Investment Final Ch 8 – Flashcards
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Which of the following beliefs would not preclude charting as a method of portfolio management?
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D. Stock prices follow recurring patterns.
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The weak form of the EMH states that ________ must be reflected in the current stock price
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A. all past information, including security price and volume data
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The semistrong form of the EMH states that ________ must be reflected in the current stock price
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B. all publicly available information
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The strong form of the EMH states that ________ must be reflected in the current stock price
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C. all information, including inside information
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Evidence suggests that there may be _______ momentum and ________ reversal patterns in stock price behavior
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D. short-run; long run
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Proponents of the EMH typically advocate __________.
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C. a passive investment strategy
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The tendency when the ______ performing stocks in one period are the best performers in the next and the current ________ performers are lagging the market later is called the reversal effect.
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A. worst; best
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Which of the following is not a method employed by followers of technical analysis?
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C. Earnings forecasting
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Which of the following is not a method employed by fundamental analysts?
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B. Relative strength analysis
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The primary objective of fundamental analysis is to identify __________.
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C. mispriced stocks
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If you believe in the __________ form of the EMH, you believe that stock prices reflect all publicly available information but not information that is available only to insiders
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A. semistrong
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If you believe in the __________ form of the EMH, you believe that stock prices reflect all relevant information, including information that is available only to insiders
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B. strong
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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, but you do not believe stock prices reflect all publicly available and inside information. You are a proponent of the ____________ form of the EMH.
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C. weak
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A mutual fund that attempts to hold quantities of shares in proportion to their representation in the market is called a __________ fund
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B. index
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Choosing stocks by searching for predictable patterns in stock prices is called ________.
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B. technical analysis
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Which of the following is not an issue that is central to the debate regarding market efficiency?
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The tax-loss selling issue
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Small firms have tended to earn abnormal returns primarily in __________.
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A. the month of January
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Fama and French have suggested that many market anomalies can be explained as manifestations of ____________.
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D. varying risk premiums
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Proponents of the EMH think technical analysts __________.
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D. are wasting their time
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Evidence supporting semistrong-form market efficiency suggests that investors should _________________________.
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C. use a passive trading strategy such as purchasing an index fund or an ETF
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"Buy a stock if its price moves up by 2% more than the Dow Average" is an example of a _________________.
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A. trading rule
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According to 1968 research by Ball and Brown, securities markets fully adjust to earnings announcements _______.
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D. gradually over time
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When stock returns exhibit positive serial correlation, this means that __________ returns tend to follow ___________ returns.
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A. positive; positive
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Basu found that firms with high P/E ratios __________.
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C. earned lower average returns than firms with low P/E ratios
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Fundamental analysis is likely to yield best results for _______.
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B. neglected stocks
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You are looking to invest in one of three stocks. All other things being equal, Stock A has high expected earnings growth, stock B has only modest expected earnings growth, and stock C is expected to generate poor earnings growth. According to LaPorta's 1996 study, which stock is likely to generate the greatest alpha for you?
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C. Stock C
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Even if the markets are efficient, professional portfolio management is still important because it provides investors with: I. Low-cost diversification II. A portfolio with a specified risk level III. Better risk-adjusted returns than an index
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B. I and II only
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Banz found that, on average, the risk-adjusted returns of small firms __________.
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A. were higher than the risk-adjusted returns of large firms
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"Active investment management may at times generate additional returns of about .1%. However, the standard deviation of the typical well-diversified portfolio is about 20%, so it is very difficult to statistically identify any increase in performance." Even if true, this statement is an example of the _________ problem in deciding how efficient the markets are
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A. magnitude
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DeBondt and Thaler (1985) found that the poorest-performing stocks in one time period experienced __________ performance in the following period and that the best-performing stocks in one time period experienced __________ performance in the following time period.
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B. good; poor
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. M. Keyes put all his money in one stock, and the stock doubled in value in a matter of months. He did this three times in a row with three different stocks. J. M. got his picture on the front page of the Wall Street Journal. However, the paper never mentioned the thousands of investors who made similar bets on other stocks and lost most of their money. This is an example of the ________ problem in deciding how efficient the markets are.
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C. lucky event
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Most tests of semistrong efficiency are _________.
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D. joint tests of market efficiency and the risk-adjustment measure
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The broadest information set is included in the _____.
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C. strong-form efficiency argument
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The Fama and French evidence that high book-to-market firms outperform low book-to-market firms even after adjusting for beta means that _________.
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C. either high book-to-market firms are underpriced or the book-to-market ratio is a proxy for a systematic risk factor
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The term random walk is used in investments to refer to ______________.
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C. stock price changes that are random and unpredictable
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Among the important characteristics of market efficiency is (are) that: I. There are no arbitrage opportunities. II. Security prices react quickly to new information. III. Active trading strategies will not consistently outperform passive strategies.
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D. I, II, and III
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Stock market analysts have tended to be ___________ in their recommendations to investors
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B. overwhelmingly optimistic
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Assume that a company announces unexpectedly high earnings in a particular quarter. In an efficient market one might expect _____________.
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A. an abnormal price change immediately after the announcement
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Market anomaly refers to _______.
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D. price behavior that differs from the behavior predicted by the efficient market hypothesis
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Which of the following contradicts the proposition that the stock market is weakly efficient?
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C. Every January, the stock market earns above-normal returns.
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Which of the following stock price observations would appear to contradict the weak form of the efficient market hypothesis?
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C. You could have consistently made superior returns by buying stock after a 10% rise in price and selling after a 10% fall.
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The semistrong form of the efficient market hypothesis implies that ____________ generate abnormal returns and ____________ generate abnormal returns.
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D. technical analysis cannot; fundamental analysis cannot
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An implication of the efficient market hypothesis is that __________.
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C. nonzero alphas will quickly disappear
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One type of passive portfolio management is ________.
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A. investing in a well-diversified portfolio without attempting to search out mispriced securities
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Value stocks usually exhibit ______ price-to-book ratios and ______ price-to-earnings ratios.
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A. low; low
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Growth stocks usually exhibit ______ price-to-book ratios and ______ price-to-earnings
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D. high; high
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A technical analyst is most likely to be affiliated with which investment philosophy?
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A. Active management
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Someone who invests in the Vanguard Index 500 mutual fund could most accurately be described as using which approach
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D. Passive investment
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Evidence by Blake, Elton, and Gruber indicates that, on average, actively managed bond funds ______.
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D. underperform passive fixed-income indexes by an amount equal to fund expenses
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Insiders are able to profitably trade and earn abnormal returns prior to the announcement of positive news. This is a violation of which form of efficiency?
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C. Strong-form efficiency
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In an efficient market and for an investor who believes in a passive approach to investing, what is the primary duty of a portfolio manager?
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B. Diversification
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Which Fidelity Magellan portfolio manager is often referenced as an exception to the general conclusion of efficient markets
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B. Peter Lynch
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The tendency of poorly performing stocks and well-performing stocks in one period to continue their performance into the next period is called the ________________.
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C. momentum effect
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Fundamental analysis determines that the price of a firm's stock is too low, given its intrinsic value. The information used in the analysis is available to all market participants, yet the price does not seem to react. The stock does not trade on a major exchange. What concept might explain the ability to produce excess returns on this stock?
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B. Neglected-firm effect
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When testing mutual fund performance over time, one must be careful of ___________, which means that a certain percentage of poorer-performing funds fail over time, making the performance of remaining funds seem more consistent over time.
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A. survivorship bias
