(完整版)投资学第7版TestBank答案11

Multiple Choice Questions
1.If you believe in the ________ form of the EMH, you believe that stock prices reflect
all relevant information including historical stock prices and current public information
about the firm, but not information that is available only to insiders.
A)semistrong
B)strong
C)weak
D)A, B, and C
E)none of the above
Answer: A Difficulty: Easy
Rationale: The semistrong form of EMH maintains that stock prices immediately
reflect all historical and current public information, but not inside information.
2.Proponents of the EMH typically advocate
A)an active trading strategy.
B)investing in an index fund.
C) a passive investment strategy.
D) A and B
E) B and C
Answer: E Difficulty: Easy
Rationale: Believers of market efficiency advocate passive investment strategies, and
an investment in an index fund is one of the most practical passive investment strategies, especially for small investors.
3.If you believe in the _______ form of the EMH, you believe that stock prices reflect all
information that can be derived by examining market trading data such as the history
of past stock prices, trading volume or short interest.
A)semistrong
B)strong
C)weak
D)all of the above
E)none of the above
Answer: C Difficulty: Easy
Rationale: The information described above is market data, which is the data set for
the weak form of market efficiency. The semistrong form includes the above plus all
other public information. The strong form includes all public and private information.
4.If you believe in the _________ form of the EMH, you believe that stock prices reflect
all available information, including information that is available only to insiders.
A)semistrong
B)strong
C)weak
D)all of the above
E)none of the above
Answer: B Difficulty: Easy
Rationale: The strong form includes all public and private information.
5.If you believe in the reversal effect, you should
A)buy bonds in this period if you held stocks in the last period.
B)buy stocks in this period if you held bonds in the last period.
C)buy stocks this period that performed poorly last period.
D)go short.
E) C and D
Answer: C Difficulty: Easy
Rationale: The reversal effect states that stocks that do well in one period tend to perform poorly in the subsequent period, and vice versa.
6.__________ focus more on past price movements of a firm's stock than on the
underlying determinants of future profitability.
A)Credit analysts
B)Fundamental analysts
C)Systems analysts
D)Technical analysts
E)All of the above
Answer: D Difficulty: Easy
Rationale: Technicians attempt to predict future stock prices based on historical stock prices.
7._________ above which it is difficult for the market to rise.
A)Book value is a value
B)Resistance level is a value
C)Support level is a value
D) A and B
E) A and C
Answer: B Difficulty: Easy
Rationale: When stock prices have remained stable for a long period, these prices are termed resistance levels; technicians believe it is difficult for the stock prices to penetrate these resistance levels.
8.___________ the return on a stock beyond what would be predicted from
market movements alone.
A)An excess economic return is
B)An economic return is
C)An abnormal return is
D) A and B
E) A and C
Answer: E Difficulty: Easy
Rationale: An economic return is the expected return, based on the perceived level of risk and market factors. When returns exceed these levels, the returns are called abnormal or excess economic returns.
9.The debate over whether markets are efficient will probably never be resolved
because of ________.
A)the lucky event issue.
B)the magnitude issue.
C)the selection bias issue.
D)all of the above.
E)none of the above.
Answer: D Difficulty: Easy
Rationale: Factors A, B, and C all exist make rigid testing of market efficiency
difficult or impossible.
10. A common strategy for passive management is ____________.
A)creating an index fund
B)creating a small firm fund
C)creating an investment club
D) A and C
E) B and C
Answer: A Difficulty: Easy
Rationale: The index fund is, by definition, passively managed. The other investment alternatives may or may not be managed passively.
11.Arbel (1985) found that
A)the January effect was highest for neglected firms.
B)the book-to-market value ratio effect was highest in January
C)the liquidity effect was highest for small firms.
D)the neglected firm effect was independent of the small firm effect.
E)small firms had higher book-to-market value ratios.
Answer: A Difficulty: Moderate
Rationale: Arbel divided firms into highly researched, moderately researched,
and neglected groups based on the number of institutions holding the stock.
