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1 If the market processes new information efficiently, the reaction of market prices to new information will be unbiased. instantaneous and unbiased. fair. instantaneous. Ramdom 2 An efficient capital market is one in which there is no thin trading. there are a large number of buyers and sellers. security prices fully reflect all available information. no abnormal returns can be made transaction costs are minimal. 3 Returns greater or less than that which the market expects from a security are known as inferior returns. true returns. excess returns normal returns. abnormal returns. 4 Flukey Gold Mines makes an unexpected announcement regarding gold production at 2.20 p.m. Shares of the company were traded at 12 p.m., 2.10 p.m., 2.30 p.m. and 4 p.m. If the market for Flukey Gold Mines' shares is efficient, then at which trade will the newly established share price fully reflect the new information? 4 p.m. 2.10 p.m. 12 p.m. on the opening of the next trading day 2.30 p.m. 5 A weak-form efficient market can best be described as a market in which: trading strategies based upon past share prices cannot consistently earn abnormal profits. share prices follow predictable trends. trading strategies based on past information can earn abnormal profits. all publicly available information is fully reflected in share prices. trends in prices can be exploited 6 Which of the following statements about market efficiency is true? A market can be semi-strong form, weak-form or strong-form efficient but not all simultaneously. A market must be weak-form efficient if it is semi-strong form efficient. A market can be semi-strong form and strong-form efficient but not weak-form efficient. A market must be weak-form efficient if share prices are random. A market can be semi-strong form efficient but not weak-form efficient. 7 Semi-strong form efficiency can best be described as: noone can make a profit the ability of investors to earn abnormal profits from the over-reaction of share prices to news. a market in which trading strategies based on all publicly available information cannot earn abnormal profits. all information, public and private, is fully impounded in share prices. a market in which trading strategies based on past prices cannot earn abnormal profits 8 The random walk hypothesis assumes that: share price changes are correlated. capital markets are semi-strong form efficient. successive price changes are independent and identically distributed over time. capital markets are weak-form efficient. the expected return on an asset is constant from one period to the next and therefore changes in actual returns around the expected return are non-random. 9 Which of the following results may be inconsistent with semi-strong form market efficiency? Share prices react instantaneously to profit announcements. Share returns follow a predictable trend after a profit announcement. Abnormal returns are not detected around profit announcements. None of the given options. 10 If fund managers display superior investment performance, it can then be said that: fund managers do not use past information to derive trading strategies. none of the given options. the market is strong-form efficient. the market is not strong-form efficient. 11 The January effect refers to: the fact that the average share return for January is larger than in any other month. the fact that the average share return for January is smaller than any other month. the mispricing of shares due to brokers being on holidays for most of January mis-pricing of shares due to New Year parties. the fact that smaller firms, on average, earn higher returns than larger firms 12 The size effect refers to: the observation that returns on shares traded exclusively on large markets are above average. the observation that returns on shares of smaller companies are no different from those of larger companies the observation that returns on shares traded exclusively on small markets are below average. the observation that returns on shares of smaller companies are larger than those of larger companies. the observation that returns on shares of smaller companies are smaller than those of larger companies 13 If the stock market is efficient with respect to the incorporation of publicly available information, then: technical analysis is likely to be profitable. charting a company's share prices is likely to be profitable. fraudulent activity is not possible. insider information is unlikely to lead to abnormal profits. fundamental analysis is unlikely to be profitable 14 Which of the following statements is the most consistent with evidence provided on the EMH? Fundamental analysis is a worthwhile trading strategy for most investors. Technical analysis is a worthwhile trading strategy for most investors. Most investors should adopt a passive buy-and-hold strategy, most of the time. Most investors have access to private information. Investors cannot make abnormal returns. 15 ________ assets on average earn a risk premium. Real Most Financial None of the given answers Risky 16 The hypothesis that market prices reflect all historical information is called efficiency in the: open form semi-strong form strong form none of the given answers weak form 17 The hypothesis that market prices reflect all publicly available information is called efficiency in the: strong form weak form open form semi-strong form none of the given answers 18 The hypothesis that market prices reflect all available information is called efficiency in the: semi-strong form strong form weak form open form none of the given answers 19 The excess return required from an investment in a risky asset over a riskfree investment is called: a return premium only a return premium and a risk premium an average return a real return a risk premium 20 According to Liquidity Preference Theory long-term government bonds have a risk premium above short-term rates because: the government cannot easily raise tax dollars to repay the bonds long-term government bonds do not have risk premium of longer time to maturity they are not guaranteed by the government both long-term government bonds do not have risk premium and they are not guaranteed by the government