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1、Chapter 11The Efficient Market HypothesisMultiple 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 to i

2、nsiders.A.Semistrong2. When Maurice Kendall examined the patterns of stock returns in 1953 he concluded that the stock market was _. Now, these random price movements are believed to be _.A.inefficient; the effect of a well-functioning market3. The stock market follows a _.B.Submartingale4. A hybrid

3、 strategy is one where the investorD.maintains a passive core and augments the position with an actively managed portfolio.5. The difference between a random walk and a submartingale is the expected price change in a random walk is _ and the expected price change for a submartingale is _.D.zero; pos

4、itive6. 6.The difference between a random walk and a submartingale is the expected price change in a random walk is _ and the expected price change for a submartingale is _.D.zero; positive7.Proponents of the EMH typically advocateB.investing in an index fund.C.a passive investment strategy.E.B and

5、C8. Proponents of the EMH typically advocateC.a passive investment strategy.9. 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 interes

6、t.C.Weak10. 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.B.strong11.If you believe in the reversal effect, you shouldC.buy stocks this period that performed poorly last period.12._ f

7、ocus more on past price movements of a firms stock than on the underlying determinants of future profitability.D.Technical analysts13._ above which it is difficult for the market to rise.B.Resistance level is a value14._ below which it is difficult for the market to fall.C.Support level is a value15

8、._ the return on a stock beyond what would be predicted from market movements alone.A.An excess economic return isC.An abnormal return isE.A and C16.The debate over whether markets are efficient will probably never be resolved because of _.A.the lucky event issue.B.the magnitude issue.C.the selectio

9、n bias issue.D.all of the above.17.A common strategy for passive management is _.A.creating an index fund18.Arbel (1985) found thatA.the January effect was highest for neglected firms.19.Researchers have found that most of the small firm effect occursD.in January.20.Basu (1977, 1983) found that firm

10、s with low P/E ratiosA.earned higher average returns than firms with high P/E ratios.21.Jaffe (1974) found that stock prices _ after insiders intensively bought shares.C.increased22.Banz (1981) found that, on average, the risk-adjusted returns of small firmsA.were higher than the risk-adjusted retur

11、ns of large firms.23.Proponents of the EMH think technical analystsE.are wasting their time.24.Studies of positive earnings surprises have shown that there isA.a positive abnormal return on the day positive earnings surprises are announced.B.a positive drift in the stock price on the days following

12、the earnings surprise announcement.D.both A and B are true.25.Studies of negative earnings surprises have shown that there isA.a negative abnormal return on the day negative earnings surprises are announced.B.a positive drift in the stock price on the days following the earnings surprise announcemen

13、t.D.both A and B are true.26.Studies of stock price reactions to news are calledB.event studies.27.On November 22, the stock price of Walmart was $39.50 and the retailer stock index was 600.30. On November 25, the stock price of Walmart was $40.25 and the retailer stock index was 605.20. Consider th

14、e ratio of Walmart to the retailer index on November 22 and November 25. Walmart is _ the retail industry and technical analysts who follow relative strength would advise _ the stock.A.outperforming, buying28.Work by Amihud and Mendelson (1986,1991)A.argues that investors will demand a rate of retur

15、n premium to invest in less liquid stocks.B.may help explain the small firm effect.C.may be related to the neglected firm effect.E.A, B, and C.29.Fama 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

16、 firms within the lowest decile of market/book ratios had average monthly returns of _.C.less than 1%, greater than 1%30.A market decline of 23% on a day when there is no significant macroeconomic event _ consistent with the EMH because _.D.would not be, it was not a clear response to macroeconomic

17、news.31.In an efficient market, _.A.security prices react quickly to new informationB.security prices are seldom far above or below their justified levelsC.security analysts will not enable investors to realize superior returns consistentlyE.A, B, and C32.The weak form of the efficient market hypoth

18、esis asserts thatB.future changes in stock prices cannot be predicted from past prices.C.technicians cannot expect to outperform the market.E.B and C33. A support level is the price range at which a technical analyst would expect theC.demand for a stock to increase substantially.34. A finding that _

19、 would provide evidence against the semistrong form of the efficient market theory.A.low P/E stocks tend to have positive abnormal returnsC.one can consistently outperform the market by adopting the contrarian approach exemplified by the reversals phenomenonE.A and C35.The weak form of the efficient

20、 market hypothesis contradictsD.technical analysis, but is silent on the possibility of successful fundamental analysis. 36.Two basic assumptions of technical analysis are that security prices adjustC.gradually to new information and market prices are determined by the interaction of supply and dema

21、nd.37.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).D.A and B.38.Studies of mutual fund performanceA.indicate that one should not randomly select a mutual fund.B.indicate that historic

22、al performance is not necessarily indicative of future performance.D.A and B.39.The likelihood of an investment newsletters successfully predicting the direction of the market for three consecutive years by chance should beC.between 10% and 25%.40.In an efficient market the correlation coefficient b

