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1、Chapter 11 The Efficient Market Hypothesis 237 Multiple Choice Questions1.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
2、to insiders.A)semistrong B)strong C)weak D)A,B,and C E)none of the above Answer:A Difficulty:Easy Rationale:The semistrong form of EMH maintains that stock prices immediately reflect all historical and current public information,but not inside information.2.Proponents of the EMH typically advocate A
3、)an active trading strategy.B)investing in an index fund.C)a passive investment strategy.D)A and B E)B and C Answer:E Difficulty:Easy Rationale:Believers of market efficiency advocate passive investment strategies,and an investment in an index fund is one of the most practical passive investment str
4、ategies,especially for small investors.3.If you believe in the _ form of the EMH,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.A)semistrong B)strong C)weak D)all of
5、the above E)none of the above Answer:C Difficulty:Easy Rationale:The information described above is market data,which is the data set for the weak form of market efficiency.The semistrong form includes the above plus all other public information.The strong form includes all public and private inform
6、ation.Chapter 11 The Efficient Market Hypothesis 238 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.A)semistrong B)strong C)weak D)all of the above E)none of the above Answer:B Difficu
7、lty:Easy Rationale:The strong form includes all public and private information.5.If you believe in the reversal effect,you should A)buy bonds in this period if you held stocks in the last period.B)buy stocks in this period if you held bonds in the last period.C)buy stocks this period that performed
8、poorly last period.D)go short.E)C and D Answer:C Difficulty:Easy Rationale:The reversal effect states that stocks that do well in one period tend to perform poorly in the subsequent period,and vice versa.6._ focus more on past price movements of a firms stock than on the underlying determinants of f
9、uture profitability.A)Credit analysts B)Fundamental analysts C)Systems analysts D)Technical analysts E)All of the above Answer:D Difficulty:Easy Rationale:Technicians attempt to predict future stock prices based on historical stock prices.Chapter 11 The Efficient Market Hypothesis 239 7._ above whic
10、h it is difficult for the market to rise.A)Book value is a value B)Resistance level is a value C)Support level is a value D)A and B E)A and C Answer:B Difficulty:Easy Rationale:When stock prices have remained stable for a long period,these prices are termed resistance levels;technicians believe it i
11、s difficult for the stock prices to penetrate these resistance levels.8._ the return on a stock beyond what would be predicted from market movements alone.A)An excess economic return is B)An economic return is C)An abnormal return is D)A and B E)A and C Answer:E Difficulty:Easy Rationale:An economic
12、 return is the expected return,based on the perceived level of risk and market factors.When returns exceed these levels,the returns are called abnormal or excess economic returns.9.The debate over whether markets are efficient will probably never be resolved because of _.A)the lucky event issue.B)th
13、e magnitude issue.C)the selection bias issue.D)all of the above.E)none of the above.Answer:D Difficulty:Easy Rationale:Factors A,B,and C all exist make rigid testing of market efficiency difficult or impossible.Chapter 11 The Efficient Market Hypothesis 240 10.A common strategy for passive managemen
14、t is _.A)creating an index fund B)creating a small firm fund C)creating an investment club D)A and C E)B and C Answer:A Difficulty:Easy Rationale:The index fund is,by definition,passively managed.The other investment alternatives may or may not be managed passively.11.Arbel(1985)found that A)the Jan
15、uary effect was highest for neglected firms.B)the book-to-market value ratio effect was highest in January C)the liquidity effect was highest for small firms.D)the neglected firm effect was independent of the small firm effect.E)small firms had higher book-to-market value ratios.Answer:A Difficulty:
16、Moderate Rationale:Arbel divided firms into highly researched,moderately researched,and neglected groups based on the number of institutions holding the stock.12.Researchers have found that most of the small firm effect occurs A)during the spring months.B)during the summer months.C)in December.D)in
17、January.E)randomly.Answer:D Difficulty:Moderate Rationale:Much of the so-called small firm effect simply may be the tax-effect as investors sell stocks on which they have losses in December and reinvest the funds in January.As small firms are especially volatile,these actions affect small firms in a
