Efficient capital markets and behavioral challenges

Chapter 14
Efficient Capital Markets and Behavioral Challenges
Multiple Choice Questions
1. An efficient capital market is one in which:
A. brokerage commissions are zero.
B. taxes are irrelevant.
C. securities always offer a positive rate of return to investors.
D. security prices are guaranteed by the U.S. Securities and Exchange Commission to be fair.
E. security prices reflect available information.
2. The notion that actual capital markets, such as the NYSE, are fairly priced is called the:
A. Efficient Markets Hypothesis (EMH).
B. Law of One Price.
C. Open Markets Theorem.
D. Laissez-Faire Axiom.
E. Monopoly Pricing Theorem.
3. The hypothesis that market prices reflect all available information of every kind is called _____
form efficiency.
A. open
B. strong
C. semistrong
D. weak
E. stable
4. The hypothesis that market prices reflect all publicly available information is called _____ form
efficiency.
A. open
B. strong
C. semistrong
D. weak
E. stable
5. The hypothesis that market prices reflect all historical information is called _____ form efficiency.
A. open
B. strong
C. semistrong
D. weak
E. stable
6. In an efficient market, the price of a security will:
A. always rise immediately upon the release of new information with no further price adjustments
related to that information.
B. react to new information over a two-day period after which time no further price adjustments
related to that information will occur.
C. rise sharply when new information is first released and then decline to a new stable level by the
following day.
D. react immediately to new information with no further price adjustments related to that
information.
E. be slow to react for the first few hours after new information is released allowing time for that
information to be reviewed and analyzed.
7. If the financial markets are efficient, then investors should expect their investments in those
markets to:
A. earn extraordinary returns on a routine basis.
B. generally have positive net present values.
C. generally have zero net present values.
D. produce arbitrage opportunities on a routine basis.
E. produce negative returns on a routine basis.
8. Which one of the following statements is correct concerning market efficiency?
A. Real asset markets are more efficient than financial markets.
B. If a market is efficient, arbitrage opportunities should be common.
C. In an efficient market, some market participants will have an advantage over others.
D. A firm will generally receive a fair price when it sells shares of stock.
E. New information will gradually be reflected in a stock's price to avoid any sudden change in the
price of the stock.
9. According to the efficient market hypothesis, financial markets fluctuate daily because they:
A. are inefficient.
B. slowly react to new information.
C. are continually reacting to new information.
D. offer tremendous arbitrage opportunities.
E. only reflect historical information.
10. Insider trading does not offer any advantages if the financial markets are:
A. weak form efficient.
B. semiweak form efficient.
C. semistrong form efficient.
D. strong form efficient.
E. inefficient.
11. According to theory, studying historical prices in order to identify mispriced stocks will not work in
markets that are _____ efficient.
I. weak form
II. semistrong form
III. strong form
A. I only
B. II only
C. I and II only
D. II and III only
E. I, II, and III
12. Which of the following tend to reinforce the argument that the financial markets are efficient?
I. Information spreads rapidly in today's world.
II. There is tremendous competition in the financial markets.
III. Market prices continually fluctuate.
IV. Market prices react suddenly to unexpected news announcements.
A. I and III only
B. II and IV only
C. I, II, and III only
D. II, III, and IV only
E. I, II, III, and IV
13. If you excel in analyzing the future outlook of firms, you would prefer that the financial markets be
____ form efficient so that you can have an advantage in the marketplace.
A. weak
B. semiweak
C. semistrong
D. strong
E. perfect
14. Your best friend works in the finance office of the Delta Corporation. You are aware that this friend
trades Delta stock based on information he overhears in the office. You know that this information
is not known to the general public. Your friend continually brags to you about the profits he earns
trading Delta stock. Based on this information, you would tend to argue that the financial markets
are at best _____ form efficient.
A. weak
B. semiweak
C. semistrong
D. strong
E. perfect
15. 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. weak
B. semiweak