Q&A Hero

Q: Which one of the following statements describes an investment strategy that may lead to profitable results based on current research findings? A. selling stocks as soon as positive earnings surprises are announced B. selling stocks on Mondays only C. selling small-company stocks in December and repurchasing them in February D. selling stocks on the 25th of the month and repurchasing them on the 5th of the following month E. buying stocks with relatively low P/E ratios

Q: Market prices tend to _____ earnings "surprises". A. adjust quickly and efficiently to B. overreact and then correct in response to C. overreact and never correct in response to D. ignore E. adjust slowly to

Q: Which of the following are offered as possible causes of the January effect? I. new professional money managers who assume the role at the beginning of the year II. tax loss selling in December III. bonus lock-in effect IV. window dressing A. I and II only B. III and IV only C. I, III, and IV only D. II, III, and IV only E. I, II, III, and IV

Q: The January effect: A. does not occur in the domestic market every year. B. occurs every year but only for large-company stocks. C. occurs every year but only for small-company stocks. D. is unaffected by institutional investors. E. is unique to the United States.

Q: Over the past 50 years, which day of the week, on average, has the lowest average rate of return? A. Monday B. Tuesday C. Wednesday D. Thursday E. Friday

Q: The day-of-the-week effect refers to which trading day? A. Monday B. Tuesday C. Wednesday D. Thursday E. Friday

Q: Which one of the following statements is correct? A. Professional money managers outperformed the Vanguard 500 Index Fund on an annual basis more than half the time for the period 1977-2011. B. Purchasing and holding a broad-based index fund is a highly recommended means of investing. C. The number of general equity mutual funds has decreased over the past 20 years due to their underperformance as compared to index funds. D. The survivorship bias lowers the returns earned by professional money managers as a group. E. In an efficient market, there is no need for professional money managers.

Q: Studies indicate that the Vanguard 500 Index fund tends to:A. underperform most professional money managers.B. produce a return equal to that of professional managers.C. outperform the average professional money manager, but only over the short-term.D. outperform most professional money managers especially over longer-periods of time.E. support the argument that the stock market is inefficient.

Q: Market timing tends to lead to: A. fairly consistent abnormal returns. B. increasing profits as experience is gained. C. superior returns but only if you are a professional money manager. D. a rate of return roughly equal to that of the overall market. E. underperforming the overall market.

Q: Moving money in and out of the market based on your market expectations is called _____ and tends to lead to returns that are _____ than the overall market return, assuming that the market is relatively efficient. A. asset allocation; higher B. asset allocation; lower C. market timing; higher D. market timing; lower E. security selection; higher

Q: If the markets are efficient, then why is asset allocation still considered important? A. because the risk-return relationship must still be considered B. because market timing is critical in efficient markets C. because individual security selection is the key to the markets being efficient D. because asset allocation combines market timing with individual security selection E. because the majority of market gains tend to occur only over long periods of time

Q: If the financial markets are highly efficient, then: A. investing based on technical analysis is highly recommended. B. holding a diversified, low-cost, passively-managed portfolio is probably your best investment strategy. C. you should adopt an investment strategy based on market timing. D. having a professional manager who actively trades your portfolio is most likely your best investment strategy. E. it doesn't matter which securities you invest in as all securities will provide relatively equal returns.

Q: Which one of the following best describes the current understanding of market efficiency? A. The market tends to overreact to new information in a manner which can be used to earn abnormal returns. B. Markets under-react to unanticipated events in a manner which can be used to earn excess returns. C. The market appears to be highly inefficient. D. Short-term market movements are difficult, if not impossible, to predict accurately. E. Markets tend to react slowly to unanticipated announcements.

Q: Which one of the following relates to the risk-adjustment problem encountered when testing market efficiency? A. ascertaining how historical prices relate to current stock prices B. determining whether a market reaction was appropriate or overstated C. correctly determining the correct risk-adjustment procedure D. determining what undocumented information existed on any particular trading day E. identifying patterns that occur over time in the pricing of a particular security

Q: Which one of the following statements related to insider trading is correct?A. Licensed stockbrokers are exempt from insider trading laws.B. Individuals, such as Martha Stewart, who have been convicted of crimes, can be barred from being executive officers of publicly-traded companies.C. Because of the increased speed of information flows and the improved efficiency of the markets, insider trading laws were abolished in 2006.D. Martha Stewart was convicted of insider trading and subjected both to a fine and a jail sentence.E. An investor who receives advice from an investment advisor is automatically charged with insider trading when the advisor bases his recommendations on private information.

