Chapter 4 Efficient Market Hypothesis

Question 1

Weak-form EMH

Answer 1

In short, prices reflect all historical information

Question 2

Semi-strong EMH

Answer 2

In short, prices reflect all public information

Question 3

Strong EMH

Answer 3

prices reflect all public and private information

Question 4

Weak EMH

Statistical tests of independence

Answer 4

Autocorrelationtests

Runs tests

Question 5

Testing results generally_______

Answer 5

support the weak-form EMH, but results are not unanimous

Question 6

Semi-strong EMH

Two sets of studies:

Answer 6

Time series analysis of returns or the cross-section distribution of returns for individual stocks.
Event studies that examine how fast stock prices adjust to specific significant economic events.

Question 7

Semi strong EMH:
Return Prediction studies: Quarterly earnings reports may yield abnormal returns due to?
Does it support the EMH?

Answer 7

unanticipated earnings surprise.

No.

Question 8

Semi-strong EMH
Return Prediction Studies:
The reason for the January anomaly.
Does it support the EMH?

Answer 8

Tax selling toward the end of the year.

No.

Question 9

Semi-strong EMH:
Predicting Cross-Sectional Returns:
Price-earnings ratios research results that:

Answer 9

Publicly available P/E ratios possess valuable information regarding future returns.
This is inconsistent with semistrong efficiency

Question 10

Semi-strong EMH:
Predicting Cross-Sectional Returns:
Price-Earnings/Growth Rate (PEG) Ratios

Answer 10

Studies have hypothesised an inverse relationship
between the PEG ratio and subsequent rates of
return. This is inconsistent with the EMH

Question 11

Semi-strong EMH:
Predicting Cross-Sectional Returns:
The size effect:
Does it support the EMH?

Answer 11

The studies indicate that risk-adjusted returns for extended periods indicate that the small firms consistently experienced significantly larger risk- adjusted returns than large firms.
No.

Question 12

Semi-strong EMH:
Predicting Cross-Sectional Returns:
Neglected firm effect caused by…….

Answer 12

lack of information and limited institutional interest

Question 13

Semi-strong EMH:
Predicting Cross-Sectional Returns:
Book value to market value ratio:

Answer 13

Significantpositiverelationshipfoundbetween current values for this ratio and future stock returns.
Results inconsistent with the EMH

Question 14

Semi-strong EMH:
Event Studies:
Stock split studies show…….
Does this confirm the EMH

Answer 14

that splits do not result in abnormal gains after the split.

Yes

Question 15

Semi-strong EMH:
Event Studies:
Do IPO research confirm the EMH?

Answer 15

Yes because the price is adjusted within one day after the offering

Question 16

Semi-strong EMH:
Event Studies:
Listing of a stock on an national exchange. Does it confirm the EMH?

Answer 16

No, Because the nation exchange listing may offer some short term profit opportunities for investors.

Question 17

Semi-strong EMH:
Event Studies:
Do stock prices adjust rapidly to unexpected world events and economic news?
Does this confirm the EMH?

Answer 17

The do adjust rapidly, and hence do not provide opportunities for abnormal profits.
Yes it does.

Question 18

Semi-strong EMH:
Summary of results:
-event studies
-Predicting Cross-Sectional Returns

Answer 18

• Studies on events- indicate strong support for semi-strong EMH with the exception of exchange listing studies
• Studies on Predicting Cross-Sectional Returns- indicates markets are not semistrong efficient

Question 19

Tests of Strong-form EMH:

Testing Groups of Investors:

Answer 19

Corporate insiders
Security analysts
Professionalmoneymanagers