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1、1 Financial Markets and Institutions,6e(Mishkin/Eakins)Chapter 6 Are Financial Markets Efficient?6.1 Multiple Choice 1)How expectations are formed is important because expectations influence A)the demand for assets.B)bond prices.C)the risk structure of interest rates.D)the term structure of interest
2、 rates.E)all of the above.Answer:E Question Status:Previous Edition 2)According to the efficient market hypothesis,the current price of a financial security A)is the discounted net present value of future interest payments.B)is determined by the highest successful bidder.C)fully reflects all availab
3、le relevant information.D)is a result of none of the above.Answer:C Question Status:Previous Edition 3)The efficient market hypothesis A)is based on the assumption that prices of securities fully reflect all available information.B)holds that the expected return on a security equals the equilibrium
4、return.C)both A and B.D)neither A nor B.Answer:C Question Status:Previous Edition 4)If the optimal forecast of the return on a security exceeds the equilibrium return,then A)the market is inefficient.B)an unexploited profit opportunity exists.C)the market is in equilibrium.D)only A and B of the abov
5、e are true.E)only B and C of the above are true.Answer:D Question Status:Previous Edition 5)According to the efficient market hypothesis A)one cannot expect to earn an abnormally high return by purchasing a security.B)information in newspapers and in the published reports of financial analysts is al
6、ready reflected in market prices.C)unexploited profit opportunities abound,thereby explaining why so many people get rich by trading securities.D)all of the above are true.E)only A and B of the above are true.Answer:E Question Status:Previous Edition 2 6)Another way to state the efficient market con
7、dition is that in an efficient market,A)unexploited profit opportunities will be quickly eliminated.B)unexploited profit opportunities will never exist.C)arbitrageurs guarantee that unexploited profit opportunities never exist.D)both A and C of the above occur.Answer:A Question Status:Previous Editi
8、on 7)Another way to state the efficient market hypothesis is that in an efficient market,A)unexploited profit opportunities will never exist as market participants,such as arbitrageurs,ensure that they are instantaneously dissipated.B)unexploited profit opportunities will not exist for long,as marke
9、t participants will act quickly to eliminate them.C)every financial market participant must be well informed about securities.D)only A and C of the above.Answer:B Question Status:Previous Edition 8)A situation in which the price of an asset differs from its fundamental market value is called A)an un
10、exploited profit opportunity.B)a bubble.C)a correction.D)a mean reversion.Answer:B Question Status:Previous Edition 9)A situation in which the price of an asset differs from its fundamental market value A)indicates that unexploited profit opportunities exist.B)indicates that unexploited profit oppor
11、tunities do not exist.C)need not indicate that unexploited profit opportunities exist.D)indicates that the efficient market hypothesis is fundamentally flawed.Answer:C Question Status:Previous Edition 10)Studies of mutual fund performance indicate that mutual funds that outperformed the market in on
12、e time period A)usually beat the market in the next time period.B)usually beat the market in the next two subsequent time periods.C)usually beat the market in the next three subsequent time periods.D)usually do not beat the market in the next time period.Answer:D Question Status:Previous Edition 3 1
13、1)The efficient market hypothesis suggests that allocating your funds in the financial markets on the advice of a financial analyst A)will certainly mean higher returns than if you had made selections by throwing darts at the financial page.B)will always mean lower returns than if you had made selec
14、tions by throwing darts at the financial page.C)is not likely to prove superior to a strategy of making selections by throwing darts at the financial page.D)is good for the economy.Answer:C Question Status:Previous Edition 12)Ivan Boesky,the most successful of the so-called arbs in the 1980s,was abl
15、e to outperform the market on a consistent basis,indicating that A)securities markets are not efficient.B)unexploited profit opportunities were abundant.C)investors can outperform the market with inside information.D)only B and C of the above.Answer:D Question Status:Previous Edition 13)To say that
16、stock prices follow a random walk is to argue that A)stock prices rise,then fall.B)stock prices rise,then fall in a predictable fashion.C)stock prices tend to follow trends.D)stock prices are,for all practical purposes,unpredictable.Answer:D Question Status:Previous Edition 14)To say that stock pric
17、es follow a random walk is to argue that A)stock prices rise,then fall,then rise again.B)stock prices rise,then fall in a predictable fashion.C)stock prices tend to follow trends.D)stock prices cannot be predicted based on past trends.Answer:D Question Status:Previous Edition 15)Rules used to predic