18、 more dramatic fashion.Chapter 11 The Efficient Market Hypothesis 241 13.Malkiel(1995)calculated that the average alphas,or abnormal returns,on a large sample of mutual funds between 1972 and 1991 were A)significantly positive.B)significantly negative.C)statistically indistinguishable from zero.D)po
19、sitive before 1981 and negative thereafter.E)negative before 1981 and positive thereafter.Answer:C Difficulty:Moderate Rationale:Malkiels study suggests that fund managers do not beat the market on a risk-adjusted basis.14.Basu(1977,1983)found that firms with low P/E ratios A)earned higher average r
20、eturns than firms with high P/E ratios.B)earned the same average returns as firms with high P/E ratios.C)earned lower average returns than firms with high P/E ratios.D)had higher dividend yields than firms with high P/E ratios.E)none of the above.Answer:A Difficulty:Moderate Rationale:Firms with hig
21、h P/E ratios already have an inflated price relative to earnings and thus tend to have lower returns than low P/E ratio stocks.However,the P/E ratio may capture risk not fully impounded in market betas so this may represent an appropriate risk adjustment rather than a market anomaly.15.Jaffe(1974)fo
22、und that stock prices _ after insiders intensively bought shares.A)decreased B)did not change C)increased D)became extremely volatile E)became much less volatile Answer:C Difficulty:Moderate Rationale:Insider trading may signal private information.Chapter 11 The Efficient Market Hypothesis 242 16.Ba
23、nz(1981)found that,on average,the risk-adjusted returns of small firms A)were higher than the risk-adjusted returns of large firms.B)were the same as the risk-adjusted returns of large firms.C)were lower than the risk-adjusted returns of large firms.D)were unrelated to the risk-adjusted returns of l
24、arge firms.E)were negative.Answer:A Difficulty:Moderate Rationale:Banz found A to be true,although subsequent studies have attempted to explain the small firm effect as the January effect,the neglected firm effect,etc.17.Proponents of the EMH think technical analysts A)should focus on relative stren
25、gth.B)should focus on resistance levels.C)should focus on support levels.D)should focus on financial statements.E)are wasting their time.Answer:E Difficulty:Moderate Rationale:Technical analysts attempt to predict future stock prices from historic stock prices;proponents of EMH believe that stock pr
26、ice changes are random variables.18.Studies of positive earnings surprises have shown that there is A)a positive abnormal return on the day positive earnings surprises are announced.B)a positive drift in the stock price on the days following the earnings surprise announcement.C)a negative drift in t
27、he stock price on the days following the earnings surprise announcement.D)both A and B are true.E)both A and C are true.Answer:D Difficulty:Moderate Rationale:The market appears to adjust to earnings information gradually,resulting in a sustained period of abnormal returns.Chapter 11 The Efficient M
28、arket Hypothesis 243 19.On November 22,2005 the stock price of Walmart was$39.50 and the retailer stock index was 600.30.On November 25,2005 the stock price of Walmart was$40.25 and the retailer stock index was 605.20.Consider the ratio of Walmart to the retailer index on November 22 and November 25
29、.Walmart is _ the retail industry and technical analysts who follow relative strength would advise _ the stock.A)outperforming,buying B)outperforming,selling C)underperforming,buying D)underperforming,selling E)equally performing,neither buying nor selling Answer:A Difficulty:Moderate Rationale:11/2
30、2:$39.50/600.30=0.0658;11/25:$40.25/605.20=0.0665;Thus,K-Marts relative strength is improving and technicians using this technique would recommend buying.20.Work by Amihud and Mendelson(1986,1991)A)argues that investors will demand a rate of return premium to invest in less liquid stocks.B)may help
31、explain the small firm effect.C)may be related to the neglected firm effect.D)B and C.E)A,B,and C.Answer:E Difficulty:Moderate Rationale:Lack of liquidity may affect the returns of small and neglected firms;however the theory does not explain why the abnormal returns are concentrated in January.21.F
32、ama and French(1992)found that the stocks of firms within the highest decile of market/book ratios had average monthly returns of _ while the stocks of firms within the lowest decile of market/book ratios had average monthly returns of_.A)greater than 1%,greater than 1%B)greater than 1%,less than 1%
33、C)less than 1%,greater than 1%D)less than 1%,less than 1%E)less than 0.5%,greater than 0.5%Answer:C Difficulty:Moderate Rationale:This finding suggests either that low market-to-book ratio firms are relatively underpriced,or that the market-to-book ratio is serving as a proxy for a risk factor that
34、affects expected equilibrium returns.Chapter 11 The Efficient Market Hypothesis 244 22.A market decline of 23%on a day when there is no significant macroeconomic event _ consistent with the EMH because _.A)would be,it was a clear response to macroeconomic news.B)would be,it was not a clear response
