Reading 54: Efficient Capital Markets LOSc习题精选 face, conclusion, efficiency, technical

honeycfa

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

The conclusion that technical analysis adds no value:

A) is not supported by fact.

B) supports the weak form of the EMH.

C) neither of these answers are correct.

---

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

 

honeycfa

Which of the following is NOT a rationale for investing in index funds?

A) Active mutual fund managers underperform index funds.

B) Efficient financial markets.

C) Minimize risk.

---

The minimization of risk is not a rationale for investing in index funds.

honeycfa

LOS c, (Part 3): Explain the rationale for investing in index funds.

Which of the following statements regarding index funds is least accurate?

A) One disadvantage of index funds is that they do not provide access to international securities.

B) One advantage of index funds is that they allow for diversification that is typically not available to the average individual investor due to a lack of resources.

C) One might conclude from the efficient market literature that an investor should mimic the market's performance and minimize costs by buying index funds.

---

An advantage of index funds is that they do offer international diversification via international index funds.

honeycfa

Given that markets are efficient, which of the following is least likely to cause an actively managed mutual fund to underperform an index fund?

A) Taxes.

B) Management expenses.

C) Inferior stock selection.

---

Inferior stock selection would not be a reason because, in an efficient market, all securities are priced perfectly. Therefore, there are no undervalued or overvalued securities. Since all securities are perfectly priced, the investor should select a strategy that minimizes taxes, transactions costs, and management expenses.

honeycfa

Assuming that markets are efficient, which of the following statements is FALSE?

A) Investors should not trade often.

B) Markets will not be volatile.

C) Investors should buy and hold passively managed index funds.

---

If markets are efficient, prices are correct. Therefore, the best investment strategy is one that chooses a market index and then minimizes investment expenses, such as transaction costs. Markets may still be volatile if important news is arriving to the market, at which time the market will react to the news, perhaps with great volatility until the news is digested.

honeycfa

The implication of efficient capital markets and a lack of superior analysts have led to the introduction of:

A) index funds.

B) balanced funds.

C) futures options.

---

An index fund is designed to duplicate the composition of a specific index series or market segment. There is a strong argument suggesting that portfolio managers cannot beat the market after fees, therefore an index fund should be used to try to match the market.

honeycfa

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.

---

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.

honeycfa

A portfolio manager should help an individual do all of the following EXCEPT:

A) offer the client diversification and a stable risk level.

B) ignore risk tolerances because markets are efficient.

C) rebalance portfolios when necessary.

---

Portfolio managers should help their clients quantify their risk tolerances and return needs within the bounds of the client’s liquidity, income, time horizon, legal, and regulatory constraints.

honeycfa

LOS c, (Part 2): Explain the implications of stock market efficiency for the portfolio management process and the role of the portfolio manager.

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

A) Tests of market efficiency have found no strategy that produces excess returns above the market after accounting for transaction costs.

B) If markets are efficient, investors should not trade often.

C) In testing for semistrong-form market efficiency, researchers typically adjust for the stock's risk.

---

Several strategies have been shown to produce abnormal returns (returns above the market after adjusting for risk). Small firms and firms with low price to earnings (P/E) ratios and high book-to-market values have all been found to produce positive abnormal returns.

honeycfa

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

A) monitor their client's needs and circumstances.

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

C) diversify to eliminate systematic risk.

---

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