18、t movements in stock prices based on past patterns are,according to the efficient markets theory,A)a waste of time.B)profitably employed by all financial analysts.C)the most efficient rules to employ.D)consistent with the random walk hypothesis.Answer:A Question Status:Previous Edition 4 16)Tests us
19、ed to rate the performance of rules developed in technical analysis conclude that A)technical analysis outperforms the overall market.B)technical analysis far outperforms the overall market,suggesting that stockbrokers provide valuable services.C)technical analysis does not outperform the overall ma
20、rket.D)technical analysis does not outperform the overall market,suggesting that stockbrokers do not provide services of any value.Answer:C Question Status:Previous Edition 17)Which of the following types of information will most likely enable the exploitation of a profit opportunity?A)Financial ana
21、lysts published recommendations B)Technical analysis C)Hot tips from a stockbroker D)Insider information Answer:D Question Status:Previous Edition 18)Which of the following types of information will most likely enable the exploitation of a profit opportunity?A)Financial analysts published recommenda
22、tions B)Technical analysis C)Hot tips from a stockbroker D)None of the above Answer:D Question Status:Previous Edition 19)The advantage of a buy-and-hold strategy is that A)net profits will tend to be higher because there will be fewer brokerage commissions.B)losses will eventually be eliminated.C)t
23、he longer a stock is held,the higher will be its price.D)only B and C of the above are true.Answer:A Question Status:Previous Edition 20)The efficient market hypothesis suggests that A)investors should not try to outguess the market by constantly buying and selling securities.B)investors do better o
24、n average if they adopt a buy and hold strategy.C)buying into a mutual fund is a sensible strategy for a small investor.D)all of the above are sensible strategies.E)only A and B of the above are sensible strategies.Answer:D Question Status:Previous Edition 5 21)Sometimes one observes that the price
25、of a companys stock falls after the announcement of favorable earnings.This phenomenon is A)clearly inconsistent with the efficient market hypothesis.B)consistent with the efficient market hypothesis if the earnings were not as high as anticipated.C)consistent with the efficient market hypothesis if
26、 the earnings were not as low as anticipated.D)the result of none of the above.Answer:B Question Status:Previous Edition 22)Important implications of the efficient market hypothesis include which of the following?A)Future changes in stock prices should,for all practical purposes,be unpredictable.B)S
27、tock prices will respond to announcements only when the information in these announcements is new.C)Sometimes a stock price declines when good news is announced.D)All of the above.E)Only A and B of the above.Answer:D Question Status:Previous Edition 23)Although the verdict is not yet in,the availabl
28、e evidence indicates that,for many purposes,the efficient market hypothesis is A)a good starting point for analyzing expectations.B)not a good starting point for analyzing expectations.C)too general to be a useful tool for analyzing expectations.D)none of the above.Answer:A Question Status:Previous
29、Edition 24)The efficient market hypothesis suggests that A)investors should purchase no-load mutual funds which have low management fees.B)investors can use the advice of technical analysts to outperform the market.C)investors let too many unexploited profit opportunities go by if they adopt a buy a
30、nd hold strategy.D)only A and B of the above are sensible strategies.Answer:A Question Status:Previous Edition 25)The efficient market hypothesis applies to A)both the stock market and the foreign exchange market.B)the stock market but not the foreign exchange market.C)the foreign exchange market bu
31、t not the stock market.D)neither the stock market nor the foreign exchange market.Answer:A Question Status:Previous Edition 6 26)According to the January effect,stock prices A)experience an abnormal price rise from December to January.B)experience an abnormal price decline from December to January.C
32、)follow a random walk during January.D)set the pattern for the entire year in January.Answer:A Question Status:Previous Edition 27)The small-firm effect refers to the observation that small firms stocks A)follow a random walk but large firms stocks do not.B)have earned abnormally low returns given t
33、heir greater risk.C)have earned abnormally high returns even taking into account their greater risk.D)sell for lower prices than do large firms stocks.Answer:C Question Status:Previous Edition 28)The efficient markets hypothesis is weakened by evidence that A)stock prices tend to follow a random wal
