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Chapter14EfficientCapitalMarketsandBehavioralChallengesMultipleChoiceQuestions1.Anefficientcapitalmarketisoneinwhich:A.brokeragecommissionsarezero.B.taxesareirrelevant.C.securitiesalwaysofferapositiverateofreturntoinvestors.D.securitypricesareguaranteedbythe.SecuritiesandExchangeCommissiontobefair.E.securitypricesreflectavailableinformation.2.Thenotionthatactualcapitalmarkets,suchastheNYSE,arefairlypricediscalledthe:A.EfficientMarketsHypothesis(EMH).B.LawofOnePrice.C.OpenMarketsTheorem.D.Laissez-FaireAxiom.E.MonopolyPricingTheorem.3.Thehypothesisthatmarketpricesreflectallavailableinformationofeverykindiscalled_____formefficiency.A.openB.strongC.semistrongD.weakE.stable4.Thehypothesisthatmarketpricesreflectallpubliclyavailableinformationiscalled_____formefficiency.A.openB.strongC.semistrongD.weakE.stable5.Thehypothesisthatmarketpricesreflectallhistoricalinformationiscalled_____formefficiency.A.openB.strongC.semistrongD.weakE.stable6.Inanefficientmarket,thepriceofasecuritywill:A.alwaysriseimmediatelyuponthereleaseofnewinformationwithnofurtherpriceadjustmentsrelatedtothatinformation.B.reacttonewinformationoveratwo-dayperiodafterwhichtimenofurtherpriceadjustmentsrelatedtothatinformationwilloccur.C.risesharplywhennewinformationisfirstreleasedandthendeclinetoanewstablelevelbythefollowingday.D.reactimmediatelytonewinformationwithnofurtherpriceadjustmentsrelatedtothatinformation.E.beslowtoreactforthefirstfewhoursafternewinformationisreleasedallowingtimeforthatinformationtobereviewedandanalyzed.7.Ifthefinancialmarketsareefficient,theninvestorsshouldexpecttheirinvestmentsinthosemarketsto:A.earnextraordinaryreturnsonaroutinebasis.B.generallyhavepositivenetpresentvalues.C.generallyhavezeronetpresentvalues.D.producearbitrageopportunitiesonaroutinebasis.E.producenegativereturnsonaroutinebasis.8.WhichoneofthefollowingstatementsiscorrectconcerningmarketefficiencyA.Realassetmarketsaremoreefficientthanfinancialmarkets.B.Ifamarketisefficient,arbitrageopportunitiesshouldbecommon.C.Inanefficientmarket,somemarketparticipantswillhaveanadvantageoverothers.D.Afirmwillgenerallyreceiveafairpricewhenitsellssharesofstock.E.Newinformationwillgraduallybereflectedinastock'spricetoavoidanysuddenchangeinthepriceofthestock.9.Accordingtotheefficientmarkethypothesis,financialmarketsfluctuatedailybecausethey:A.areinefficient.B.slowlyreacttonewinformation.C.arecontinuallyreactingtonewinformation.D.offertremendousarbitrageopportunities.E.onlyreflecthistoricalinformation.10.Insidertradingdoesnotofferanyadvantagesifthefinancialmarketsare:A.weakformefficient.B.semiweakformefficient.C.semistrongformefficient.D.strongformefficient.E.inefficient.11.Accordingtotheory,studyinghistoricalpricesinordertoidentifymispricedstockswillnotworkinmarketsthatare_____efficient.I.weakformII.semistrongformIII.strongformA.IonlyB.IIonlyC.IandIIonlyD.IIandIIIonlyE.I,II,andIII12.Whichofthefollowingtendtoreinforcetheargumentthatthefinancialmarketsareefficient？I.Informationspreadsrapidlyintoday'sworld.II.Thereistremendouscompetitioninthefinancialmarkets.III.Marketpricescontinuallyfluctuate.IV.Marketpricesreactsuddenlytounexpectednewsannouncements.A.IandIIIonlyB.IIandIVonlyC.I,II,andIIIonlyD.II,III,andIVonlyE.I,II,III,andIV13.Ifyouexcelinanalyzingthefutureoutlookoffirms,youwouldpreferthatthefinancialmarketsbe____formefficientsothatyoucanhaveanadvantageinthemarketplace.A.weakB.semiweakC.semistrongD.strongE.perfect14.YourbestfriendworksinthefinanceofficeoftheDeltaCorporation.YouareawarethatthisfriendtradesDeltastockbasedoninformationheoverhearsintheoffice.Youknowthatthisinformationisnotknowntothegeneralpublic.YourfriendcontinuallybragstoyouabouttheprofitsheearnstradingDeltastock.Basedonthisinformation,youwouldtendtoarguethatthefinancialmarketsareatbest_____formefficient.A.weakB.semiweakC.semistrongD.strongE.perfect15.The.SecuritiesandExchangeCommissionperiodicallychargesindividualsforinsidertradingandclaimsthoseindividualshavemadeunfairprofits.Basedonthisfact,youwouldtendtoarguethatthefinancialmarketsareatbest_____formefficient.A.weakB.semiweakC.semistrongD.strongE.perfect16.Individualsthatcontinuallymonitorthefinancialmarketsseekingmispricedsecurities:A.tendtomakesubstantialprofitsonadailybasis.B.tendtomakethemarketsmoreefficient.C.areneverabletofindasecuritythatistemporarilymispriced.D.arealwaysquitesuccessfulusingonlywell-knownpublicinformationastheirbasisofevaluation.E.arealwaysquitesuccessfulusingonlyhistoricalpriceinformationastheirbasisofevaluation.17.Efficientcapitalmarketsarefinancialmarkets:A.inwhichcurrentmarketpricesreflectavailableinformation.B.inwhichcurrentmarketpricesreflectthepresentvalueofsecurities.C.inwhichthereisnoexcessprofitfromusingavailableinformation.D.Alloftheabove.E.Noneoftheabove.18.Iftheefficientmarkethypothesisholds,investorsshouldexpect:A.toearnonlyanormalreturn.B.toreceiveafairpricefortheirsecurities.C.toalwaysbeabletopickstocksthatwilloutperformthemarketaverages.D.BothAandB.E.BothBandC.19.Financialmanagerscancreatevaluethroughfinancingdecisions