Q: Helena is the chief executive officer of Beltway Holdings (BEH). She owns 1.2 million shares of BEH stock and wishes to sell 10 percent of those shares to diversify her holdings. She follows the SEC requirements, along with those of her firm, and proceeds with the sale on Monday, June 9. On Tuesday, June 10, BEH stock declines by 25 percent. Helena's stock trade is: A. legal but any future trading in BEH will be prohibited as long as she remains employed by the firm. B. illegal and could subject her to both fines and jail time. C. legal. D. subject to reversal by the SEC. E. subject to a forfeiture of her profits to the SEC.

Q: Which one of the following items is most apt to be considered material non-public information? Assume that none of this information is known publicly. A. Barb knows that Sue, an accounting clerk, is planning on resigning on Friday. B. Linda knows a new receptionist has just been hired. C. Wendy knows that her firm's net income is continuing to increase at a steady rate. D. Tracey knows her employer just received patent approval on a key new product. E. Maria is the chief financial officer and knows the firm intends to maintain its current dividend policy.

Q: Which one of the following is most apt to be considered insider trading? A. Ann overhears Martha say she is being promoted to accounts payables manager and then she purchases shares in Martha's employer. B. Jennifer compiles the financial statements and knows that net income for the latest quarter is significantly below analyst's forecasts but continues to hold shares of her employer's stock. C. Kate is an outside auditor and has found what she believes are significant accounting irregularities in a company's financial reports but owns no shares in the firm. D. Les buys stock in Winter's Wear after he overhears a conversation between the firm's president and vice-president concerning a proposed acquisition. E. Jeff buys shares of stock in his employer's firm through the company retirement plan on a regular monthly basis.

Q: Ted is an engineer for True Tech and has just discovered a revolutionary method for strengthening metals. He knows this knowledge will add value to True Tech's stock. Ted happens to mention this discovery and its value to his neighbor, Fred. Fred can be charged with insider trading if he: A. continues to hold the True Tech shares of stock he already owns. B. shares this information with another neighbor. C. sells his shares in True Tech immediately after the news of the discovery is announced. D. provides this information to a friend who will trade the stock and split the profits with him. E. buys shares in True Tech immediately after the news is announced and then shortly thereafter sells the shares at a profit.

Q: Which one of the following statements is correct? A. Company insiders are not permitted to trade their employer's securities. B. Only tippers can be accused of illegal insider trading. C. Tippees are permitted to trade securities based on information they know is private. D. Trading on private information which you just happen to overhear is legal. E. Any trading based on information known to be private is illegal.

Q: Which of the following sources of information are used by informed traders? I. financial statements II. inside information III. internet reports IV. analysts reports A. I and IV only B. II and III only C. III and IV only D. I, III, and IV only E. I, II, III, and IV

Q: How should cumulative abnormal returns react in an efficient market? A. relatively constant, sharp break, relatively constant B. relatively constant with no breaks C. steadily increasing D. steadily decreasing E. remain constant at zero

Q: In an efficient market, daily abnormal returns: A. are very volatile. B. reflect news within the past week. C. reflect news since the prior trading day. D. remain constant. E. do not exist.

Q: Which one of the following would best reveal how stock prices react when competitive firms merge? A. financial analysis B. field testing C. risk analysis D. event study E. market survey

Q: Which one of the following involves the study of a firm's stock price for the few days surrounding a news announcement? A. web survey B. market analysis C. event study D. auditing review E. trend study

Q: Last week, New Plastics announced that it had developed a new plastic container that is stronger and more durable, yet easier to recycle. In response to this announcement, the firm's stock price rose from $21 a share to a high of $27 a share and has remained at that level. This is an example of a(n): A. over-reaction and correction. B. post-activity reaction. C. delayed reaction. D. pre-activity action. E. efficient market reaction.

Q: Dennison Lumber announced last week that its unpopular CEO had resigned. In response to this announcement, the firm's stock price increased from $17 a share to $23 a share. The following day the price declined to $21 a share and has remained constant at that level. This is an example of a(n): A. over-reaction and correction. B. underpricing. C. delayed reaction. D. pre-activity action. E. efficient market reaction.

