Chap essay

Which of the following beliefs would not preclude charting as a method of portfolio management? D. Stock prices follow recurring patterns. In a 1953 study of stock prices, Maurice Kendall found that were no predictable patterns in stock prices . A. there The weak form of the EMH states that must be reflected in the current stock price. A. all past information including security price and volume data The semi-strong form of the EMH states that must be reflected in the current stock price. B. ll publicly available information The strong form of the EMH states that current stock price. C. all information including inside information Random price movements indicate D. that markets are functioning efficiently When the market risk premium rises, stock prices will The small firm in January effect is strongest . B. fall A. early in the month Evidence suggests that there may be momentum and reversal patterns in stock price behavior. D. short-run, long run Proponents of the EMH typically advocate C. a passive investment strategy Stock prices that are stable over time B. ndicate that the market is not incorporating new information into current stock prices The tendency when the performing stocks in one period are the best performers in the next and the current erformers are lagging the market later is called the reversal effect. A worst, best Which of the following is not a method employed by followers of technical analysis? C. Earnings forecasting Which of the following is not a method employed by fundamental analysts? B. Relative strength analysis The primary objective of fundamental analysis is to identify C. is- priced stocks If you believe in the form of the EMH, you believe that stock prices reflect all publicly available information but not information that is available only to insiders. A. semi-strong 17. If you believe in the form of the EMH, you believe that stock rices reflect all relevant information including information that is available only to insiders. B. strong Most of the stock price response to a corporate earnings or dividend announcement OCCUrs within . B. about 10 minutes is the return on a stock beyond what would be predicted from market movements alone.

C. An abnormal return You believe that stock prices 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 but you do not believe stock prices reflect all publicly available or inside information. You are a proponent of C. weak You are an investment manager who is currently managing assets worth $6 billion. You believe that active management of your fund could generate between an additional one tenth of 1% return on the portfolio.

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If you want to make sure your active strategy adds value, how much can you spend on security analysis? B. A mutual fund which attempts to hold quantities of shares in proportion to their representation in the market is called a fund. B. index Choosing stocks by searching for predictable patterns in stock prices is called B. technical analysis Which of the following is not an issue that is central to the debate regarding arket efficiency? B. The tax loss selling issue Most people would readily agree that the stock market is not C. strong form efficient Small firms have tended to earn abnormal returns primarily in A. he month of January Fama and French have suggested that many market anomalies can be explained as manifestations of D. varying risk premiums Proponents of the EMH think technical analysts their time . D. are wasting Evidence supporting semi-strong form market efficiency suggests that investors should . C. use a passive trading strategy such as purchasing an index fund or an ETF Buy a stock if its price moves up y 2% more than the Dow Average, is an example Of a A. filter rule Jaffee found that stock prices after insiders intensively bought shares and decreased after insiders intensively sold shares. C. ncreased, In a recent study, Fama and French found that the return on the aggregate stock market was when the dividend yield was higher. A. higher Fama and French (1 991 ) and Reinganum (1988) found that firms with market/book ratios had higher stock returns. B. low 34. Joe bought a stock at $57 per share. The price promptly fell to $55. Joe held on to the stock until it again reached $57 and then he sold once he had liminated his loss. If other investors do the same to establish a trading pattern this would contradict . B. the weak-form EMH According to recent research securities markets fully adjust to earnings announcements D. radually over time When stock returns exhibit positive serial correlation, this means that returns tend to follow returns. A. positive; positive Basu found that firms with high PIE ratios C. earned lower average returns than firms with low PIE ratios Fundamental analysis is likely to yield best results for . B. neglected stocks You are looking to invest in one of three stocks. Stock A has high expected arnings growth, Stock B has only modest expected earnings growth and Stock C is expected to generate poor earnings growth. Which stock is likely to generate the greatest alpha for you?

D. You cannot tell from the information given You believe that you can earn 2% more on your portfolio if you engage in full time stock research. However, the additional trading costs and tax liability from active management will cost you about 0. 5%. You have a $800,000 stock portfolio. What is the most you can afford to spend on your research? c. $12,000 Even if the markets are efficient, professional portfolio management is still mportant because it provides investors with diversification I. provides a portfolio with a specified risk level . l. low Cost II. rovides better risk adjusted returns than an index B. and II only 42. Banz found that, on average, the risk-adjusted returns of small firms . A. was higher than the risk-adjusted returns of large firms If the U. S. capital markets are not informationally efficient . A the markets cannot be allocationally efficient 44. ‘Active investment management may generate additional returns at times of about 0. 1%. However, the standard deviation of the typical well diversified ortfolio is about 20%, so it is very difficult to statistically identify any increase in performance. Even if true, this statement is an example of the problem in deciding how efficient the markets are. A. magnitude 45. DeBondt and Thaler (1985) found that the poorest performing stocks in one time period experienced performance in the following period and the best performing stocks in one time period experienced performance in the following time period. 8. good, poor J. M. Keyes put all his money in one stock and the stock doubled in value in a matter of months. He did this three times in a row with three different stocks. J. M. got his picture on the front page of the Wall Street Journal.