12.Researchers have found that most of the small firm effect occurs
A)during the spring months.
B)during the summer months.
C)in December.
D)in January.
E)randomly.
Answer: D Difficulty: Moderate
Rationale: Much of the so-called small firm effect simply may be the tax-effect as investors sell stocks on which they have losses in December and reinvest the funds in January. As small firms are especially volatile, these actions affect small firms in a more dramatic fashion.
13.Malkiel (1995) calculated that the average alphas, or abnormal returns, on a
large sample of mutual funds between 1972 and 1991 were
A)significantly positive.
B)significantly negative.
C)statistically indistinguishable from zero.
D)positive before 1981 and negative thereafter.
E)negative before 1981 and positive thereafter.
Answer: C Difficulty: Moderate
Rationale: Malkiel's study suggests that fund managers do not beat the market on a risk-adjusted basis.
14.Basu (1977, 1983) found that firms with low P/E ratios
A)earned higher average returns than firms with high P/E ratios.
B)earned the same average returns as firms with high P/E ratios.
C)earned lower average returns than firms with high P/E ratios.
D)had higher dividend yields than firms with high P/E ratios.
E)none of the above.
Answer: A Difficulty: Moderate
Rationale: Firms with high P/E ratios already have an inflated price relative to
earnings and thus tend to have lower returns than low P/E ratio stocks. However, the P/E ratio may capture risk not fully impounded in market betas so this may represent an appropriate risk adjustment rather than a market anomaly.
15.Jaffe (1974) found that stock prices _________ after insiders intensively bought shares.
A)decreased
B)did not change
C)increased
D)became extremely volatile
E)became much less volatile
Answer: C Difficulty: Moderate
Rationale: Insider trading may signal private information.
16.Banz (1981) found that, on average, the risk-adjusted returns of small firms
A)were higher than the risk-adjusted returns of large firms.
B)were the same as the risk-adjusted returns of large firms.
C)were lower than the risk-adjusted returns of large firms.
D)were unrelated to the risk-adjusted returns of large firms.
E)were negative.
Answer: A Difficulty: Moderate
Rationale: Banz found A to be true, although subsequent studies have attempted
to explain the small firm effect as the January effect, the neglected firm effect, etc.
17.Proponents of the EMH think technical analysts
A)should focus on relative strength.
B)should focus on resistance levels.
C)should focus on support levels.
D)should focus on financial statements.
E)are wasting their time.
Answer: E Difficulty: Moderate
Rationale: Technical analysts attempt to predict future stock prices from historic stock prices; proponents of EMH believe that stock price changes are random variables.
18.Studies of positive earnings surprises have shown that there is
A) a positive abnormal return on the day positive earnings surprises are announced.
B) a positive drift in the stock price on the days following the earnings
surprise announcement.
C) a negative drift in the stock price on the days following the earnings
surprise announcement.
D)both A and B are true.
E)both A and C are true.
Answer: D Difficulty: Moderate
Rationale: The market appears to adjust to earnings information gradually, resulting in
a sustained period of abnormal returns.
19.On November 22, 2005 the stock price of Walmart was $39.50 and the retailer stock
index was 600.30. On November 25, 2005 the stock price of Walmart was $40.25 and the retailer stock index was 605.20. Consider the ratio of Walmart to the retailer index on November 22 and November 25. Walmart is _______ the retail industry and
technical analysts who follow relative strength would advise _______ the stock.
A)outperforming, buying
B)outperforming, selling
C)underperforming, buying
D)underperforming, selling
E)equally performing, neither buying nor selling
Answer: A Difficulty: Moderate
Rationale: 11/22: $39.50/600.30 = 0.0658; 11/25: $40.25/605.20 = 0.0665; Thus,
K-Mart's relative strength is improving and technicians using this technique would
recommend buying.
20.Work by Amihud and Mendelson (1986,1991)
A)argues that investors will demand a rate of return premium to invest in less
liquid stocks.
B)may help explain the small firm effect.
C)may be related to the neglected firm effect.
