honeycfa

Which category of tests assumes that, in an efficient market, securities lie on the security market line?

A) Cross-sectional tests.

B) Anomaly studies.

C) Time-series tests.

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Cross-sectional tests operate under the assumption that, in an efficient market, all securities must lie directly on the security market line.

honeycfa

Which of the following has least likely been involved in a direct test of the semistrong form of the efficient market hypothesis (EMH)?

A) Exchange listing.

B) Stock splits.

C) NYSE Specialists' returns.

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Stock exchange specialists tests are a test of the strong-form EMH, because they are related to private or insider information.

honeycfa

Which of the following forms of the EMH assumes that no group of investors has monopolistic access to relevant information?

A) Weak-form.

B) Strong-form.

C) Both weak and semistrong form.

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According to the strong-form EMH, security prices reflect all information, which includes the privately available (monopolistic) information.

honeycfa

Which of the following tests are NOT used to examine the weak form of the efficient market hypothesis? Those that examine:

A) a security's return relative to the market return.

B) whether security returns are independent over time.

C) whether excess returns can be obtained from using mechanical trading rules.

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Early tests for the semi-strong form of the efficient market hypothesis (EMH) examine security performance relative to the market return. Weak-form EMH tests include auto correlation, run, and trading rule tests.

honeycfa

Which of the following statements about the various tests of the efficient market hypothesis (EMH) is INCORRECT?

A) The historical performance of professional money managers supports the semi-strong form of the EMH.

B) Tests of the semi-strong form EMH give mixed results. Time-series tests such as dividend yield and default spread reject the semi-strong form EMH while event studies of stock splits and announcements of accounting changes support it.

C) The superior historical performance of exchange specialists and corporate insiders rejects the semi-strong form of the EMH.

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The superior historical performance of exchange specialists and corporate insiders rejects the strong form of the EMH.

The other statements are correct. Statistical and trading rule tests support the weak-form EMH contention that security prices reflect all historical market information and that mechanical trading rules do not result in superior returns. Cross-sectional tests such as the price-earnings ratio, neglected firms tests, and book value to market value tests reject the semi-strong form of the EMH. These tests show that certain stocks have high realized returns (for example, low P/E stocks and high book value to market value stocks). Tests show that professional money managers perform no better than a random buy and hold strategy. This supports the semi-strong form EMH contention that stock prices reflect all public information. (Aside from corporate insiders and specialists, no group has monopolistic access to information that would result in superior returns.)

honeycfa

Which of the following efficient markets studies suggests that securities markets are semistrong-form efficient?

A) Calendar studies.

B) Small-firm effect.

C) Short-term stock splits.

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Results of empirical tests suggest that there are no short-run or long-run impacts on security returns due to stock splits. This supports the semistrong-form efficient market hypothesis (EMH). Evidence of excess returns has been found for calendar effects and small firms.

honeycfa

Banz and Reinganum found that small firms consistently outperformed large firms. This anomaly is referred to as the:

A) size effect.

B) large firm effect.

C) growth effect.

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The size effect indicates that small firms consistently experienced significantly larger risk-adjusted returns than larger firms.

honeycfa

The opportunity to take advantage of the downward pressure on stock prices that result from end-of-the-year tax selling is known as the:

A) end-of-the-year effect.

B) end-of-the-year anomaly.

C) January anomaly.

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The January Anomaly is most likely the result of tax induced trading at year end. An investor can profit by buying stocks in December and selling them during the first week in January.

honeycfa

Which of the following groups of stocks do NOT tend to show above average returns over time?

A) Stocks with low Book Value to Market Value (BV/MV).

B) Small stocks.

C) Neglected stocks.

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Most empirical evidence suggests that the greater the ratio of book value/market value, the greater the risk adjusted rate of return. Small, neglected and low P/E stocks have all shown evidence of excess returns.

honeycfa

Which of the following would provide evidence against the semistrong form of the efficient market theory?

A) Trend analysis is worthless in determining stock prices.

B) All investors have learned to exploit signals related to future performance.

C) Low P/E stocks tend to have positive abnormal returns over the long run.

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P/E information is publicly available information and therefore this test relates to the semistrong-form EMH. Trend analysis is based on historical information and therefore relates to the weak-form EMH. In an efficient market one would expect 50% of pension fund managers to do better than average and 50% of pension fund managers to do worse than average. If all investors exploit the same information no excess returns are possible.