However the paper never mentioned the thousands of investors who made similar bets on other stocks and lost most of their money. This is an example of the problem in deciding how efficient the markets are. C. lucky event Most tests Of semi-strong efficiency are D. joint tests of market efficiency and the risk adjustment measure The effect may explain much of the small firm anomaly. l. January effect l. neglected effect Ill. liquidity effect D. l, II and Ill Studies show that the bid-ask spread for the least liquid stocks may be as high as The broadest information set is included in the C. trong form efficiency argument The Fama and French evidence that high book to market firms outperform low book to market firms even after adjusting for beta means C. either high book to market firms are underpriced or the book to market ratio is a proxy for a systematic risk factor According to results by Seyhun A. investors cannot usually earn abnormal returns by following inside trades after knowledge of the trades are made public If the daily returns on the stock market are normally distributed with a mean of 0. 05% and a standard deviation of 1. 0%, the probability that the stock market would have a return Of -23. 0% or worse on one particular day (as it did On Black Monday) is approximately . A. 0. 0% According to the semi-strong form of the efficient markets hypothesis B. future changes in stock prices cannot be predicted from any information that is publicly available The term random walk is used in investments to refer to and unpredictable C. stock price changes that are random 56. Important characteristic(s) of market efficiency is that there are no arbitrage opportunities I. security prices react quickly to new information Ill. ctive trading strategies will not consistently outperform passive strategies D. , II and Ill Stock market analysts have tended to be in their recommendations to investors. B. overwhelmingly optimistic Assume that a company announces unexpectedly high earnings in a particular quarter. In an efficient market one might expect . A. an abnormal price change immediately following the announcement A market anomaly refers to D. price behavior that differs from the behavior predicted by the efficient market hypothesis Which of the following contradicts the proposition that the stock market is weakly efficient? C. Every January, the stock market earns above normal returns.

Which of the following would violate the efficient market hypothesis? C. Earning abnormal returns after a firm announces surprise earnings. Which of the following stock price observations would appear to contradict the weak form Of the efficient market hypothesis? C. You could have consistently made superior returns by buying stock after a 10% rise in price and selling after a 10% fall. The semi-strong form of the efficient market hypothesis implies that generate abnormal returns and generate abnormal returns. D. Technical analysis cannot; fundamental analysis cannot

An implication of the efficient market hypothesis is that alphas will quickly disappear Fundamental indexing refers to . C. nonzero A. investing in index stocks in proportion to the stock’s fundamental value 66. Tests of mutual fund performance indicate that funds with tend to have poorer performance. B. higher expense and turnover ratios Value stocks may provide investors with better returns than gronrth stocks if . l. value stocks are out of favor with investors II. prices of growth stocks include premiums for overly optimistic growth levels Ill. value stocks are likely to generate positive earnings surprises.

D. l, II and Ill Value stocks usually exhibit _ price-to-book ratios and _ price-to-earnings ratios. A. low, low Growth stocks usually exhibit _ price-to-book ratios and price-to- earnings ratios. D. high, high A day trade with an average stock holding period of under 8 minutes might be most closely associated with which trading philosophy? D. Technical analysis A technical analyst is most likely to be affiliated with which investment philosophy? A. Active management Someone who invests in the Vanguard Index 500 mutual fund could most accurately be described as using what approach? D.

Passive investment Evidence by Blake, Elton and Gruber indicates that on average actively managed bond funds D. under perform passive fixed-income indexes by an amount equal to fund expenses Insiders are able to profitably trade and earn abnormal returns prior to the announcement of positive news. This is a violation of which form of efficiency? C. Strong form efficiency In an efficient market and for an investor that believes in a passive approach to investing, what is the primary duty of a portfolio manager? B. Diversification Which of the following is not a topic related to the debate over market fficiency?

A. IPO results Which Fidelity Magellan portfolio manager is often referenced as an exception to the general conclusion of efficient markets? B. Peter Lynch The tendency of poorly performing stocks and well performing stocks in one period to continue their performance into the next period is called the C. momentum effect Which of the following is not a concept related to explaining abnormal excess stock returns? D. Preferred stock effect The lack of adequate trading volume in stock that may ultimately lead to its ability to produce excess returns is referred to as the B. liquidity effect

Fundamental analysis determines that the price of a firm’s stock is too low, given its intrinsic value. The information used in the analysis is available to all market participants, yet the price does not seem to react. The stock does not trade on a major exchange. What concept might explain the ability to produce excess returns on this stock? B. Neglected firm effect When testing mutual fund performance over time one must be careful of which means that a certain percentage of poorer performing funds fail over time which makes the performance of remaining funds seem more consistent over time.

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