Exam

Name___________________________________

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the
question.

1) When the market risk premium rises, stock prices will ________. 1)
A) recover B) rise
C) have excess volatility D) fall

2) Which of the following is not a concept related to explaining abnormal excess stock 2)
returns?
A) preferred stock effect B) P/E effect
C) January effect D) neglected-firm effect

3) Banz found that, on average, the risk-adjusted returns of small firms ________. 3)
A) were higher than the risk-adjusted returns of large firms
B) were lower than the risk-adjusted returns of large firms
C) were negative
D) were the same as the risk-adjusted returns of large firms

4) Jaffe found that stock prices ________ after insiders intensively bought shares and 4)
________ after insiders intensively sold shares.
A) decreased; decreased B) increased; decreased
C) increased; increased D) decreased; increased

5) The Fama and French evidence that high book-to-market firms outperform low 5)
book-to-market firms even after adjusting for beta means that ________.
A) high book-to-market firms are underpriced or the book-to-market ratio is a proxy
for a unique risk factor
B) either high book-to-market firms are underpriced or the book-to-market ratio is a
proxy for a systematic risk factor
C) low book-to-market firms are underpriced or the book-to-market ratio is a proxy
for a systematic risk factor
D) high book-to-market firms have more post-earnings drift

6) A technical analyst is most likely to be affiliated with which investment philosophy? 6)

A) passive investment B) active management
C) index funds D) buy and hold

7) Proponents of the EMH typically advocate ________. 7)

A) an aggressive investment strategy B) a liberal investment strategy
C) a conservative investment strategy D) a passive investment strategy

1
 8) Someone who invests in the Vanguard Index 500 mutual fund could most accurately be 8)
described as using which approach?
A) Arbitrage B) Passive investment
C) Fundamental analysis D) Active management

9) "Buy a stock if its price moves up by 2% more than the Dow Average" is an example of 9)
a ________.
A) fundamental approach B) trading rule
C) market anomaly D) passive trading strategy

10) Fundamental analysis is likely to yield best results for ________. 10)
A) NYSE stocks
B) neglected stocks
C) fast-growing companies
D) stocks that are frequently in the news

11) A possible limit on arbitrage activity that may allow behavioral biases to persist is 11)
________.
A) trend reversals B) technical trends in prices
C) fundamental risk D) momentum effects

12) Which one of the following best describes fundamental risk? 12)
A) You buy a stock that you believe is underpriced, and the underpricing persists for
a long time, hurting your short-term results.
B) A stock is trading in two different markets at two different prices.
C) A stock is overpriced, but your fund does not allow you to engage in short sales.
D) Your models indicate a stock is mispriced, but you are not sure if this is a real
profit opportunity or a model input error.

13) The only way for behavioral patterns to persist in prices is if ________. 13)
A) market psychology is inconsistent over time
B) markets are not weak-form efficient
C) there are no significant trading costs
D) there are limits to arbitrage activity

14) Behaviorists point out that even if market prices are ________, there may be ________. 14)
A) distorted; limited arbitrage opportunities
B) allocationally efficient; limitless arbitrage opportunities
C) distorted; fundamental efficiency
D) distorted; allocational efficiency

2
15) The semistrong-form of the efficient market hypothesis implies that ________ generate 15)
abnormal returns and ________ generate abnormal returns.
A) technical analysis cannot; fundamental analysis cannot
B) technical analysis cannot; fundamental analysis can
C) technical analysis can; fundamental analysis cannot
D) technical analysis can; fundamental analysis can

16) You are an investment manager who is currently managing assets worth $6 billion. You 16)
believe that active management of your fund could generate an additional one-tenth of
1% return on the portfolio. If you want to make sure your active strategy adds value,
how much can you spend on security analysis?
A) $0 B) $3,000,000 C) $12,000,000 D) $6,000,000

17) Which of the following stock price observations would appear to contradict the weak 17)
form of the efficient market hypothesis?
A) The average rate of return is significantly greater than zero.
B) You could have consistently made superior returns by forecasting future earnings
performance with your new Crystal Ball forecast methodology.
C) The correlation between the market return one week and the return the following
week is zero.
D) You could have consistently made superior returns by buying stock after a 10%
rise in price and selling after a 10% fall.

18) Which of the following statements is (are) correct? 18)

A) If a market is strong-form efficient, it is also semistrong- but not weak-form
efficient.
B) If a market is semistrong-form efficient, it is also strong-form efficient.
C) If a market is weak-form efficient, it is also semistrong- and strong-form efficient.
D) If a market is strong-form efficient, it is also semistrong- and weak-form efficient.

19) The strong form of the EMH states that ________ must be reflected in the current stock 19)
price.
A) all publicly available information
B) all costless information
C) all information, including inside information
D) all security price and volume data

20) Short interest is a ________ indicator. 20)

A) flow of funds B) fundamental
C) sentiment D) market structure

3
21) 21)

From day 1 to day 4, the TRIN has ________ and is ________.

A) increased; bullish B) decreased; bearish
C) increased; bearish D) decreased; bullish

22) The cumulative tally of the number of advancing stocks minus declining stocks is called 22)
the ________.
A) relative strength ratio B) trin ratio
C) market breadth D) market volume

23) Trend analysts who follow bonds are most likely to monitor the ________. 23)
A) short interest B) TRIN statistic
C) odd-lot trading D) confidence index

24) Which of the following analysts focus more on past price movements of a firm's stock 24)
than on the underlying determinants of its future profitability?
A) fundamental analysts B) technical analysts
C) systems analysts D) credit analysts

25) Conventional finance theory assumes investors are ________, and behavioral finance 25)
assumes investors are ________.
A) greedy; philanthropic B) philanthropic; greedy
C) irrational; rational D) rational; irrational

26) Trading activity and average returns in brokerage accounts tend to be ________. 26)
A) negatively correlated
B) uncorrelated
C) positively correlated
D) positively correlated for women and negatively correlated for men

27) An investor holds a very conservative portfolio invested for retirement, but she takes 27)
some extra cash she earned from her year-end bonus and buys gold futures. She appears
to be engaging in ________.
A) forecast errors B) mental accounting
C) overconfidence D) representativeness

4
28) Statman, Fisher, and Anginer (2008) found that stocks ranked high in Fortune's Survey 28)
of Most Admired Companies tended to have lower average risk-adjusted returns than
the least admired firms. This could be attributed to
A) prospect theory B) affect
C) framing D) mental accounting

29) If investors are too slow to update their beliefs about a stock's future performance when 29)
new evidence arises, they are exhibiting ________.
A) framing error B) representativeness bias
C) conservatism D) memory bias