1. The semistrong form of the efficient market hypothesis asserts that stock prices:

a. Fully reflect all historical price information.

b. Fully reflect all publicly available information.

c. Fully reflect all relevant information including insider information.

d. May be predictable.

2. Assume that a company announces an unexpectedly large cash dividend to its shareholders. In an efficient market without information leakage, one might expect:

a. An abnormal price change at the announcement.

b. An abnormal price increase before the announcement.

c. An abnormal price decrease after the announcement.

d. No abnormal price change before or after the announcement.

3. Which one of the following would provide evidence against the semi strong form of the efficient market theory?

a. About 50% of pension funds outperform the market in any year.

b. You cannot make abnormal profits by buying stocks after an announcement of strong earnings.

c. Trend analysis is worthless in forecasting stock prices.

d. Low P/E stocks tend to have positive abnormal returns over the long run.

4. According to the efficient market hypothesis:

a. High-beta stocks are consistently overpriced.

b. Low-beta stocks are consistently overpriced.

c. Positive alphas on stocks will quickly disappear.

d. Negative-alpha stocks consistently yield low returns for arbitrageurs.

5. A "random walk" occurs when:

a. Stock price changes are random but predictable.

b. Stock prices respond slowly to both new and old information.

c. Future price changes are uncorrelated with past price changes.

d. Past information is useful in predicting future prices.

6. A market anomaly refers to:

a. An exogenous shock to the market that is sharp but not persistent.

b. A price or volume event that is inconsistent with historical price or volume trends.

c. A trading or pricing structure that interferes with efficient buying and selling of securities.

d. Price behavior that differs from the behavior predicted by the efficient market hypothesis.

7. Some scholars contend that professional managers are incapable of outperforming the market. Others come to an opposite conclusion. Compare and contrast the assumptions about the stock market that support (a) passive portfolio management and (b) active portfolio management.

8. You are a portfolio manager meeting a client. During the conversation that follows your formal review of her account, your client asks the following question: My grandson, who is studying investments, tells me that one of the best ways to make money in the stock market is to buy the stocks of small-capitalization firms late in December and to sell the stocks one month later. What is he talking about?

a. Identify the apparent market anomalies that would justify the proposed strategy.

b. Explain why you believe such a strategy might or might not work in the future.

9. a. Briefly explain the concept of the efficient market hypothesis (EMH) and each of its three formsweak, semi strong, and strongand briefly discuss the degree to which existing empirical evidence supports each of the three forms of the EMH.

b. Briefly discuss the implications of the efficient market hypothesis for investment policy as it applies to: i. Technical analysis in the form of charting. ii. Fundamental analysis.

c. Briefly explain the roles or responsibilities of portfolio managers in an efficient market environment.

10. Growth and value can be defined in several ways. Growth usually conveys the idea of a portfolio emphasizing or including only companies believed to possess above-average future rates of per-share earnings growth. Low current yield, high price-to-book ratios, and high price-to-earnings ratios are typical characteristics of such portfolios. Value usually conveys the idea of portfolios emphasizing or including only issues currently showing low price-to-book ratios, low price-to-earnings ratios, above-average levels of dividend yield, and market prices believed to be below the issues' intrinsic values.

a. Identify and provide reasons why, over an extended period of time, value-stock investing might outperform growth-stock investing.

b. Explain why the outcome suggested in (a) should not be possible in a market widely regarded as being highly efficient.

11. Your investment client asks for information concerning the benefits of active portfolio management. She is particularly interested in the question of whether active managers can be expected to consistently exploit inefficiencies in the capital markets to produce above-average returns without assuming higher risk. The semi strong form of the efficient market hypothesis asserts that all publicly available information is rapidly and correctly reflected in securities prices. This implies that investors cannot expect to derive above-average profits from purchases made after information has become public because security prices already reflect the information's full effects.

a. Identify and explain two examples of empirical evidence that tend to support the EMH implication stated above.

b. Identify and explain two examples of empirical evidence that tend to refute the EMH implication stated above.

c. Discuss reasons why an investor might choose not to index even if the markets were, in fact, semi strong-form efficient.