SS 13: Equity Market Organisation, Market Indices, Market Efficiency

Question 1

A behavioral bias in which an investor assesses probabilities of outcomes depending on how similar they are to the current state is called:

Answer 1

Representativeness

Question 2

This hypothesis implies that the market is efficient, reflecting all publicly available information. This hypothesis assumes that stocks adjust quickly to absorb new information. Given the assumption that stock prices reflect all new available information and investors purchase stocks after this information is released, an investor cannot benefit over and above the market by trading on new information.

Answer 2

Semi-strong-form EMH

Question 3

Formula for the value of a forward contract:

Answer 3

Vt(T) = St - Fo(T)(1 + r)^-(T-t)

Question 4

Industries that are least affected by the stage of the business cycle, including utilities, consumer staples (such as food producers), and basic services (such as drug stores) are called:

Answer 4

Defensive Industries

Question 5

The neglected firm effect and P/E ratio studies are tests of which form of the efficient market hypothesis?

Answer 5

Semi-strong-form EMH

Question 6

_____ indices represent a group of securities classified according to market capitalization, value, and growth or a combination of these characteristics

Answer 6

Style

Question 7

This hypothesis implies that the market is efficient: it reflects all information both public and private. Given the assumption that stock prices reflect all information (public as well as private) no investor would be able to profit above the average investor even if he was given new information.

Answer 7

Strong-form EMH

Question 8

Liquidity in a call market is provided by:

Answer 8

the concentration of orders

Question 9

An investor using a low P/E ratio, high dividend yield and low P/B ratio as three indicators for a stock to be bought is most likely to believe in:

Answer 9

Cross sectional anomalies

Question 10

What is the basis for construction of nearly all bond market indices?

Answer 10

Dealer prices

Question 11

An index provider launches a new index that will include value stocks in a specific country. This index will be a:

Answer 11

Style Index

Question 12

____ is a measure of the firm’s dividend-paying capacity.

Answer 12

FCFE

Question 13

The semi-strong form of the efficient market hypothesis (EMH) asserts that stock prices:

Answer 13

Reflect all publicly available information

Question 14

This hypothesis implies that the market is efficient, reflecting all market information. This hypothesis assumes that the rates of return on the market should be independent; past rates of return have no effect on future rates. Given this assumption, rules such as the ones traders use to buy or sell a stock, are invalid.

Answer 14

Weak-form EMH

Question 15

Name 5 cross-sectional anomalies:

Answer 15

Size effect

Value effect

Book-to-market ratios

P/E ratio effect

Value line enigma

Question 16

A security market index that reports returns based on the reinvestment of income and the change in price of its constituent securities is best described as which type of index?

Answer 16

Total Return Index

Question 17

In what kind of market are stocks only traded at specific times?

Answer 17

Call market

Question 18

A sample for use in constructing a market indicator series should consider the sample’s (3):

Answer 18

Source

Size

Breadth

Question 19

In futures markets, contract performance is most likely guaranteed by:

Answer 19

clearing houses.

Clearing houses arrange for financial settlement of trades. In futures markets, they guarantee contract performance.

Question 20

Margin trigger price formula:

Answer 20

Trigger price = price today * (1 - initial margin) / (1 - maintenance margin)

Question 21

Compared with its market-value-weighted counterpart, a fundamental-weighted index is least likely to have a:

Answer 21

momentum effect

The momentum effect is a characteristic of a market-capitalization-weighted index, not a fundamental index.

Question 22

Using put-call parity, a long call can best be replicated by going:

Answer 22

long the put, long the asset and short the bond.