35、to macroeconomic news.C)would not be,it was a clear response to macroeconomic news.D)would not be,it was not a clear response to macroeconomic news.E)none of the above.Answer:D Difficulty:Moderate Rationale:This happened on October 19,1987.Although this specific event is not mentioned in this editio
36、n of the book,it is an example of something that would be considered a violation of the EMH.23.In an efficient market,_.A)security prices react quickly to new information B)security prices are seldom far above or below their justified levels C)security analysts will not enable investors to realize s
37、uperior returns consistently D)one cannot make money E)A,B,and C Answer:E Difficulty:Easy Rationale:A,B,and C are true;however,even in an efficient market one should be able to earn the appropriate risk-adjusted rate of return.24.The weak form of the efficient market hypothesis asserts that A)stock
38、prices do not rapidly adjust to new information contained in past prices or past data.B)future changes in stock prices cannot be predicted from past prices.C)technicians cannot expect to outperform the market.D)A and B E)B and C Answer:E Difficulty:Easy Rationale:Stock prices do adjust rapidly to ne
39、w information.Chapter 11 The Efficient Market Hypothesis 245 25.A support level is the price range at which a technical analyst would expect the A)supply of a stock to increase dramatically.B)supply of a stock to decrease substantially.C)demand for a stock to increase substantially.D)demand for a st
40、ock to decrease substantially.E)price of a stock to fall.Answer:C Difficulty:Easy Rationale:A support level is considered to be a level below that the price of the stock is unlikely to fall and is believed to be determined by market psychology.26.A finding that _ would provide evidence against the s
41、emistrong form of the efficient market theory.A)low P/E stocks tend to have positive abnormal returns B)trend analysis is worthless in determining stock prices C)one can consistently outperform the market by adopting the contrarian approach exemplified by the reversals phenomenon D)A and B E)A and C
42、 Answer:E Difficulty:Moderate Rationale:Both A and C are inconsistent with the semistrong form of the EMH.27.The weak form of the efficient market hypothesis contradicts A)technical analysis,but supports fundamental analysis as valid.B)fundamental analysis,but supports technical analysis as valid.C)
43、both fundamental analysis and technical analysis.D)technical analysis,but is silent on the possibility of successful fundamental analysis.E)none of the above.Answer:D Difficulty:Moderate Rationale:The process of fundamental analysis makes the market more efficient,and thus the work of the fundamenta
44、list more difficult.The data set for the weak form of the EMH is market data,which is the only data used exclusively by technicians.Fundamentalists use all public information.Chapter 11 The Efficient Market Hypothesis 246 28.Two basic assumptions of technical analysis are that security prices adjust
45、 A)rapidly to new information and market prices are determined by the interaction of supply and demand.B)rapidly to new information and liquidity is provided by security dealers.C)gradually to new information and market prices are determined by the interaction of supply and demand.D)gradually to new
46、 information and liquidity is provided by security dealers.E)rapidly to information and to the actions of insiders.Answer:C Difficulty:Moderate Rationale:Technicians follow market data-price changes and volume of trading(as indicator of supply and demand)believing that they can identify price trends
47、 as security prices adjust gradually.29.Cumulative abnormal returns(CAR)A)are used in event studies.B)are better measures of security returns due to firm-specific events than are abnormal returns(AR).C)are cumulated over the period prior to the firm-specific event.D)A and B.E)A and C.Answer:D Diffic
48、ulty:Moderate Rationale:As leakage of information occurs,the accumulated abnormal returns that are abnormal returns summed over the period of interest(around the event date)are better measures of the effect of firm-specific events.30.Studies of mutual fund performance A)indicate that one should not
49、randomly select a mutual fund.B)indicate that historical performance is not necessarily indicative of future performance.C)indicate that the professional management of the fund insures above market returns.D)A and B.E)B and C.Answer:D Difficulty:Easy Rationale:Studies show that all funds do not outp
50、erform the market and that historical performance is not necessarily an indicator of future performance.Chapter 11 The Efficient Market Hypothesis 247 31.The likelihood of an investment newsletters successfully predicting the direction of the market for three consecutive years by chance should be A)