D) B and C.
E)A, B, and C.
Answer: E Difficulty: Moderate
Rationale: Lack of liquidity may affect the returns of small and neglected firms;
however the theory does not explain why the abnormal returns are concentrated
in January.
21.Fama and French (1992) found that the stocks of firms within the highest decile of
market/book ratios had average monthly returns of _______ while the stocks of
firms within the lowest decile of market/book ratios had average monthly returns
of________.
A)greater than 1%, greater than 1%
B)greater than 1%, less than 1%
C)less than 1%, greater than 1%
D)less than 1%, less than 1%
E)less than 0.5%, greater than 0.5%
Answer: C Difficulty: Moderate
Rationale: This finding suggests either that low market-to-book ratio firms are
relatively underpriced, or that the market-to-book ratio is serving as a proxy for a
risk factor that affects expected equilibrium returns.
22. A market decline of 23% on a day when there is no significant macroeconomic event
______ consistent with the EMH because ________.
A)would be, it was a clear response to macroeconomic news.
B)would be, it was not a clear response to macroeconomic news.
C)would not be, it was a clear response to macroeconomic news.
D)would not be, it was not a clear response to macroeconomic news.
E)none of the above.
Answer: D Difficulty: Moderate
Rationale: This happened on October 19, 1987. Although this specific event is not mentioned in this edition of the book, it is an example of something that would be considered a violation of the EMH.
23.In an efficient market, __________.
A)security prices react quickly to new information
B)security prices are seldom far above or below their justified levels
C)security analysts will not enable investors to realize superior returns consistently
D)one cannot make money
E)A, B, and C
Answer: E Difficulty: Easy
Rationale: A, B, and C are true; however, even in an efficient market one should be able to earn the appropriate risk-adjusted rate of return.
24.The weak form of the efficient market hypothesis asserts that
A)stock prices do not rapidly adjust to new information contained in past prices or
past data.
B)future changes in stock prices cannot be predicted from past prices.
C)technicians cannot expect to outperform the market.
D) A and B
E) B and C
Answer: E Difficulty: Easy
Rationale: Stock prices do adjust rapidly to new information.
25. A support level is the price range at which a technical analyst would expect the
A)supply of a stock to increase dramatically.
B)supply of a stock to decrease substantially.
C)demand for a stock to increase substantially.
D)demand for a stock to decrease substantially.
E)price of a stock to fall.
Answer: C Difficulty: Easy
Rationale: A support level is considered to be a level below that the price of the stock is unlikely to fall and is believed to be determined by market psychology.
26. A finding that _________ would provide evidence against the semistrong form of
the efficient market theory.
A)low P/E stocks tend to have positive abnormal returns
B)trend analysis is worthless in determining stock prices
C)one can consistently outperform the market by adopting the contrarian
approach exemplified by the reversals phenomenon
D) A and B
E) A and C
Answer: E Difficulty: Moderate
Rationale: Both A and C are inconsistent with the semistrong form of the EMH.
27.The weak form of the efficient market hypothesis contradicts
A)technical analysis, but supports fundamental analysis as valid.
B)fundamental analysis, but supports technical analysis as valid.
C)both fundamental analysis and technical analysis.
D)technical analysis, but is silent on the possibility of successful
fundamental analysis.
E)none of the above.
Answer: D Difficulty: Moderate
Rationale: The process of fundamental analysis makes the market more efficient, and thus the work of the fundamentalist more difficult. The data set for the weak form of the EMH is market data, which is the only data used exclusively by technicians.
Fundamentalists use all public information.
28.Two basic assumptions of technical analysis are that security prices adjust
A)rapidly to new information and market prices are determined by the interaction
of supply and demand.
B)rapidly to new information and liquidity is provided by security dealers.
C)gradually to new information and market prices are determined by the interaction
of supply and demand.
D)gradually to new information and liquidity is provided by security dealers.
E)rapidly to information and to the actions of insiders.
