hinsafdar

Which of the following is a limitation to fully efficient markets?

A) The gains to be earned by information trading can be less than the transaction costs the trading would entail.

B) There are no limitations to fully efficient markets because the trading actions of fundamental and technical analysts are continuously keeping prices at their intrinsic value.

C) Information is always quickly disseminated and fully embedded in a security’s prices.

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Market prices that are not precisely efficient can persist if the gains to be made by information trading are less than the transaction costs such trading would entail.

hinsafdar

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.

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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.

hinsafdar

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

A) diversify to eliminate systematic risk.

B) monitor their client's needs and circumstances.

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

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

hinsafdar

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

A) achieve complete diversification of the portfolio.

B) minimize systematic risk in the portfolio.

C) follow a strict buy and hold strategy.

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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.

hinsafdar

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

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

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

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

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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.

hinsafdar

If the efficient markets hypothesis is true, portfolio managers should do all of the following EXCEPT:

A) Minimize transaction costs.

B) Spend more time working on security selection.

C) Work more with clients to better quantify their risk preferences.

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In an efficient market all stocks are properly priced and reflect all publicly available information. Therefore, individual selection of stocks is not important the only thing that is relevant is the portfolio’s beta.

hinsafdar

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

A) Weak-form.

B) Both weak and semistrong form.

C) Strong-form.

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

hinsafdar

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.

hinsafdar

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.

hinsafdar

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

C) A large number of profit-maximizing participants.

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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.