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Managerial Finance > chp 13 > Flashcards

chp 13 Flashcards

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1
Q

The cause of the October 19, 1987 stock market crash

A

has yet to be determined.

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2
Q

Leonie has noticed that a particular stock has increased in value during each of the last several days. Given this trend, she believes the stock price will increase over the next two trading days, as well. This is an example of

A

representativeness.

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3
Q

If an investor can earn abnormal returns based on insider trading, the stock market is at best

A

semistrong form efficient.

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4
Q

Research has found that investors tend to react to earnings surprises

A

slowly, which illustrates conservatism.

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5
Q

Which one of the following serial coefficient values is most consistent with weak form market efficiency?

A

0

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6
Q

If markets are strong form efficient, event studies should show that new information affects a related stock’s price

A

for a single day.

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7
Q

The hypothesis that market prices reflect all publicly available information is called __________ form efficiency.

A

semistrong

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8
Q

Donald Keim’s research presents evidence that the difference in performance between small capitalization stocks and large capitalization stocks is largest in the month of

A

January.

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9
Q

What does weak form efficiency imply?

A

Price patterns that existed in the past will reappear in the future.

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10
Q

Weak form efficiency is best defined as a market where current prices are based on

A

historical prices.

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11
Q

Which one of the following serial correlation values is the strongest indicator of price continuation?

A

+.5

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12
Q

If an investor can earn above average returns based on a thorough reading of the financial press, the stock market is at best

A

weak form efficient.

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13
Q

Your friend works in the finance department at Sedum Corporation. You are aware that this friend trades Sedum stock based on information she overhears in the office. You also know that this information is not known to the general public. Your friend continually brags to you about the profits she earns trading Sedum stock. Based on this information, you would tend to argue that the financial markets are at best __________ form efficient.

A

semistrong

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14
Q

Insider trading does not offer any advantages if the financial markets are

A

strong form efficient.

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15
Q

Your roommate is an avid reader of The Wall Street Journal. She saw favorable news about a particular company in this morning’s paper and immediately purchased 200 shares of the company’s stock. By the close of business today, the company’s stock price had increased 3.5 percent. Also today, the market in total increased .1 percent. These results would suggest that the stock market is at best

A

weak form efficient.

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16
Q

The stock of Albacore, Inc., earned an abnormal return at Time t. The efficient market hypothesis would suggest that the abnormal return is an indicator of

A

a release of new information at Time t.

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17
Q

If the market is fully efficient, an announcement by a firm of a new product with a large positive net present value will cause the market price of that firm’s stock to

A

immediately increase to a new level equivalent to the increased value of the firm.

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18
Q

In an event study, the abnormal return is described as the

A

actual return on a security minus the market rate of return on the same date.

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19
Q

Serial correlation

A

supports weak form efficiency.

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20
Q

Market efficiency

A

or the lack thereof, is highly controversial.

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21
Q

If the financial markets are efficient, then investors should expect their investments in those markets to

A

have zero net present values.

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22
Q

Which one of the following actions would generally be considered the most rational action for a tax-paying investor?

A

Selling his losing securities and holding his winning securities

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23
Q

Individuals that continually monitor the financial markets seeking mispriced securities

A

tend to make the markets more efficient.

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24
Q

The U.S. Securities and Exchange Commission periodically charges individuals for insider trading and claims those individuals have made unfair profits. Based on this fact, you would tend to argue that the financial markets are at best __________ form efficient.

A

semistrong

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25
Q

In an efficient market, the price of a security will

A

react immediately to new information with no further price adjustments related to that information.

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26
Q

Given the vast resources available to mutual fund managers, these managers, on average, have generally

A

underperformed the market on a risk-adjusted basis.

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27
Q

Which one of the following terms is used to describe a principle where investors draw conclusions from insufficient data?

A

Representativeness

28
Q

The principle that investors slowly adjust their beliefs to new information is referred to as

A

conservatism

29
Q

Efficient markets require which one of the following?

A

Countervailing irrationalities

30
Q

Even though no final conclusion is currently warranted, a number of research papers, including those of Fama and French, have argued that

A

stocks with high book-value-to-stock-price ratios outperform those with low ratios.

31
Q

If you live in a remote area with limited access to the news but do a lot of historical research on firms, you would prefer that the financial markets be __________ form efficient so you can have an advantage in the marketplace.

A

weak

32
Q

Serial correlation

A

supports weak form efficiency.

33
Q

Insider trading does not offer any advantages if the financial markets are

A

strong form efficient.

34
Q

Serial correlation

A

involves the relationship of one stock’s returns over various time periods.

35
Q

In an event study, the abnormal return is described as the

A

actual return on a security minus the market rate of return on the same date.