Answer: C Difficulty: Moderate
Rationale: Technicians follow market data--price changes and volume of trading (as
indicator of supply and demand) believing that they can identify price trends as
security prices adjust gradually.
29.Cumulative abnormal returns (CAR)
A)are used in event studies.
B)are better measures of security returns due to firm-specific events than are
abnormal returns (AR).
C)are cumulated over the period prior to the firm-specific event.
D) A and B.
E) A and C.
Answer: D Difficulty: Moderate
Rationale: As leakage of information occurs, the accumulated abnormal returns that are abnormal returns summed over the period of interest (around the event date) are better measures of the effect of firm-specific events.
30.Studies of mutual fund performance
A)indicate that one should not randomly select a mutual fund.
B)indicate that historical performance is not necessarily indicative of
future performance.
C)indicate that the professional management of the fund insures above market returns.
D) A and B.
E) B and C.
Answer: D Difficulty: Easy
Rationale: Studies show that all funds do not outperform the market and that
historical performance is not necessarily an indicator of future performance.
31.The likelihood of an investment newsletter's successfully predicting the direction of the
market for three consecutive years by chance should be
A)between 50% and 70%.
B)between 25% and 50%.
C)between 10% and 25%.
D)less than 10%.
E)greater than 70%.
Answer: C Difficulty: Moderate
Rationale: The probability of successful prediction for 3 consecutive years is 23,
or 12.5%.
32.In an efficient market the correlation coefficient between stock returns for
two non-overlapping time periods should be
A)positive and large.
B)positive and small.
C)zero.
D)negative and small.
E)negative and large.
Answer: C Difficulty: Moderate
Rationale: In an efficient market there should be no serial correlation between
returns from non-overlapping periods.
33.The weather report says that a devastating and unexpected freeze is expected to hit
Florida tonight, during the peak of the citrus harvest. In an efficient market one would expect the price of Florida Orange's stock to
A)drop immediately.
B)remain unchanged.
C)increase immediately.
D)gradually decline for the next several weeks.
E)gradually increase for the next several weeks.
Answer: A Difficulty: Moderate
Rationale: In an efficient market the price of the stock should drop immediately
when the bad news is announced. If later news changes the perceived impact to
Florida Orange, the price may once again adjust quickly to the new information. A
gradual change is a violation of the EMH.
34. Matthews Corporation has a beta of 1.2. The annualized market return yesterday was
13%, and the risk-free rate is currently 5%. You observe that Matthews had an
annualized return yesterday of 17%. Assuming that markets are efficient, this suggests that
A) bad news about Matthews was announced yesterday.
B) good news about Matthews was announced yesterday.
C) no news about Matthews was announced yesterday.
D) interest rates rose yesterday.
E) interest rates fell yesterday.
Answer: B Difficulty: Moderate
Rationale: AR = 17% - (5% + 1.2 (8%)) = +2.4%. A positive abnormal return suggests that there was firm-specific good news.
th 35. Nicholas Manufacturing just announced yesterday that its 4 quarter earnings will be 10% higher than last year's 4th quarter. You observe that Nicholas had an
abnormal return of -1.2% yesterday. This suggests that
A) the market is not efficient.
B) Nicholas' stock will probably rise in value tomorrow.
C) investors expected the earnings increase to be larger than what was actually
announced.
D) investors expected the earnings increase to be smaller than what was actually
announced.
E) earnings are expected to decrease next quarter.
Answer: C Difficulty: Moderate
Rationale: Anticipated earnings changes are impounded into a security's price as soon as expectations are formed. Therefore a negative market response indicates that the earnings surprise was negative, that is, the increase was less than anticipated.
36.When Maurice Kendall first examined stock price patterns in 1953, he found that
A)certain patterns tended to repeat within the business cycle.
B)there were no predictable patterns in stock prices.
C)stocks whose prices had increased consistently for one week tended to have a
net decrease the following week.
D)stocks whose prices had increased consistently for one week tended to have a
net increase the following week.
E)the direction of change in stock prices was unpredictable, but the amount of
change followed a distinct pattern.
