LOS c, (Part 1): Explain the implications of stock market efficiency for technical analysis and fundamental analysis.

Q1. The conclusion that technical analysis adds no value:

A)   is not supported by fact.

B)   neither of these answers are correct.

C)   supports the weak form of the EMH.

Q2. Assuming market efficiency, which of the following statements regarding technical and fundamental analysis is FALSE?

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

B)   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.

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

Q3. Which of the following actions is most likely to give an analyst superior results?

A)   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.

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

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

Q4. The performance of professional money managers taken as a whole has been:

A)   below average.

B)   inconsistent with the strong form of the EMH.

C)   above average.

LOS c, (Part 1): Explain the implications of stock market efficiency for technical analysis and fundamental analysis.fficeffice" />

Q1. The conclusion that technical analysis adds no value:

A)   is not supported by fact.

B)   neither of these answers are correct.

C)   supports the weak form of the EMH.

Correct answer is C)

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

Q2. Assuming market efficiency, which of the following statements regarding technical and fundamental analysis is FALSE?

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

B)   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.

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

Correct answer is B)

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

Q3. Which of the following actions is most likely to give an analyst superior results?

A)   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.

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

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

Correct answer is C)

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.

Q4. The performance of professional money managers taken as a whole has been:

A)   below average.

B)   inconsistent with the strong form of the EMH.

C)   above average.

Correct answer is A)        

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.

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