36
Q

Markets tend to be efficient when

A

professional arbitrage exceeds amateur speculation.

37
Q

The U.S. Securities and Exchange Commission periodically charges individuals for insider trading and claims those individuals have made unfair profits. Based on this fact, you would tend to argue that the financial markets are at best __________ form efficient.

A

semistrong

38
Q

Your roommate is an avid reader of The Wall Street Journal. She saw favorable news about a particular company in this morning’s paper and immediately purchased 200 shares of the company’s stock. By the close of business today, the company’s stock price had increased 3.5 percent. Also today, the market in total increased .1 percent. These results would suggest that the stock market is at best

A

weak form efficient.

39
Q

If semistrong or strong form efficiency exists, on average, investors are probably best served by

A

investing in index funds rather than in actively managed mutual funds.

40
Q

Stocks can be efficiently priced if

A

a number of interested traders use the publicly available information.

41
Q

Market efficiency

A

or the lack thereof, is highly controversial.

42
Q

Individuals that continually monitor the financial markets seeking mispriced securities

A

tend to make the markets more efficient.

43
Q

Donald Keim’s research presents evidence that the difference in performance between small capitalization stocks and large capitalization stocks is largest in the month of

A

January.

44
Q

Leonie has noticed that a particular stock has increased in value during each of the last several days. Given this trend, she believes the stock price will increase over the next two trading days, as well. This is an example of

A

representativeness.

45
Q

Which one of the following statements is correct concerning market efficiency?

A

A firm will generally receive a fair price when it sells shares of stock in an efficient market.

46
Q

What does weak form efficiency imply?

A

Price patterns that existed in the past will reappear in the future.

47
Q

Which one of the following serial correlation values is the strongest indicator of price continuation?

A

+.5

48
Q

Given the vast resources available to mutual fund managers, these managers, on average, have generally

A

underperformed the market on a risk-adjusted basis.

49
Q

If an investor can earn abnormal returns based on insider trading, the stock market is at best

A

semistrong form efficient.

50
Q

The efficient market hypothesis implies that

A

any investment should earn a normal return commensurate with the investment’s risk.

51
Q

If behavioral finance holds, it implies

A

some investors are irrational some of the time.

52
Q

The hypothesis that market prices reflect all publicly available information is called __________ form efficiency.

A

semistrong

53
Q

The efficient market hypothesis says that, on average, professional investors will

A

earn a normal rate of return.

54
Q

In an efficient market, the price of a security will

A

react immediately to new information with no further price adjustments related to that information.

55
Q

Representativeness, according to financial economists, leads to

A

overreactions in stock returns.

56
Q

Researchers have found that over long periods of time

A

value stocks may outperform growth stocks on a risk-adjusted basis, but no firm conclusion can be drawn.

57
Q

Stocks can be efficiently priced if

A

a number of interested traders use the publicly available information.

58
Q

Your roommate is an avid reader of The Wall Street Journal. She saw favorable news about a particular company in this morning’s paper and immediately purchased 200 shares of the company’s stock. By the close of business today, the company’s stock price had increased 3.5 percent. Also today, the market in total increased .1 percent. These results would suggest that the stock market is at best

A

weak form efficient.

59
Q

The stock of Albacore, Inc., earned an abnormal return at Time t. The efficient market hypothesis would suggest that the abnormal return is an indicator of

A

a release of new information at Time t.

60
Q

Insider trading does not offer any advantages if the financial markets are

A

strong form efficient.

61
Q

Danae owned 400 shares of Goodlow Co. stock. After evaluating Goodlow’s historical stock price performance, Danae determined that the stock price typically fell on the last Tuesday of the month. She sold her stock on the last Monday of the month. The stock price did indeed fall by almost four percent on the last Tuesday of the month. The market in total rose .3 percent that day. These results would suggest that the stock market is at best

A

inefficient.

62
Q

If an investor can earn above average returns based on historical information, the stock market is at best

A

inefficient.

63
Q

Shoshanna is an analyst at Trident Communications. Based on her knowledge of a new product under development, she purchased 1,000 shares of Trident stock yesterday. Today, Trident announced the new product to the public. The stock price rose two percent, and Shoshanna sold her shares. Also today, the stock market increased .5 percent. These results would suggest that the stock market is at best

A

semistrong form efficient.

64
Q

Individuals that continually monitor the financial markets seeking mispriced securities

A

tend to make the markets more efficient.

65
Q

If you live in a remote area with limited access to the news but do a lot of historical research on firms, you would prefer that the financial markets be __________ form efficient so you can have an advantage in the marketplace.

A

weak

66
Q

If the financial markets are efficient, then investors should expect their investments in those markets to

A

have zero net present values.

Managerial Finance (6 decks)

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