Answer: B Difficulty: Easy
Rationale: The first studies in this area were made possible by the development of computer technology. Kendall's study was the first to indicate that markets
were efficient.
37.If stock prices follow a random walk
A)it implies that investors are irrational.
B)it means that the market cannot be efficient.
C)price levels are not random.
D)price changes are random.
E)price movements are predictable.
Answer: D Difficulty: Easy
Rationale: A random walk means that the changes in prices are random
and independent.
38.The main difference between the three forms of market efficiency is that
A)the definition of efficiency differs.
B)the definition of excess return differs.
C)the definition of prices differs.
D)the definition of information differs.
E)they were discovered by different people.
Answer: D Difficulty: Moderate
Rationale: The main difference is that weak form encompasses historical data,
semistrong form encompasses historical data and current public information, and strong form encompasses historical data, current public information, and inside information. All of the other definitions remain the same.
39.Chartists practice
A)technical analysis.
B)fundamental analysis.
C)regression analysis.
D)insider analysis.
E)psychoanalysis.
Answer: A Difficulty: Easy
Rationale: Chartist is another name for a technical analyst.
40.Which of the following are used by fundamental analysts to determine proper
stock prices?
I)trendlines
II)earnings
III)dividend prospects
IV) expectations of future interest rates
V)resistance levels
A)I, IV, and V
B)I, II, and III
C)II, III, and IV
D)II, IV, and V
E)All of the items are used by fundamental analysts.
Answer: C Difficulty: Moderate
Rationale: Analysts look at fundamental factors such as earnings, dividend prospects, expectation of future interest rates, and risk of the firm. The information is used to
determine the present value of future cash flows to stockholders. Technical analysts use trendlines and resistance levels.
41.According to proponents of the efficient market hypothesis, the best strategy for a
small investor with a portfolio worth $40,000 is probably to
A)perform fundamental analysis.
B)exploit market anomalies.
C)invest in Treasury securities.
D)invest in derivative securities.
E)invest in mutual funds.
Answer: E Difficulty: Moderate
Rationale: Individual investors tend to have relatively small portfolios and are usually unable to realize economies of size. The best strategy is to pool funds with other small investors and allow professional managers to invest the funds.
42.Which of the following are investment superstars who have consistently shown
superior performance?
I)Warren Buffet
II)Phoebe Buffet
III)Peter Lynch
IV) Merrill Lynch
V)Jimmy Buffet
A)I, III, and IV
B)II, III, and IV
C)I and III
D)III and IV
E)I, III, IV, and V
Answer: C Difficulty: Moderate
Rationale: Warren Buffet manages Berkshire Hathaway and Peter Lynch managed Fidelity's Magellan Fund. Phoebe Buffet is a character on NBC's and Jimmy Buffet is Away in Margaritaville. Merrill Lynch isn't a person.
43.Google has a beta of 1.0. The annualized market return yesterday was 11%, and the
risk-free rate is currently 5%. You observe that Google had an annualized return
yesterday of 14%. Assuming that markets are efficient, this suggests that
A)bad news about Google was announced yesterday.
B)good news about Google was announced yesterday.
C)no news about Google was announced yesterday.
D)interest rates rose yesterday.
E)interest rates fell yesterday.
Answer: B Difficulty: Moderate
Rationale: AR = 14% - (5% + 1.0 (6%)) = +3.0%. A positive abnormal return suggests that there was firm-specific good news.
44.Music Doctors has a beta of 2.25. The annualized market return yesterday was 12%,
and the risk-free rate is currently 4%. You observe that Music Doctors had an
annualized return yesterday of 15%. Assuming that markets are efficient, this suggests that
A)bad news about Music Doctors was announced yesterday.
B)good news about Music Doctors was announced yesterday.
C)no news about Music Doctors was announced yesterday.
D)interest rates rose yesterday.
E)interest rates fell yesterday.
Answer: A Difficulty: Moderate
Rationale: AR = 15% - (4% + 2.25 (8%)) = -7.0%. A negative abnormal return suggests that there was firm-specific bad news.
