficient capital market hypothesis may not hold in reality is that:

Accepted Answer

One reason why the efficient capital market hypothesis may not hold in reality is that irrationality may be related across individuals. This means that if a set of investors are irrational, they may share the same biases and make similar investment decisions, which can lead to market inefficiencies. This can prevent the market from being fully efficient and therefore contradict the efficient market hypothesis.

Question 6

Ritter's study of SEO's suggests that:

Accepted Answer

DRitter's study on SEOs (Seasoned Equity Offerings) suggests that managers appear to be able to time SEO issues when the stock is overpriced, indicating they can take advantage of market conditions to benefit the firm. Additionally, the study finds that returns on SEO-issuing firms are statistically the same as those of style-matched non-issuers for the five years following issuance, suggesting that the market adjusts to the new equity issuance over time, and the long-term performance of these firms does not significantly differ from their peers.

Question 7

Critics of behavioral finance use which one of these as an argument for market efficiency?

Accepted Answer

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Question 8

Psychologists generally agree that irrational traits such as those related to behavioral finance are generally:

Accepted Answer

Psychologists generally agree that irrational traits related to behavioral finance are pervasive across individuals. These traits are not limited to a small sector of the population and can be observed in various contexts and cultures.

Question 9

Empirical evidence suggests that:

Accepted Answer

The answer of Empirical evidence suggests that:
...

Question 10

Assume today is an earnings announcement day for a firm.For the day,the firm's return was .8 percent,while the risk-free daily rate was .01 percent and the market rate of return was 1.1 percent.The firm's industrial class returned 1.2 percent on average for the day.What was the firm's abnormal return for the day?

Accepted Answer

The abnormal return is calculated as the firm's return minus the expected return. The expected return can be approximated by the market return or industry return. Using the market return: Abnormal Return = Firm's Return - Market Return = 0.8% - 1.1% = -0.3%.

Question 11

In the three years prior to a forced departure of a top manager,stock prices,adjusted for market performance,on average:

Accepted Answer

Research shows that in the three years prior to a forced departure of a top manager, stock prices, adjusted for market performance, decline about 40 percent on average. This suggests that such departures have a significant negative impact on company performance and investor confidence.

Question 12

Suppose your cousin invests in the stock market and doubles her money in a single year while the market,on average,earned a return of only 15 percent.Is your cousin's performance a violation of market efficiency?

Accepted Answer

The answer of Suppose your cousin invests in the stock...

Question 13

Define the three forms of market efficiency.

Accepted Answer

The answer of Define the three forms of market efficiency....

Question 14

Explain the risk that often accompanies the behavioral concept of familiarity.

Accepted Answer

The answer of Explain the risk that often accompanies the...

Question 15

Who is credited with saying "Markets can stay irrational longer than you can stay solvent"?

Accepted Answer

The quote "Markets can stay irrational longer than you can stay solvent" is often attributed to renowned economist John Maynard Keynes.

Question 16

The studies conducted by Fama and French show that:

Accepted Answer

The studies conducted by Fama and French show that value stocks have higher average returns than growth stocks around the world. This is known as the value premium and has been observed in multiple markets and time periods.

Question 17

Why should a financial decision maker such as a corporate treasurer or CFO be concerned with market efficiency?

Accepted Answer

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Question 18

If financial markets are efficient,then attempting to accurately predict interest rates is:

Accepted Answer

If financial markets are efficient, attempting to accurately predict interest rates would be a waste of time because all available information is already reflected in market prices. In an efficient market, prices adjust quickly and accurately to new information, making it difficult to consistently outperform the market by trying to predict interest rates. Therefore, option C is the correct answer.

Question 19

In examining the issue of whether the choice of accounting methods affects stock prices,studies have found that:

Accepted Answer

The answer of In examining the issue of whether the...

Quiz 14: Efficient Capital Markets and Behavioral Challenges