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Multiple Choice Quiz
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1
If the capital markets are efficient, then the sale or purchase of any security at the prevailing market price is:
A)Always a positive NPV transaction
B)Generally a zero NPV transaction
C)Is always a negative NPV transaction
D)None of the above
2
Generally, a firm is able to find positive NPV opportunities with:
A)Financing decisions
B)Capital investment decisions
C)All of the above
D)None of the above
3
Financing decisions differ from investment decisions for which of the following reasons?
A)You cannot use NPV to evaluate financing decisions
B)The markets for financial assets are more competitive
C)It is easier to find financing decisions with positive NPV than to find investment decisions with positive NPV
D)None of the above
4
The statement that stock prices follow a random walk implies that:
A)Successive price changes are independent of each other
B)Successive price changes are positively related
C)Successive price changes are negatively related
D)The autocorrelation coefficient is positive
5
Which of the following statement(s) is/are true if the efficient market hypothesis holds?
A)It implies perfect forecasting ability
B)It implies market is irrational
C)It implies that prices follow a particular pattern
D)It implies that prices reflect all available information
6
Which of the following is a statement of weak form efficiency?
A)If markets are efficient in the weak form, then it is impossible to make consistently superior profits by using trading rules based on past returns
B)If markets are efficient in the weak form, then prices will adjust immediately to public information
C)If markets are efficient in the weak form, then prices reflect all information
D)None of the above
7
Suppose that, after conducting an analysis of past stock prices, you came up with the following observations. Which would appear to contradict the weak form of the efficient market hypothesis?
A)The average return is significantly higher than the risk-free rate of return.
B)The correlation between the return one week and the return the next week is −0.4
C)The correlation between the return one week and the return next week is zero
D)One could have made higher-than-average capital gains by holding shares with low dividend yield
8
Studies on mutual fund performance indicate
A)Most mutual funds had higher returns than the benchmark portfolio after expenses
B)Most mutual funds had lower returns than the benchmark portfolio before expenses
C)Most mutual funds had roughly the same returns as the benchmark portfolio after expenses
D)Most mutual funds had lower returns than the benchmark portfolio after expenses and roughly matched the benchmark portfolio before expenses
9
In an efficient market:
A)Publicly held companies should diversify their operations because investors benefit from diversification
B)Publicly held companies should not diversify their operations
C)Investors do not care whether or not companies diversify their operations
D)None of the above
10
Maurice Kendall's presentation on the random walk of stock and commodity pricing implied:
A)Price changes were uncorrelated
B)Price changes were based on trends
C)Price changes were correlated
D)Price changes can be predicted
11
Which of the following is not a form of market efficiency?
A)Semi-weak form
B)Weak form
C)Semi-strong form
D)Strong
12
The weak form of market efficiency implies that:
A)Prices reflect only insider information
B)Prices reflect only published information
C)Prices reflect both published and insider information
D)None of the above
13
Which of the following is false?
A)Bubble can occur when asset prices rise rapidly and more and more investors jump into the game
B)Bubbles can be sustained indefinitely
C)It can be rational to join a bubble
D)Lots of money will be lost when the bubble bursts
14
If financial managers believe they can determine asset pricing better than others, they are in violation of which lesson of market efficiency?
A)Trust market prices
B)Read the entrails
C)The do-it yourself alternative
D)There are no financial illusions
15
Suppose a financial manager assumes there are no financial illusions. What return would be earned immediately after a 2 for 1 stock split?
A)100%
B)50%
C)−50%
D)0.0%







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