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A)	is not supported by fact.

B)	supports the weak form of the EMH.

C)	neither of these answers are correct.

Simple trading rule, autocorrelation and runs tests generally find evidence suggesting that technical analysis based on historical information does not generate significant excess returns.

Assuming market efficiency, which of the following statements regarding technical and fundamental analysis is FALSE?

A)	The only way to obtain superior results using historical data is to perform a top down analysis examining first the market, then the industry and then individual firms.

B)	Evidence indicates it is possible to obtain superior returns by investing in mid-cap firms since they tend to be followed by fewer analysts.

C)	Technical analysis that relies exclusively on historical data has no value.

Assuming market efficiency, any approach, including a top down approach, will not produce superior results as long as it relies exclusively on historical data.

Which of the following actions is most likely to give an analyst superior results?

A)	A strong ability to interpret and estimate the future impact of publicly available information.

Having superior abilities to identify patterns of returns based on historical data of economic factors and being able to determine the relationship between a stock return and certain economic factors based on historical data and then use that relationship to make reliable forecasts for future price movements.

C)	The ability to react very quickly to public announcements.

An analyst cannot obtain superior results by relying on historical data. The analyst must be able to do a superior job of interpreting and estimating variables that are relevant to the value of the security.

A)	inconsistent with the strong form of the EMH.

B)	below average.

C)	above average.

The implication of the strong-form tests is that money managers as a group have not outperformed the buy-and-hold policy. In fact after accounting for fees, mutual funds, bank trust departments, pension plans, and endowment funds are not able to match the performance of a simple buy-and-hold policy.

Under the efficient market hypothesis (EMH), the major effort of the portfolio manager should be to:

A)	minimize systematic risk in the portfolio.

B)	achieve complete diversification of the portfolio.

C)	stay the course by following a strict buy and hold strategy.

In an efficient market, portfolio managers must create and maintain the appropriate mix of assets to meet their client’s needs. The portfolio should be diversified to eliminate unsystematic risk. The appropriate systematic risk will depend on the clients risk tolerance and return requirement. Over time the needs of the client and environment will justify changes to the portfolio. The manager should also try to minimize transaction costs and at least try to match the performance of a benchmark.

Which of the following statements about the assumptions of efficient capital markets and the conclusion of the efficient market hypothesis is least accurate?

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

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

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

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.

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

A)	monitor their client's needs and circumstances.

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

C)	diversify to eliminate systematic risk.

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

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

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

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

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.

A)	above average.

B)	below average.

C)	a support for semi-strong form of the EMH.

Which of the following statements least likely describes the role of a portfolio manager in perfectly efficient markets? Portfolio managers should:

A)	construct a portfolio that includes financial and real assets.

B)	quantify client's risk tolerance, communicate portfolio policies and strategies, and maintain a strict buy and hold policy avoiding any changes in the portfolio to minimize transaction costs.

C)	construct diversified portfolios that include international securities to eliminate unsystematic risk.

A portfolio manager should quantify each client's risk tolerance and communicate portfolio policies and strategies. However, portfolio managers should monitor client's needs and changing circumstances and make appropriate changes to the portfolio. Adhering to a strict buy and hold policy would not be in the client's best interest. Portfolios need to be rebalanced and changed to meet client’s changing needs.

A portfolio manager should help an individual do all of the following EXCEPT:

A)	offer the client diversification and a stable risk level.

B)	ignore risk tolerances because markets are efficient.

C)	rebalance portfolios when necessary.

Portfolio managers should help their clients quantify their risk tolerances and return needs within the bounds of the client’s liquidity, income, time horizon, legal, and regulatory constraints.

The implication of efficient capital markets and a lack of superior analysts have led to the introduction of:

An index fund is designed to duplicate the composition of a specific index series or market segment. There is a strong argument suggesting that portfolio managers cannot beat the market after fees, therefore an index fund should be used to try to match the market.

Which of the following statements regarding index funds is least accurate?

A)
One disadvantage of index funds is that they do not provide access to international securities.

B)
One advantage of index funds is that they allow for diversification that is typically not available to the average individual investor due to a lack of resources.

C)
One might conclude from the efficient market literature that an investor should mimic the market's performance and minimize costs by buying index funds.

An advantage of index funds is that they do offer international diversification via international index funds.

Given that markets are efficient, which of the following is least likely to cause an actively managed mutual fund to underperform an index fund?

Inferior stock selection would not be a reason because, in an efficient market, all securities are priced perfectly. Therefore, there are no undervalued or overvalued securities. Since all securities are perfectly priced, the investor should select a strategy that minimizes taxes, transactions costs, and management expenses.

Assuming that markets are efficient, which of the following statements is FALSE?

A)	Investors should not trade often.

B)	Markets will not be volatile.

C)	Investors should buy and hold passively managed index funds.

If markets are efficient, prices are correct. Therefore, the best investment strategy is one that chooses a market index and then minimizes investment expenses, such as transaction costs. Markets may still be volatile if important news is arriving to the market, at which time the market will react to the news, perhaps with great volatility until the news is digested.

A)	Active mutual fund managers underperform index funds.

B)	Efficient financial markets.

C)	Minimize risk.