23、etween stock returns for two non-overlapping time periods should beC.zero.41.The weather report says that a devastating and unexpected freeze is expected to hit Florida tonight, during the peak of the citrus harvest. In an efficient market one would expect the price of Florida Oranges stock toA.drop

24、 immediately.42.Matthews Corporation has a beta of 1.2. The annualized market return yesterday was 13%, and the risk-free rate is currently 5%. You observe that Matthews had an annualized return yesterday of 17%. Assuming that markets are efficient, this suggests thatB.good news about Matthews was a

25、nnounced yesterday.43.Nicholas Manufacturing just announced yesterday that its 4th quarter earnings will be 10% higher than last years 4th quarter. You observe that Nicholas had an abnormal return of -1.2% yesterday. This suggests thatC.investors expected the earnings increase to be larger than what

26、 was actually announced.44.When Maurice Kendall first examined stock price patterns in 1953, he found thatB.there were no predictable patterns in stock prices.45.If stock prices follow a random walkD.price changes are random.46.The main difference between the three forms of market efficiency is that

27、D.the definition of information differs.47.Chartists practiceA.technical analysis.48.Which of the following are used by fundamental analysts to determine proper stock prices? I) trendlinesII) earningsIII) dividend prospectsIV) expectations of future interest ratesV) resistance levelsC.II, III, and I

28、V49.According to proponents of the efficient market hypothesis, the best strategy for a small investor with a portfolio worth $40,000 is probably toE.invest in mutual funds.50.Which of the following are investment superstars who have consistently shown superior performance? I) Warren BuffetII) Phoeb

29、e BuffetIII) Peter LynchIV) Merrill LynchV) Jimmy BuffetC.I and III51.Google has a beta of 1.0. The annualized market return yesterday was 11%, and the risk-free rate is currently 5%. You observe that Google had an annualized return yesterday of 14%. Assuming that markets are efficient, this suggest

30、s thatB.good news about Google was announced yesterday.52.Music Doctors has a beta of 2.25. The annualized market return yesterday was 12%, and the risk-free rate is currently 4%. You observe that Music Doctors had an annualized return yesterday of 15%. Assuming that markets are efficient, this sugg

31、ests thatA.bad news about Music Doctors was announced yesterday.53.QQAG has a beta of 1.7. The annualized market return yesterday was 13%, and the risk-free rate is currently 3%. You observe that QQAG had an annualized return yesterday of 20%. Assuming that markets are efficient, this suggests thatC

32、.no significant news about QQAG was announced yesterday.54.QQAG just announced yesterday that its 4th quarter earnings will be 35% higher than last years 4th quarter. You observe that QQAG had an abnormal return of -1.7% yesterday. This suggests thatC.investors expected the earnings increase to be l

33、arger than what was actually announced.55.LJP Corporation just announced yesterday that it would undertake an international joint venture. You observe that LJP had an abnormal return of 3% yesterday. This suggests thatD.investors view the international joint venture as good news.56.Music Doctors jus

34、t announced yesterday that its 1st quarter sales were 35% higher than last years 1st quarter. You observe that Music Doctors had an abnormal return of -2% yesterday. This suggests thatC.investors expected the sales increase to be larger than what was actually announced.57.The Food and Drug Administr

35、ation (FDA) just announced yesterday that they would approve a new cancer-fighting drug from King. You observe that King had an abnormal return of 0% yesterday. This suggests thatD.the approval was already anticipated by the market58.Your professor finds a stock-trading rule that generates excess ri

36、sk-adjusted returns. Instead of publishing the results, she keeps the trading rule to herself. This is most closely associated with _.B.selection bias59.At freshman orientation, 1,500 students are asked to flip a coin 20 times. One student is crowned the winner (tossed 20 heads). This is most closel

37、y associated with _.D.the lucky event issue60.Sehun (1986) finds that the practice of monitoring insider trade disclosures, and trading on that information, would be _.E.not sufficiently profitable to cover trading costs61.If you believe in the reversal effect, you shouldC.sell stocks this period th

38、at performed well last period.62.Patell and Woflson (1984) report that most of the stock price response to corporate dividend or earnings announcements occurs within _ of the announcement.C.2 hoursShort Answer Questions63.Discuss the various forms of market efficiency. Include in your discussion the

39、 information sets involved in each form and the relationships across information sets and across forms of market efficiency. Also discuss the implications for the various forms of market efficiency for the various types of securities analysts.The weak form of the efficient markets hypothesis (EMH) s

40、tates that stock prices immediately reflect market data. Market data refers to stock prices and trading volume. Technicians attempt to predict future stock prices based on historic stock price movements. Thus, if the weak form of the EMH holds, the work of the technician is of no value.The semistron

41、g form of the EMH states that stock prices include all public information. This public information includes market data and all other publicly available information, such as financial statements, and all information reported in the press relevant to the firm. Thus, market information is a subset of

42、all public information. As a result, if the semistrong form of the EMH holds, the weak form must hold also. If the semistrong form holds, then the fundamentalist, who attempts to identify undervalued securities by analyzing public information, is unlikely to do so consistently over time. In fact, th

