LOS b, (Part 1): Describe the tests used to examine each of the three forms of the EMH.

Q1. Which form(s) of the efficient market hypothesis (EMH) is/are tested by measuring a security’s excess returns with respect to market returns while considering the security’s market risk?

A)   Weak-form.

B)   Semi-strong form.

C)   Weak and semi-strong forms.

Q2. A stock's abnormal rate of return is defined as the:

A)   actual rate of return less the expected risk-adjusted rate of return.

B)   rate of return during abnormal price movements.

C)   expected risk-adjusted rate of return minus the market rate of return.

Q3. Which of the following statements about efficient capital markets and the efficient market hypothesis is least accurate?

A)   The semistrong form of the market efficiency hypothesis states that prices fully reflect all information from public sources.

B)   Efficient capital markets assume that information comes to the market in a random fashion.

C)   Filter rules in stock trading have been shown to produce above-average rates of return, even after including transactions costs.

Q4. If statistical tests of stock returns over time support the efficient market hypothesis, the resulting correlations should be:

A)   lagged.

B)   zero.

C)   positive.

Q5. Tests of trading rules based on available market data are tests of which form of the efficient markets hypothesis (EMH)?

A)   Weak-form.

B)   They are used to test all three forms.

C)   Semistrong-form.

Q6. “Runs tests” involve which form of the efficient markets hypothesis (EMH)?

A)   They are used to test all three forms.

B)   Weak-form.

C)   Semistrong-form.

Q7. Which of the following are examples of tests used to examine the statistical independence of past returns?

A)   Filter rules tests.

B)   Event study tests.

C)   Runs tests.

LOS b, (Part 1): Describe the tests used to examine each of the three forms of the EMH.fficeffice" />

Q1. Which form(s) of the efficient market hypothesis (EMH) is/are tested by measuring a security’s excess returns with respect to market returns while considering the security’s market risk?

A)   Weak-form.

B)   Semi-strong form.

C)   Weak and semi-strong forms.

Correct answer is B)

One set of tests for the semi-strong form of the EMH examines security performance adjusted for market risk.

Q2. A stock's abnormal rate of return is defined as the:

A)   actual rate of return less the expected risk-adjusted rate of return.

B)   rate of return during abnormal price movements.

C)   expected risk-adjusted rate of return minus the market rate of return.

Correct answer is A)

Abnormal return = Actual return – expected risk-adjusted return

Q

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

A)   The semistrong form of the market efficiency hypothesis states that prices fully reflect all information from public sources.

B)   Efficient capital markets assume that information comes to the market in a random fashion.

C)   Filter rules in stock trading have been shown to produce above-average rates of return, even after including transactions costs.

Correct answer is C)

Filter rules have not been shown to produce above-average rates of return after accounting for transactions costs.

Q4. If statistical tests of stock returns over time support the efficient market hypothesis, the resulting correlations should be:

A)   lagged.

B)   zero.

C)   positive.

Correct answer is B)

There should be zero correlation between observations, or all observations should be independent of each other, if the weak-form EMH is true.

Q5. Tests of trading rules based on available market data are tests of which form of the efficient markets hypothesis (EMH)?

A)   Weak-form.

B)   They are used to test all three forms.

C)   Semistrong-form.

Correct answer is A)

Trading rule tests are used to examine the weak form of the EMH. Most evidence suggests that technical trading rules do not produce superior returns after adjusting for transaction costs and taxes.

Q6. “Runs tests” involve which form of the efficient markets hypothesis (EMH)?

A)   They are used to test all three forms.

B)   Weak-form.

C)   Semistrong-form.

Correct answer is B)

Statistical tests of the independence of security returns are used to examine the weak form of the EMH. Autocorrelation and runs tests are tests for independence over time.

Q7. Which of the following are examples of tests used to examine the statistical independence of past returns?

A)   Filter rules tests.

B)   Event study tests.

C)   Runs tests.

Correct answer is C)

Both the runs and the autocorrelation tests are used to examine the statistically independence of past returns. Filter rule tests have been conducted to see if investors can earn excess returns following mechanical trading rules based on price data.

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