Reading 54: Efficient Capital Markets LOSa习题精选 2010, hypothesis, efficient, following

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LOS a, (Part 1): Define an efficient capital market.

If a firm announces an unexpectedly large cash dividend, the efficient market hypothesis (EMH) would predict which of the following price changes at the announcement?

A) No price change.

B) An abnormal price change to occur before the announcement.

C) An abnormal price change to occur at the time of the announcement.

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Market efficiency assumes investors adjust their estimate of security prices rapidly to reflect their interpretation of the new information received. Market efficiency also assumes that new information comes to market randomly and is available to all investors at the same time. Therefore, the price should not be reflected prior to the announcement.

 

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The semi-strong form of the efficient market hypothesis (EMH) asserts that stock prices:

A) fully reflect all historical price information.

B) fully reflect all relevant information including insider information.

C) fully reflect all publicly available information.

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The semi-strong form of the EMH asserts that security prices fully reflect all publicly available information. This would include all historical information. The weak form relates to historical information only. The strong form relates to public and private information.

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Which of the following statements concerning market efficiency is least accurate?

A) If weak-form market efficiency holds, technical analysis cannot be used to earn abnormal returns over the long-run.

B) Tests of the semi-strong form of the EMH require that security returns be risk-adjusted using a market model.

C) Market efficiency assumes that individual market participants correctly estimate asset prices.

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Market efficiency does not assume that individual market participants correctly estimate asset prices, but does assume that their estimates are unbiased. That is, some agents will over-estimate and some will under-estimate, but they will be correct, on average.

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The strong-form EMH goes beyond the semistrong-form in that it calls for:

A) all non-market public information should be incorporated into security prices.

B) a large number of profit maximizing participants.

C) cost free availability of all information, both public and private.

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The strong-form assumes perfect markets in which all information, both public and private, is cost free and available to everyone at the same time.

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

A) Strong-form.

B) Both weak and semistrong form.

C) Weak-form.

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The strong-form EMH assumes that stock prices fully reflect all information from public and private sources. In addition, no group of investors has monopolistic access to information relevant to the formation of prices.

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The reaction of stock prices to the announcement of a stock split is covered by which form of the efficient market hypothesis (EMH)?

A) Weak.

B) Strong.

C) Semistrong.

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The semistrong form of the EMH asserts that security prices fully reflect all publicly available information. Announcement type information such as that related to stock splits is an example of publicly available information.

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Which of the following is least likely an assumption behind the semistrong-form of the efficient market hypothesis (EMH)?

A) The timing of news announcements are independent of each other.

B) A large number of profit-maximizing participants.

C) All information is cost-free and available to everyone at the same time.

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The strong-form EMH assumes all information, both public and private, is cost-free and available to all investors at the same time.

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Which of the following statements is INCORRECT?

A) The weak-form EMH suggests that fundamental analysis will not provide excess returns while the semi-strong form suggests that technical analysis cannot achieve excess returns.

B) The strong-form EMH assumes cost free availability of all information, both public and private.

C) The semi-strong form EMH addresses market and non-market public information.

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The weak-form EMH suggests that technical analysis will not provide excess returns while the semi-strong form suggests that fundamental analysis cannot achieve excess returns. The weak-form EMH assumes the price of a security reflects all currently available historical information. Thus, the past price and volume of trading has no relationship with the future, hence technical analysis is not useful in achieving superior returns.

The other choices are correct. The strong-form EMH states that stock prices reflect all types of information: market, non-public market, and private. No group has monopolistic access to relevant information; thus no group can achieve excess returns. For these assumptions to hold, the strong-form assumes perfect markets – information is free and available to all.

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LOS a, (Part 2): Describe and contrast the three forms of the efficient market hypothesis (EMH).

Which of the following statements on the forms of the efficient market hypothesis (EMH) is least accurate?

A) The semi-strong form EMH addresses market and non-market public information.

B) The weak-form EMH states that stock prices reflect current public market information and expectations.

C) The strong-form EMH assumes perfect markets.

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The weak-form EMH assumes the price of a security reflects all currently available historical information. Thus, the past price and volume of trading has no relationship with the future, hence technical analysis is not useful in achieving superior returns.

The other statements are true. The strong-form EMH states that stock prices reflect all types of information: market, non-public market, and private. No group has monopolistic access to relevant information; thus no group can achieve excess returns. For these assumptions to hold, the strong-form assumes perfect markets – information is free and available to all.

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The statement, "Stock prices fully reflect all information from public and private sources," can be attributed to which form of the efficient market hypothesis (EMH)?

A) Semistrong-form EMH.

B) Strong-form EMH.

C) Weak-form EMH.

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This is the definition of the strong-form EMH. Private sources include insider information, such as persons holding monopolistic access to information relevant to the formation of prices.