Q: Two weeks ago Ace Electronics announced that it had developed a new chip design which was being considered by major companies for use in future smart phone development. At the close of trading the day before the announcement, Ace common stock closed at $20. On the day following the announcement, Ace closed at $21. Two days after the announcement the stock closed at $22.50. Four days after the announcement the stock traded at $23. Last week, Ace stock traded at $26, a level it has maintained since then. This is an example of a(n): A. over-reaction and correction. B. underpricing. C. delayed reaction. D. pre-activity action. E. efficient market reaction.

Q: If you believe that stock market prices follow a random walk, then: A. historical price information provides no benefit in predicting future prices. B. there is no financial benefit from investing in the stock market. C. having inside information will not lead to excess profits. D. studying past price movements will lead to excess profits. E. you also believe the market is strong-form efficient.

Q: Research on semistrong-form efficient markets indicates which one of the following is correct? A. Identifying a stock with repetitive price movements is generally the best method of active investing. B. Future returns on large company stocks tend to closely follow past pricing patterns. C. Buying and holding a broad market index is one of the best investment strategies. D. Predicting future stock prices is relatively easy for academic researchers. E. Trading costs have little, if any, impact on investment returns.

Q: Which of the following will lead to excess profits in a semistrong-form efficient market? I. private financial information II. historical price trends III. financial analysts reports IV. unreleased merger plans A. I only B. I and IV only C. II and III only D. I, II, and III only E. I, III, and IV only

Q: Which form of market efficiency exists if the market is efficient only in regard to historical information? A. mild-form B. weak-form C. historical-form D. semistrong-form E. strong-form

Q: If the market is semistrong-form efficient, then which one of the following statements is true? A. Neither technical nor fundamental analysis leads to abnormal profits. B. Technical analysts have the ability to earn excess profits but fundamental analysts cannot. C. Fundamental analysts can earn excess profits but technical analysts cannot. D. Both technical and fundamental analysts earn excess profits based on their research. E. No answer can be determined as the form of market efficiency is unrelated to abnormal, or excess returns.

Q: Amy uses two approaches to trading stocks. First, she trades on what she believes is a repetitive pattern as seen in Delta Co's historical prices. Secondly, she analyzes the financial statements of The Atwater Co. to compute changes in the return on equity as a predictor of future stock prices for that firm. She trades based on both strategies. Amy earns excess profits on her return on equity strategy but not on her historical prices strategy. This suggests that the market is at least _____ efficient but less than _____ efficient. A. weak-form; mild-form B. mild-form; semistrong-form C. weak-form; semistrong-form D. semistrong-form; full-form E. semistrong-form; strong-form

Q: You analyze a firm's financial statements and invest based upon the results of this analysis. Which form of market efficiency must exist if you are able to earn excess profits on these investments? A. weak-form B. historical-form C. semi-strong form D. full-form E. mild-form

Q: Which of the following are ineffective strategies for producing excess returns if the market is semistrong-form efficient? I. graphing past prices searching for patterns II. watching the daily market movements III. studying the latest analyst's reports IV. analyzing a firm's financial statements A. I and III only B. I and IV only C. I, II, and III only D. II, III, and IV only E. I, II, III, and IV

Q: If the financial markets were regulated such that the markets maintained strong-form efficiency, then: A. insider trading laws would be unnecessary. B. all investors would earn equivalent rates of return. C. risk premiums would vanish. D. all investors would become arbitrage traders. E. securities would tend to be continually underpriced.

Q: Which one of the following best describes the type(s) of information included in a strong-form efficient market? A. historical B. historical and public C. private and public D. current and public E. historical and private

Q: You are the chief financial officer of Donnelly Industries. On multiple occasions, you have engaged in insider trading but have never been able to earn any abnormal returns. Which form of market efficiency most likely exists given your situation? A. mild-form B. weak-form C. historical-form D. semi-strong form E. strong-form

Q: Arbitrage traders: A. tend to be well-capitalized. B. tend to be irrational investors. C. are dominated by irrational investors in an efficient market. D. lower the efficiency level of a market. E. sell only relatively inexpensive stocks.

