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Multiple Choice Quiz
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1
If you observe that stock prices consistently go up for two days after declining for three days
A)The market is inefficient in the weak form
B)The market is inefficient in the semi-strong form
C)Nothing can be concluded about market efficiency
D)Markets are efficient in the strong form though not in the weak form
E)None of the above
2
Economists believe that markets tend to be efficient because
A)Investors dislike inefficiency
B)The government will regulate inefficient markets
C)Rational investors will monitor markets for profit opportunities and step in to exploit any of them
D)Economists tend to be over-optimistic
E)None of the above
3
Anomalies inconsistent with the efficient market hypothesis may appear
A)Because in practice there are limits to arbitrage preventing investors from taking advantage of profit opportunities
B)As anomalies but disappear when transaction costs are considered
C)As anomalies but are actually caused by researchers mining databases for apparent anomalies
D)All of the above
E)None of the above.
4
The winner-loser hypothesis
A)Can be used successfully to predict winners in races
B)Occurs because investors, prone to the representativeness hypothesis, extrapolate prior earnings information too far.
C)Occurs when winning stocks continue to be winners and past losers continue to be losers
D)Is consistent with managerial beliefs that safe stocks tend to be good stocks – i.e. there is a negative relation between risk and expected return.
E)All of the above
5
The difference between the momentum effect and the winner-loser effect is that
A)The momentum effect is short-term but the winner-loser effect is long-term
B)The momentum effect is based on over-confidence while the winner-loser effect is based on investors using the affect heuristic
C)The momentum effect is riskier to take advantage of than the winner-loser effect
D)All of the above
E)There is no difference between them
6
The post-earnings announcement drift phenomenon
A)Happens when firms that announce positive earnings surprises tend to perform better than expected in the two months after the announcement
B)Illustrates both short-term return continuation and long-term return reversals
C)May be evidence against semi-strong form market efficiency
D)May occur because analysts under-react to the information in earnings announcements
E)All of the above
7
Because of the limits to arbitrage, buying stocks involves
A)An understanding of how other investors may be subject to behavioral errors
B)Deciding on different courses of actions when the other investors may commit errors than when they do not.
C)Perfect analysis does not bring the stock price close to the value if no one committed any errors
D)All of the above
E)None of the above
8
Managers tend to be fixated on EPS rather than on cash flows because
A)The EPS is a simple easy-to-compute number
B)In many cases managerial compensation is determined by EPS rather than on shareholder value added
C)The outside world, including analysts and investors, are fixated on EPS rather than on cash flows
D)Both a and c
E)Both a and b
9
Stock splits
A)Are cosmetic changes in the stock that should not affect the stock price performance
B)In practice, are associated with a positive drift
C)Tend to be announced by firms that are less likely to suffer a decline in future earnings
D)All of the above
E)None of the above
10
Initial public offerings are typically underpriced because
A)Managers with low reference points as to the amount of wealth they can earn, are willing to leave money on the table
B)Banks may encourage underpricing in order to reward their favored clients with underpriced shares
C)Firms may try to persuade uninformed investors that they are not getting a bad deal
D)All of the above
E)None of the above





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