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Investments & Securities
Q:
According to the behavioral finance, markets are always
a. informationally efficient.
b. informationally inefficient.
c. weak-form efficient.
d. semi-strong form efficient.
Q:
Studies cited in the text show technical trading rules based on price and volume data lead to investment timing decisions that
a. consistently outperform the buy-and-hold strategy.
b. minimize brokerage costs.
c. do not provide excess returns after all brokerage costs are deducted.
d. do provide excess returns to most investors who follow the rules faithfully.
Q:
According to the random walk hypothesis, price(s)
a. over time are independent of one another.
b. changes over time are independent.
c. levels over time are independent.
d. changes today are dependent on yesterday's price changes.
Q:
A lady bought 100 shares of a leading diamond mining company with an expected return of 20 percent per year. The following day the company's president announced a major new discovery in Arkansas. The stock price immediately doubled. This scenario probably best illustrates
a. weak form EMH is not valid.
b. semi-strong form of EMH is not valid.
c. market prices are random.
d. the lady was lucky.
Q:
According to the semi-strong form of the EMH, investors who invest in a stock after a highly positive announcement concerning the stock can expect to earn
a. normal return because the stock will be fairly priced when purchased.
b. extraordinary return because the new information will not affect the price
until later.
c. extraordinary loss because insiders possess
non-public information.
d. zero return because the next price is expected to be the same as the last price.
Q:
With regard to market efficiency, identify the INCORRECT statement.
a. Information is the central issue of the efficient markets concept.
b. The most stringent form of market efficiency is the strong form.
c. The efficient market concept does not require a perfect adjustment in price following new information.
d. Tests of the usefulness of price data are semi-strong form tests.
Q:
According to the weak form of the EMH,
a. successive price changes are biased.
b. successive price changes are dependent.
c. specified trading rules can prove to be extremely useful in generating
excess returns.
d. successive price changes are independent.
Q:
Stockholders that own more than ____% of a company's stock are considered insiders by the SEC.
a. 10
b. 20
c. 30
d. 40
Q:
Which of the following is NOT a test of semi-strong form efficiency?
a. Insider transactions
b. Stock splits
c. Accounting changes
d. Dividend announcements
Q:
Debont and Thayler (1985)'s overreaction hypothesis tends to:
a. support the weak form of the EMH.
b. not support the weak form of the EMH.
c. support the semistrong form of the EMH.
d. not support the semistrong form of the EMH.
Q:
The random walk hypothesis is most related to the:
a. weak-form EMH
b. semistrong-form EMH
c. semiweak-form EMH
d. strong-form EMH
Q:
Which of the following statements is true regarding the efficiency of foreign securities and foreign markets?
a. Foreign securities tend to be more analyzed than U.S. securities.
b. Foreign markets tend to be less efficient than U.S. markets.
c. Foreign markets often lag behind U.S. markets as much as 6 months.
d. Foreign markets tend to be as efficient as U.S. markets.
Q:
Select the FALSE statement concerning efficient markets.
a. The current price of a stock reflects all known information.
b. Investors will use all relevant data in making their decisions.
c. A perfect adjustment in price follows any new information.
d. Following any adjustment, the new price does not have to be the new
equilibrium price.
Q:
The weak form of the EMH is supported if successive price changes over time are
a. independent of each other.
b. negative.
c. positive.
d. lagged.
Q:
The highest level of market efficiency is
a. weak form efficiency.
b. semi-strong form efficiency.
c. random walk efficiency.
d. strong form efficiency.
Q:
Weak form market efficiency
a. implies that the expected return on any security is zero.
b. incorporates semi-strong form efficiency.
c. involves price and volume information.
d. is compatible with technical analysis.
Q:
Which of the following markets is generally considered to be the most efficient: a. China. b. India. c. Russia. d. U.S.
Q:
Tests of the semistrong EMH include:
a. regression analysis.
b. correlation tests that compare the security returns to the overall market return.
c. tests of the speed of adjustment of stock prices to company announcements.
d. queuing line theory tests.
Q:
All of the following conditions must occur for a market to be considered efficient except:
a. Information is costless and widely available to market participants at approximately the same time.
b. Information is generated in a specific fashion such that announcements are basically dependent on each other.
c. There are a large number of rational, profit-maximizing investors who actively participate in the market.
d. Investors react quickly and fully to the new information, causing stock prices to adjust accordingly.
Q:
If a market is inefficient, as new information is received about a security:
a. nothing will happen.
b. the stock price will fall at first and then later rise.
c. there will be a lag in the adjustment of the stock price
d. there will be negative demand for the stock.
Q:
What is the result of the widespread usage of the Internet with regards to efficient markets?
a. It makes information cheaper and more accessible thus making markets more efficient.
b. It is subject to new regulation thus marking markets less efficient.
c. It increases the volatility of security prices thus making markets less efficient.
d. It increases competition among brokers thus making markets more efficient.