Q: The term "independent deviations from rationality" implies that: A. irrational investors are absent from an efficient market. B. arbitrage traders act independent of each other. C. markets must be inefficient. D. irrational investors behave differently from one another. E. arbitrage traders act together to offset the actions of rational investors.

Q: Independent deviations from rationality: A. only exist when the overall market is overvalued. B. prevent the markets from ever being efficient. C. can create an efficient market. D. are the actions taken by rational arbitrage traders. E. do not exist in an efficient market.

Q: Efficient markets tend to exist: A. only when all investors are rational. B. anytime market volume exceeds the average trading volume. C. only when market volatility is low. D. when rational arbitrage traders dominate irrational traders. E. when arbitrage trading is prohibited.

Q: Which one of the following will automatically occur if all investors are rational? A. All stock prices will be equal. B. Equivalent risk assets will have equal expected rates of return. C. All investors will earn the market rate of return. D. All investors will earn the same rate of return. E. The riskier an asset, the higher its market price will be.

Q: In an efficient market, stocks with similar risks will: A. have the same market price. B. pay similar dividends. C. yield the market rate of return. D. produce abnormal returns. E. have similar rates of return.

Q: Stocks A, B, and C have identical risks. Stock A earns an annual return of 9.9 percent as compared to 9.6 percent returns on stocks B and C. Given this, you can correctly assume that: A. Stock A is overpriced. B. the market return is 9.75 percent. C. Stock A represents the smallest-sized firm. D. Stock A has a positive excess return. E. Stocks B and C represent firms that are in the process of merging.

Q: Which one of the following is required for a trader to earn excess profits? A. excessive trading B. excessive research C. market inefficiency D. highly volatile market state E. relatively stable market state

Q: Which one of the following terms is used to identify the NYSE rules which slow or stop trading when the DJIA declines by more than a specified amount during a trading session? A. order flows B. market timers C. crash helmets D. circuit breakers E. trade barriers

Q: Which one of the following terms is used to describe a sudden and significant collapse in market prices? A. dive B. recession C. crash D. adjustment E. rebound

Q: Which one of the following terms is used to describe a market situation where prices are much higher than either fundamental or rational analysis would tend to support? A. bear market B. cloud C. inversion D. bubble E. crash aversion

Q: Which one of the following correctly identifies the phenomenon that states that one month has the greatest tendency for small stocks to earn large returns? A. January effect B. March effect C. September effect D. October effect E. December effect

Q: The day-of-the-week effect is defined as the tendency for which day of the week to have a negative average rate of return? A. Monday B. Tuesday C. Wednesday D. Thursday E. Friday

Q: Which one of the following terms best describes the information you know about a company that will have a significant effect on the price of the company's stock once that information is released? A. material public information B. public information C. abnormal information D. private, non-material information E. material non-public information

Q: Which type of trader is defined as one who decides to trade securities based on publicly available information and analysis? A. public B. informed C. normal D. inside E. block

Q: Which one of the following returns is computed as the observed return minus the expected return? A. visible B. distinct C. abnormal D. subjective E. efficient

Q: Which one of the following is a research method used to study the effects news has on stock prices? A. polarization B. market analysis C. event study D. news theory E. reaction hypothesis

Q: Which one of the following terms is used to describe a stock price that moves over time creating no discernible pattern? A. deviated pattern B. dispersed flow C. efficient movement D. overreaction and correction E. random walk

Q: Security A and Security B have similar risks. However, Security A has a higher rate of return than Security B. The return on Security A minus the return on Security B is referred to as which one of the following? A. market return B. abnormal return C. deviated return D. excess return E. real return

Q: Which one of the following states that investors cannot consistently earn positive excess returns? A. market return hypothesis B. current market hypothesis C. efficient market hypothesis D. risk-return theory E. excess theory

Q: What is the market value of a share of stock divided by the net income per share called? A. earnings per share B. price-earnings ratio C. value-earnings ratio D. earnings yield E. market multiple

Q: The Free Cash Flow Model: I. can be used to value a company with negative earnings II. is based on a firm having positive cash flows III. requires that a firm pay a dividend IV. directly estimates a value for a firm's equity A. I only B. I and II only C. I and III only D. I, II, and III only E. I, II, III, and IV

Q: What is the accounting relationship in which earnings per share minus dividends equal the change in book value per share called? A. clean surplus relationship B. economic value added relationship C. accounting earnings identity D. payout-retention identity E. dividend valuation equation