34、k.B)stock prices are more volatile than fluctuations in their fundamental values can explain.C)technical analysis does not outperform the overall market.D)an investment advisers past success or failure at picking stocks does not predict his or her future performance.Answer:B Question Status:Previous
35、 Edition 29)Mean reversion refers to the observation that A)stock prices overact to news announcements.B)stocks prices are more volatile than fluctuations in their fundamental value would predict.C)stocks with low returns are likely to have high returns in the future.D)stocks with low returns are li
36、kely to have even lower returns in the future.Answer:C Question Status:Previous Edition 30)Which of the following does not weaken the efficient markets hypothesis?A)Mean reversion B)Success of buy-and-hold strategy C)January effect D)Excessive volatility Answer:B Question Status:Previous Edition 31)
37、An important lesson from the Black Monday Crash of 1987 and the tech crash of 2000 is that A)factors other than market fundamentals affect stock prices.B)the strong version of the efficient market hypothesis,that stock prices reflect the true fundamental value of securities,is correct.C)market psych
38、ology has little if any effect on stock prices.D)there is no such thing as a rational bubble.Answer:A Question Status:Previous Edition 7 32)An investor gains from short selling by _ and then later _.A)buying a stock;selling it at a higher price B)selling a stock;buying at back at a lower price C)buy
39、ing a stock;selling it at a lower price D)selling a stock;buying it back at a higher price Answer:B Question Status:Previous Edition 33)Which of the following is an insight from behavioral finance?A)The price of securities fully reflects all available information.B)Investor overconfidence leads to h
40、igh trading volumes.C)The optimal forecast of a securitys return equals the securitys equilibrium return.D)Investment advisers cannot consistently beat the market.Answer:B Question Status:Previous Edition 34)Which of the following is empirical evidence indicating that the efficient market hypothesis
41、 may not always be generally applicable?A)Small-firm effect B)January effect C)Market Overreaction D)All of the above Answer:D Question Status:New 35)An arrangement with a broker to borrow stocks from them and then sell it in the market,with the hope that they earn a profit by buying the stock back
42、again after it has fallen in price is A)behavioral finance.B)short sales.C)smart money.D)random walk.Answer:B Question Status:New 36)Evidence in favor of market efficiency includes A)performance of investment analysts and mutual funds.B)whether stock prices reflect publicly available information.C)t
43、he random-walk behavior of stock prices.D)all of the above.Answer:D Question Status:New 37)Evidence against market efficiency does not include A)small-firm effect.B)technical analysis.C)excessive volatility.D)mean reversion.Answer:B Question Status:New 8 38)Evidence in favor of market efficiency doe
44、s not include A)random-walk behavior.B)technical analysis.C)performance of investment analysts and mutual funds.D)January effect.Answer:D Question Status:New 39)The elimination of a riskless profit opportunity in a market is called A)the efficient market hypothesis.B)random-walk.C)arbitrage.D)market
45、 fundamentals.Answer:C Question Status:New 6.2 True/False 1)Evidence that stock prices sometimes fall when a firm announces good news contradicts the efficient market hypothesis.Answer:FALSE Question Status:Previous Edition 2)If the security markets are truly efficient,there is no need to pay for he
46、lp selecting securities.Answer:TRUE Question Status:Previous Edition 3)Evidence that a mutual fund has performed extraordinarily well in the past contradicts the efficient market hypothesis.Answer:FALSE Question Status:Previous Edition 4)In an efficient market,every stock is a good choice.Answer:TRU
47、E Question Status:Previous Edition 5)Technical analysts look at historical prices for information to project future prices.Answer:TRUE Question Status:Previous Edition 6)The evidence suggests technical analysts are not superior stock pickers.Answer:TRUE Question Status:Previous Edition 7)If the mark
48、ets are efficient,the optimal investment strategy will be to buy and hold so as to minimize transaction costs.Answer:TRUE Question Status:Previous Edition 9 8)In an efficient market,abnormal returns are not possible even using inside information.Answer:FALSE Question Status:Previous Edition 9)Short
49、selling refers to the practice of buying a stock and holding it for only a short time before selling it.Answer:FALSE Question Status:Previous Edition 10)Loss aversion means the unhappiness a person feels when he or she suffers a monetary loss exceeds the happiness the same person experiences from re
50、ceiving a monetary gain of the same amount.Answer:TRUE Question Status:Previous Edition 11)It is probably a good use of an investors time to watch as many shows featuring technical analysts as possible.Answer:FALSE Question Status:Previous Edition 12)In an efficient market,all exploited profit oppor