Reading 54: Efficient Capital Markets - LOS c, (Part 2) ～ market, efficient, hypothesis, black, class

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6.An implication of the weak-form efficient market hypothesis (EMH) is:

A)   insider information is of no value for obtaining excess abnormal returns.

B)   all public and private information is rapidly incorporated into security prices.

C)   that there should be no relationship between past price changes and future price changes.

D)   that technical analysts can make excess returns on filter rules but not runs rules.

7.In a perfectly efficient market, portfolio managers should do all of the following EXCEPT:

A)   monitor their client's needs and circumstances.

B)   rebalance their portfolio when changes are necessary.

C)   diversify to eliminate systematic risk.

D)   quantify their risk and return needs within the bounds of the client's liquidity, income, time horizon, legal, and regulatory constraints.

8.Which of the following statements about the assumptions of efficient capital markets and the conclusion of the efficient market hypothesis is FALSE?

A)   If markets are efficient, investors should not trade often.

B)   In testing for semistrong-form market efficiency, researchers typically adjust for the stock's risk.

C)   If markets are informationally efficient, the price will react quickly to new information.

D)   Tests of market efficiency have found no strategy that produces excess returns above the market after accounting for transaction costs.

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答案和详解如下：

6.An implication of the weak-form efficient market hypothesis (EMH) is:

A)   insider information is of no value for obtaining excess abnormal returns.

B)   all public and private information is rapidly incorporated into security prices.

C)   that there should be no relationship between past price changes and future price changes.

D)   that technical analysts can make excess returns on filter rules but not runs rules.

The correct answer was C)

The implication of the weak-form EMH is that there should be no relationship between past price changes and future price changes. Results of runs tests and filter tests suggest that excess returns are not possible. Tests related to insider or private information are related to the strong-form EMH.

7.In a perfectly efficient market, portfolio managers should do all of the following EXCEPT:

A)   monitor their client's needs and circumstances.

B)   rebalance their portfolio when changes are necessary.

C)   diversify to eliminate systematic risk.

D)   quantify their risk and return needs within the bounds of the client's liquidity, income, time horizon, legal, and regulatory constraints.

The correct answer was C)

Portfolio mangers cannot eliminate systematic risk (i.e., market risk) thru the use of diversification. Portfolio managers should try to eliminate unsystematic portfolio risk.

8.Which of the following statements about the assumptions of efficient capital markets and the conclusion of the efficient market hypothesis is FALSE?

A)   If markets are efficient, investors should not trade often.

B)   In testing for semistrong-form market efficiency, researchers typically adjust for the stock's risk.

C)   If markets are informationally efficient, the price will react quickly to new information.

D)   Tests of market efficiency have found no strategy that produces excess returns above the market after accounting for transaction costs.

The correct answer was D)

Several strategies have been shown to produce abnormal returns (returns above the market after adjusting for risk). Small firms and firms with low price to earnings (P/E) ratios and high book-to-market values have all been found to produce positive abnormal returns.