Q: What is beta? A. a rate of return measure B. the return on a stock relative to the overall market C. the rate of dividend growth D. the percentage of net income paid out as a dividend E. measure of a stock's risk relative to the stock market average

Q: The model used to value the stock of a firm which has a short-term growth rate that varies from its long-term growth rate is called the _____ dividend growth model. A. flexible B. increasing C. two-stage D. stepped up E. geometric

Q: What is the percentage of a firm's net income which is reinvested in the firm to support future growth called? A. payout ratio B. distribution percentage C. retention ratio D. equity ratio E. equity reinvestment

Q: What is the percentage of a firm's earnings that is distributed to shareholders called? A. payout ratio B. distribution percentage C. retention ratio D. dividend portion E. outflow ratio

Q: The portion of net income that is held by a firm, for future growth, comprises which one of the following balance sheet accounts? A. capital surplus B. common stock C. internal earnings D. retained earnings E. net earnings

Q: How is a sustainable dividend growth rate defined? A. a constant rate at which dividends increase B. a rate of growth that does not exceed two percent of the annual increase in revenue C. a rate of growth that is set equal to one-half of the average growth rate of a firm's earnings D. a rate that can be supported over time by a company's earnings E. a rate of dividend growth that is equal to the discount rate used to value the firm's stock

Q: The model used to value a stock that pays a dividend which increases at a constant rate forever is referred to as which one of the following? Assume the growth rate is less than the discount rate. A. diminishing valuation growth model B. increasing valuation growth model C. constant perpetual growth model D. irregular growth perpetual model E. two-stage growth model

Q: The method of valuing a stock based on the present value of the future income derived from that stock is called: A. technical analysis. B. constant valuation. C. the basic stock valuation method. D. compound dividend analysis. E. the dividend discount model.

Q: Which one of the following terms is used to identify the evaluation method that determines the value of a stock by reviewing a firm's financial statement in conjunction with other financial and economic information? A. technical analysis B. conceptual analysis C. prediction valuation D. fundamental analysis E. discounted valuation

Q: The residual income model for valuing a stock suffers from some of the same estimating errors as the dividend growth model. Identify and explain these estimating errors.

Q: Identify three causes for a decrease in a firm's sustainable rate of growth.

Q: Future stock prices that are estimated using any one of the various price ratios will be based on an assumption related to the ratio. What is that assumption?

Q: Currently, Southern Foods has sales of $1.32 million, net profit of $521,400, and 125,000 shares of stock outstanding. The sales and net profit are each expected to grow by 6 percent annually. The historical P/S ratio is 7.8. What is the expected price of this stock one year from now?A. $32.54B. $34.49C. $82.37D. $85.15E. $87.31

Q: The Satellite Shoppe has current sales per share of $8.40. The sales per share are expected to increase at an annual rate of 12 percent. The historical P/E ratio is 16.2 and the historical P/S ratio is 7.6. What is the expected price of this stock one year from now? A. $59.72 B. $66.67 C. $71.50 D. $115.18 E. $129.00

Q: The Retail Box has an historical P/CF ratio of 21.5. The current CFPS is $1.42 and the projected CFPS growth rate is 5.6 percent. The current EPS is $1.02. What is the expected price of this stock one year from now? A. $30.53 B. $32.24 C. $32.88 D. $34.11 E. $34.20

Q: Historically, Jones Trucking has had a P/E ratio of 14.6. The firm has current net income of $92,000 with 85,000 shares of stock outstanding. The EPS growth rate is 4.5 percent. What is the expected price of this stock one year from now? A. $15.32 B. $15.85 C. $16.41 D. $16.51 E. $17.10

Q: Electronics Galore has historically had a P/E ratio of 23.4. This ratio is considered a good estimate of the future ratio. The firm currently has EPS of $1.68. These earnings are expected to increase by 4.2 percent next year. What is the expected price of this stock one year from now? A. $39.31 B. $40.96 C. $41.25 D. $42.78 E. $43.79

Q: Miller's Farm has 120,000 shares of stock outstanding, sales of $850,000, and net income of $55,000. Financial analysts believe the price-earnings ratio for this firm should be 15.8. Given this information, what should be the current stock price? A. $7.24 B. $8.87 C. $14.85 D. $14.57 E. $15.21