Q:
All "known " information means:
a. past information only.
b. past and current information.
c. past, current, and inferred information.
d. past, current, inferred and relative information.
Q:
An efficient market is defined as one in which:
a. all participants have the same opportunity to make the same returns.
b. all participants have the same legal rights and transactions costs.
c. securities prices quickly and fully reflect all available information.
d. securities prices are completely in line with the intrinsic value.
Q:
We can expect that the U.S. stock markets will be efficient for all of the following reasons EXCEPT:
a. A large number of rational, profit-maximizing investors exist who actively participate in the U.S. market by analyzing, valuing, and trading stocks.
b. The U.S. economy is the largest in the world, with the most sophisticated investors.
c. Information is costless and widely available to market participants at approximately the same time.
d. Investors react quickly and fully to the new information, causing stock prices to adjust accordingly.
Q:
What are the four broad stock sectors? What is sector rotation? Explain what changes in the business cycle would prompt one to rotate from one sector to another.
Q:
What is the paradox regarding fundamental analysis in regard to the efficient market hypothesis (EMH)?
Q:
In an upward trending market, what sectors might investors consider to increase absolute returns?
Q:
How could one invest indirectly in sectors and practice sector rotation?
Q:
What is meant by the term 'defensive stocks?' Give some examples.
Q:
What are the major reasons investing in index funds works, according to Burton Malkiel?
Q:
Compare and contrast the passive strategies of buy-and-hold and buying index funds.
Q:
An investor using the buy-and-hold strategy will receive dividends to reinvest. What dividend option do many companies offer that would make this strategy even more passive?
Q:
How is the required rate of return utilized in stock analysis?
Q:
With respect to proper diversification in asset allocation, what are the general guidelines for a U.S. investor's portfolio regarding foreign securities?
Q:
If security prices fully reflect all the relevant information that is available and usable, then a securities market is considered to be efficient.
Q:
Security analysts receive all of their information from the management of the company.
Q:
Sector rotation would be very successful in a truly efficient market.
Q:
Under new SEC rules adopted in 2002, price targets for stocks are to be shown.
Q:
Due to advances in technology and better understanding of stocks and financial markets, security analysts' estimates have become more accurate.
Q:
The primary emphasis in fundamental security analysis is on expected sales of the company.
Q:
Buy side analysts will more likely have a potential conflict of interest in a stock than a sell-side analyst.
Q:
Index funds are considered relatively tax efficient since they rarely have short-term gains.
Q:
As evidence about the efficiency of stocks markets has grown, so have index funds.
Q:
One of the major benefits of employing a buy and hold strategy is the savings on trading costs.
Q:
A common asset allocation for a number of institutional investors using only two asset classes is 60 percent equities and 40 percent bonds.
Q:
A utility stock is more likely to have a beta lower than the overall market.
Q:
The nominal risk-free rate of return is calculated by subtracting an expected inflation premium from the real risk-free rate of interest.
Q:
Market risk is the single most important risk affecting the price movements of common stocks.
Q:
A general guideline is that investors should probably have at least 20 percent of their portfolio invested in emerging markets.
Q:
The Coffeehouse Portfolio suggests investors hold:
a. 50% bonds, 50% equities (including the S&P 500, Large Cap Value, International, Small Cap, and Small Cap Value stocks)
b. 40% bonds, 60% equities (including the S&P 500, Large Cap Value, International, Small Cap, Small Cap Value, and REITs)
c. 60% bonds, 40% equities (in two index funds)
d. 40% bonds, 60% equities (in two index funds)
Q:
If security prices fully reflect all relevant information available and usable, a securities market is said to be:
a. rational.
b. in equilibrium.
c. effective.
d. efficient.
Q:
If stock prices reflect their approximate fair value after transactions costs are taken into account, this is known as:
a. after-cost efficiency.
b. economic efficiency.
c. a market in equilibrium.
d. an efficient market.
Q:
What is usually considered the biggest risk of market timing?
a. getting out of the market too soon
b. high transactions costs
c. failing to adjust for short-term corrections
d. not being in the market at critical times
Q:
Commodity ETF's are mainly used as speculative plays by:
a. hedge fund traders.
b. conservative investors.
c. mutual fund managers.
d. value investors.
Q:
____________ funds are especially popular with momentum investors.
a. Sector
b. Managed
c. Global
d. Index
Q:
Historically, sell-side equity research has typically been _________to the target company?
a. very unfavorable
b. unfavorable
c. favorable
d. neutral
Q:
Sector rotation is
a. one form of passive investing.
b. an active strategy similar to stock selection.
c. an attempt to earn excess returns by varying the percentage of assets in the
portfolio.
d. not dependent on an accurate assessment of current economic conditions.
Q:
Which of the following statements regarding defensive stocks is true?
a. They are often expected to have above-average future growth.
b. They often have high P/E multiples.
c. They are expected to be adversely affected by high interest rates.
d. They often produce necessary items such as food and prescription drugs.