43、e work of the fundamentalist may make the markets even more efficient!The strong form of the EMH states that all information (public and private) is immediately reflected in stock prices. Public information is a subset of all information, thus if the strong form of the EMH holds, the semistrong form

44、 must hold also. The strong form of EMH states that even with inside (legal or illegal) information, one cannot expect to outperform the market consistently over time.Studies have shown the weak form to hold, when transactions costs are considered. Studies have shown the semistrong form to hold in g

45、eneral, although some anomalies have been observed. Studies have shown that some insiders (specialists, major shareholders, major corporate officers) do outperform the market.Feedback: The purpose of this question is to assure that the student understands the interrelationships across different form

46、s of the EMH, across the information sets, and the implications of each form for different types of analysts.64.What is an event study? It is a test of what form of market efficiency? Discuss the process of conducting an event study, including the best variable(s) to observe as tests of market effic

47、iency.A event study is an empirical test which allows the researcher to assess the impact of a particular event on a firms stock price. To do so, one often uses the index model and estimates et, the residual term which measures the firm-specific component of the stocks return. This variable is the d

48、ifference between the return the stock would ordinarily earn for a given level of market performance and the actual rate of return on the stock. This measure is often referred to as the abnormal return of the stock. However, it is very difficult to identify the exact point in time that an event beco

49、mes public information; thus, the better measure is the cumulative abnormal return, which is the sum of abnormal returns over a period of time (a window around the event date).This technique may be used to study the effect of any public event on a firms stock price; thus, this technique is a test of

50、 the semistrong form of the EMH.Feedback: The rationale for this question is to ascertain if the student understands the methodology most commonly used as a test of the semistrong form of market efficiency.65.Discuss the small firm effect, the neglected firm effect, and the January effect, the tax e

51、ffect and how the four effects may be related.Studies have shown that small firms earn a risk-adjusted rate of return greater than that of larger firms. Additional studies have shown that firms that are not followed by analysts (neglected firms) also have a risk-adjusted return greater than that of

52、larger firms. However, the neglected firms tend to be small firms; thus, the neglected firm effect may be a manifestation of the small firm effect. Finally, studies have shown that returns in January tend to be higher than in other months of the year. This effect has been shown to persist consistent

53、ly over the years. However, the January effect may be the tax effect, as investors may have sold stocks with losses in December for tax purposes and reinvested in January. Small firms (and neglected firms) would tend to be more affected by this increased buying than larger firms, as small firms tend

54、 to sell for lower prices.Feedback: The purpose of this question is to reinforce the interrelationships, that effects may not always be independent and thus readily identifiable. Also these effects are widely discussed in the financial press, and the January effect appears to be quite persistent.66.

55、Why might the degree of market efficiency differ across various markets? State three reasons why this might occur and explain each reason briefly.1. Market efficiency depends on information being essentially free and costless to market participants. In the U.S. markets this is the case to a large ex

56、tent. The U.S. markets are well developed and professional analysts often follow securities. Information is available on television, in the press, and on the Internet. The opposite may be true in other markets, such as those of developing countries, where there are fewer or no analysts and few marke

57、t participants with these resources. 2. Accounting disclosure requirements are different across markets. In the U.S. firms must meet SEC requirements to be publicly traded. In other countries the requirements may be different or nonexistent. This has implications about the ease with which analysts c

58、an evaluate the company to determine its proper value. 3. Markets for neglected stocks may be less efficient than markets for stocks that are heavily followed by analysts. If analysts feel that it is not worthwhile to give their attention to particular stocks then ample information about these stock

59、s will not be readily available to investors.Feedback: This question leads the student to look at some of the fundamental reasons for market efficiency and why there may be differences among markets with regard to the reasons. Alternative answers are possible.67.With regard to market efficiency, wha

60、t is meant by the term anomaly? Give three examples of market anomalies and explain why each is considered to be an anomaly.Anomalies are patterns that should not exist if the market is truly efficient. Investors might be able to make abnormal profits by exploiting the anomalies, which doesnt make s

61、ense in an efficient market.Possible examples include, but are not limited to, the following.1.the small-firm effect - average annual returns are consistently higher for small-firm portfolios, even when adjusted for risk by using the CAPM.2.the January effect - the small-firm effect occurs virtually

62、 entirely in January.3.the neglected-firm effect - small firms tend to be ignored by large institutional traders and stock analysts. This lack of monitoring makes them riskier and they earn higher risk-adjusted returns. The January effect is largest for neglected firms.4.the liquidity effect - inves

63、tors demand a return premium to invest in less-liquid stocks. This is related to the small-firm effect and the neglected-firm effect. These stocks tend to earn high risk-adjusted rates of return.5.book-to-market ratios - firms with the higher book-to-market-value ratios have higher risk-adjusted returns, suggesting that they are underpriced. When combined with the firm-size factor, this ratio explained returns better than systematic risk as measured by beta.