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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.




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.

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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.



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.)

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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.




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.

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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.




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

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Which of the following statements about the efficient market hypothesis is least accurate?

A)
Efficient markets tests have found that professional money managers, as a group, have consistently outperformed the market.
B)
Exchange specialists derive above-average returns from private information.
C)
The use of a price weighting versus a market value weighting produces a downward bias on the index.



Professional money managers, as a group, have not been found to outperform the market.

 

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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.




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

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Which of the following are examples of tests used to examine the statistical independence of past returns?

A)
Filter rules tests.
B)
Runs tests.
C)
Event study tests.



Both the runs and the autocorrelation tests are used to examine the statistically independence of past returns. Filter rule tests have been conducted to see if investors can earn excess returns following mechanical trading rules based on price data.

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A trading rule which signals purchase of a stock if it rises X percent and sale of stock if it falls X percent is known as a:

A)

breakout.

B)

sieve.

C)

filter.




Filter rules entail trading stocks when prices move up or down by certain amounts.

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A “runs test” on successive stock price changes which supports the efficient market hypothesis would show that the actual number of runs:

A)

is small.

B)

falls into the range expected of a dependent series.

C)

falls into the range expected of a random series.




The weak form of the efficient market hypothesis argues that, over time, security returns are independent of each other. Runs tests contend that stock price changes (upticks and downticks) are independent over time.

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“Runs tests” involve which form of the efficient markets hypothesis (EMH)?

A)

They are used to test all three forms.

B)

Weak-form.

C)

Semistrong-form.




Statistical tests of the independence of security returns are used to examine the weak form of the EMH. Autocorrelation and runs tests are tests for independence over time.

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