BUS 405 Week 2 Chapter 7 Stock Price Behavior and Market Efficiency This archive file of BUS 405 Week 2 Chapter 7 Stock Price Behaviour and Market Efficiency consists of: 1

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BUS 405 Week 2 Chapter 7 Stock Price Behavior and Market Efficiency

This archive file of BUS 405 Week 2 Chapter 7 Stock Price Behaviour and Market Efficiency consists of:

1. Which one of the following states that investors cannot consistently earn positive excess returns?

2. 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?

3. Which one of the following terms is used to describe a stock price that moves over time creating no discernible pattern?

4. Which one of the following is a research method used to study the effects news has on stock prices?

5. Which one of the following returns is computed as the observed return minus the expected return?

6. Which type of trader is defined as one who decides to trade securities based on publicly available information and analysis?

7. 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?

8. 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?

9. 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?

10. 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?

11. Which one of the following terms is used to describe a sudden and significant collapse in market prices?

12. 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?

13. Which one of the following is required for a trader to earn excess profits?

14. 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:

15. In an efficient market, stocks with similar risks will:

16. Which one of the following will automatically occur if all investors are rational?

17. Efficient markets tend to exist:

18. Independent deviations from rationality:

19. The term "independent deviations from rationality" implies that:

20. Arbitrage traders:

21. 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?

22. Which one of the following best describes the type(s) of information included in a strong-form efficient market?

23. If the financial markets were regulated such that the markets maintained strong-form efficiency, then:

24. 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

25. 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?

26. 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.

27. If the market is semistrong-form efficient, then which one of the following statements is true?

28. Which form of market efficiency exists if the market is efficient only in regard to historical information?

29. Which of the following will lead to excess profits in a semistrong-form efficient market?

30. Research on semistrong-form efficient markets indicates which one of the following is correct?

31. If you believe that stock market prices follow a random walk, then:

32. 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):

33. 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):

34. 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):

35. Which one of the following involves the study of a firm's stock price for the few days surrounding a news announcement?

36. Which one of the following would best reveal how stock prices react when competitive firms merge?

37. In an efficient market, daily abnormal returns

38. How should cumulative abnormal returns react in an efficient market?

39. Which of the following sources of information are used by informed traders?

I. financial statements

II. inside information

III. internet reports

IV. analysts reports

40. Which one of the following statements is correct?

41. 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 neighbour, Fred. Fred can be charged with insider trading if he:

42. Which one of the following is most apt to be considered insider trading?

43. 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.

44. 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:

45. Which one of the following statements related to insider trading is correct?

46. Which one of the following relates to the risk-adjustment problem encountered when testing market efficiency?

47. Which one of the following best describes the current understanding of market efficiency?

48. If the financial markets are highly efficient, then:

49. If the markets are efficient, then why is asset allocation still considered important?

50. 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.

51. Market timing tends to lead to:

52. Studies indicate that the Vanguard 500 Index fund tends to:

53. Which one of the following statements is correct?

54. The day-of-the-week effect refers to which trading day?

55. Over the past 50 years, which day of the week, on average, has the lowest average rate of return?

56. The January effect:

57. 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

58. Market prices tend to _____ earnings "surprises".

59. Which one of the following statements describes an investment strategy that may lead to profitable results based on current research findings?

60. Which one of the following statements concerning the stock market is correct?

61. Over the time period of 1929 to 1932, the stock market lost approximately _____ percent of its value.

62. Approximately how many years did it take for the stock market to recover from the bear market of 1929 to 1932?

63. Which of the following are offered as factors contributing to the Crash of October 1987?

I. bubble bursting

II. market volatility

III. negative economic signals

IV. activities in Congress

64. Which of the following occurred during the Crash of 1987?

I. market prices were kept up-to-date which increased investors' anxiety

II. the market declined another 5 percent within the 2 days following the crash

III. trading volume exceeded the exchange's capacities

IV. NASDAQ went off-line

65. Which one of the following occurred following the Crash of 1987?

66. Which of the following factors contributed to the Crash of 1987?

I. irrational investors

II. program trading

III. panic selling

IV. price uncertainty

67. Immediately following the Crash of 1987, the stock market:

68. If the DJIA falls by 10 percent, the NYSE will:

69. If the DJIA falls by 20 percent, the NYSE will:

70. If the DJIA falls by 30 percent, the NYSE will:

71. The primary purpose of the NYSE circuit breakers is to:

72. From the end of 1989 to the spring of 2003, the Nikkei Index declined in value approximately _____ percent.

73. The Asian stock market crash of 1990 was followed by a:

74. The value of the Amex Internet Index increased by about _____ percent from October 1998 to March 2000 and subsequently declined by about _____ percent by October 2002.

75. By the end of 2002, the AMEX Internet Index was at a level approximately equal to _____ percent of the index high.

76. The following are the daily returns for both the overall market and for Dexter Inc. What is the cumulative abnormal return on Dexter, Inc., stock for these 5 days?

77. Over the past 5 days, the common stock of Tyler Mfg. had daily returns of 0.2, -0.1, -0.2, 0.3, and 0.1 percent, respectively. For the same 5 days, the market had daily returns of 0.0, 0.1, -0.3, 0.4, and 0.2 percent, respectively. What is the cumulative abnormal return on Tyler Mfg. stock for this time period?

78. Swenson Co. announced its merger plans on August 25 and had a daily return of 0.7 percent. Tyler Co. announced its merger plans on August 26 and had a daily return of 0.5 percent. The Underwood Co. announced its merger plans on August 27 and had a daily return of -0.1 percent. The daily market returns for August 25 through August 27 were 0.2, 0.3, and -0.4, respectively. What is the combined cumulative abnormal return for the announcement date?

79. A.B. Pharmaceutical announced FDA approval for a new drug on October 12. Uptown Drug Co. announced FDA approval for its new drug on October 14. No other information was released that would affect returns over this time period. What is the combined cumulative abnormal return for the 5 day period commencing 2 days prior to the FDA approval announcement date? Use the following data to answer this question. No trading occurred on October 15 or 16.

80. What are some of the key lessons to be learned from historical stock market crashes?

81. What should the primary role of portfolio managers be given the research to date on their market performance and based on the assumption that markets are efficient?

82. A trader was found guilty of violating insider trading laws. As part of his sentencing, he had to forfeit the excessive profits earned on the illegal trades. What does this conviction indicate about the current form of market efficiency?