Q:
All of the following represent requirements for conducting effective sector rotation, EXCEPT
a. an accurate assessment of current economic conditions.
b. a knowledge and understanding of the phases of the business cycle.
c. an understanding of the political environment.
d. expertise in technical analysis.
Q:
How can investors reasonably justify buy actively managed funds instead of index funds?
a. higher management fees usually suggests better performance
b. the fund consistently outperformed the market, net of fees, and is expected to continue to do so
c. the fund outperformed the S&P 500 by 4% last year
d. the portfolio manager is new and considered a star analyst
Q:
Market timers attempt to earn excess returns by:
a. adjusting the ratio of aggressive equity securities to defensive equity securities.
b. shifting the mix of short-term securities to long-term securities.
c. varying the percentage of portfolio assets in equity securities.
d. adjusting the ratio of primary market securities to capital market securities.
Q:
----------- shifts the weights of securities in the portfolio to take advantage of areas expected to do relatively better than others.
a. Portfolio management
b. Technical analysis
c. Momentum strategy
d. Sector rotation
Q:
The so-called "global settlement" negotiated by the SEC, NYSE and NASD with a number of brokerage firms was intended to:
a. ensure more disclosure of relevant information to investors.
b. separate investment banking from analyst research.
c. stop the practice of buy, sell or hold recommendations in analysts' reports.
d. all of the above
Q:
The Merrill Lynch case in 2002 confirmed that many analysts:
a. were paid too much.
b. were unable to accurately pinpoint earnings.
c. gave buy recommendations to win investment banking business.
d. shared private information about companies with investors.
Q:
An analyst employed by a pension fund to search for stocks for the fund to invest in would be referred to as:
a. a sell-side analyst.
b. a buy-side analyst.
c. an institutional analyst.
d. a money manager.
Q:
The central focus of a security analyst's job is to:
a. ascertain the accuracy of financial statements of selected companies.
b. find growth stocks.
c. forecast a specific company's return.
d. determine the market demand for a specific company's stock.
Q:
One of the most famous investment advisory services since 1965 is:
a. The Wall Street Journal
b. Standard and Poor's Corporate Records
c. Moody's
d. Value Line Investment Survey
Q:
An index fund that uses futures to hold the S&P 500 Index and invests the remainder in bonds would be an example of:
a. a value index fund.
b. a derivatives index fund.
c. an enhanced index fund.
d. an active index fund.
Q:
A significant advantage of index funds is their:
a. lower market price than other types of funds.
b. sector rotation.
c. tax efficiency.
d. minimization of risk.
Q:
Which of the following statements concerning index funds and actively managed funds is true?
a. Their performance is about equal.
b. They tend to have an inverse relationship.
c. Actively managed funds tend to outperform index funds.
d. Index funds tend to outperform actively managed funds.
Q:
Which of the following is NOT considered a passive equity investment:
a. investing in a sector ETF.
b. investing in a S&P 500 index mutual fund.
c. investing in a multi-strategy hedge fund.
d. investing in a Russell 2000 index mutual fund.
Q:
Which of the following statements regarding a buy and hold strategy are true?
a. There are no selection choices to be made under this strategy.
b. This strategy is applicable only to large portfolios.
c. There is no reinvestment decision to make under this strategy.
d. This strategy produces lower transactions and search costs.
Q:
Investors following a passive strategy use which of the following as the best estimate of a security's value?
a. the dividend discount model.
b. Fisher model.
c. current market price.
d. current earnings per share.
Q:
If security markets are totally efficient, the best common stock strategy to take is:
a. an asset allocation approach.
b. the modern portfolio theory.
c. an active strategy.
d. a passive strategy.
Q:
Passive common stock strategies attempt to minimize:
a. capital losses.
b. transactions costs, including time spent managing the portfolio.
c. market risk.
d. company and industry risk.
Q:
The passive investment strategy does not try to find undervalued stocks nor time the market. Instead, it is concerned with:
a. achieving returns available in various market sectors at minimum risk.
b. achieving maximum returns available in various market sectors.
c. achieving minimum risk in various market sectors.
d. achieving returns available in various market sectors at minimum cost.
Q:
The most important decision to make when building a diversified stock portfolio is:
a. individual security analysis.
b. asset allocation.
c. minimization of market risk.
d. maximization of expected return.
Q:
If investors in the market become more pessimistic, it is expected that the required return will ----------.
a. decrease.
b. increase.
c. stay the same.
d. there is not enough information to answer the question.
Q:
Individual investors consider the investment decision:
a. based on market and economic conditions as consisting of asset allocation.
b. based on market and economic conditions as consisting of asset allocation and security selection.
c. based on objectives, constraints, and preferences, as consisting of asset allocation.
d. based on objectives, constraints, and preferences, as consisting of asset allocation and security selection.
Q:
A bear market is one characterized by a decline of:
a. 10% or more.
b. 15% or more.
c. 20% or more.
d. 25% or more.