45.QQAG has a beta of 1.7. The annualized market return yesterday was 13%, and the
risk-free rate is currently 3%. You observe that QQAG had an annualized return
yesterday of 20%. Assuming that markets are efficient, this suggests that
A)bad news about QQAG was announced yesterday.
B)good news about QQAG was announced yesterday.
C)no significant news about QQAG was announced yesterday.
D)interest rates rose yesterday.
E)interest rates fell yesterday.
Answer: C Difficulty: Moderate
Rationale: AR = 20% - (3% + 1.7 (10%)) = 0.0%. A positive abnormal return suggests that there was firm-specific good news and a negative abnormal return suggests that there was firm-specific bad news.
46.QQAG just announced yesterday that its th
4 quarter earnings will be 35% higher
than last year's 4th
quarter. You observe that QQAG had an abnormal return of -
1.7% yesterday. This suggests that
A)the market is not efficient.
B)QQAG stock will probably rise in value tomorrow.
C)investors expected the earnings increase to be larger than what was
actually announced.
D)investors expected the earnings increase to be smaller than what was
actually announced.
E)earnings are expected to decrease next quarter.
Answer: C Difficulty: Moderate
Rationale: Anticipated earnings changes are impounded into a security's price as soon as expectations are formed. Therefore a negative market response indicates that the earnings surprise was negative, that is, the increase was less than anticipated.
47.LJP Corporation just announced yesterday that it would undertake an international joint
venture. You observe that LJP had an abnormal return of 3% yesterday. This suggests that
A)the market is not efficient.
B)LJP stock will probably rise in value again tomorrow.
C)investors view the international joint venture as bad news.
D)investors view the international joint venture as good news.
E)earnings are expected to decrease next quarter.
Answer: D Difficulty: Moderate
48.Music Doctors just announced yesterday that its st
1 quarter sales were 35% higher
than last year's 1st
quarter. You observe that Music Doctors had an abnormal return
of -2% yesterday. This suggests that
A)the market is not efficient.
B)Music Doctors stock will probably rise in value tomorrow.
C)investors expected the sales increase to be larger than what was actually announced.
D)investors expected the sales increase to be smaller than what was
actually announced.
E)earnings are expected to decrease next quarter.
Answer: C Difficulty: Moderate
49.The Food and Drug Administration (FDA) just announced yesterday that they would
approve a new cancer-fighting drug from King. You observe that King had an abnormal return of 0% yesterday. This suggests that
A)the market is not efficient.
B)King stock will probably rise in value tomorrow.
C)King stock will probably fall in value tomorrow.
D)the approval was already anticipated by the market
E)none of the above.
Answer: D Difficulty: Moderate
50.Your professor finds a stock-trading rule that generates excess risk-adjusted returns.
Instead of publishing the results, she keeps the trading rule to herself. This is most
closely associated with ________.
A)regret avoidance
B)selection bias
C)framing
D)insider trading
E)none of the above
Answer: B Difficulty: Moderate
51.At freshman orientation, 1,500 students are asked to flip a coin 20 times. One student is
crowned the winner (tossed 20 heads). This is most closely associated with ________.
A)regret avoidance
B)selection bias
C)overconfidence
D)the lucky event issue
E)none of the above
Answer: D Difficulty: Moderate
52.Sehun (1986) finds that the practice of monitoring insider trade disclosures, and
trading on that information, would be ________.
A)extremely profitable for long-term traders
B)extremely profitable for short-term traders
C)marginally profitable for long-term traders
D)marginally profitable for short-term traders
E)not sufficiently profitable to cover trading costs
Answer: E
53.If you believe in the reversal effect, you should
A)sell bonds in this period if you held stocks in the last period.
B)sell stocks in this period if you held bonds in the last period.
C)sell stocks this period that performed well last period.
D)go long.
E) C and D
Answer: C Difficulty: Easy
Rationale: The reversal effect states that stocks that do well in one period tend
to perform poorly in the subsequent period, and vice versa.。