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SD2-Security Analysis and Efficient Market

SD2-Security Analysis and Efficient Market - CHAPTER 2...

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CHAPTER 2 SECURITY ANALYSIS AND EFFICIENT MARKETS LEARNING OBJECTIVES 1. The goal of security analysis. 2. The concept of an efficient securities market and the differences between weak-form, semistrong-form, and strong-form efficient markets. 3. The implications of an efficient market on the behavior of security prices. 4. The key role investors play in an efficient market. 5. What creates comparative advantage in security analysis. 6. How investors’ beliefs about efficient markets determine their style of investment analysis. 7. The recent empirical evidence on efficient markets. TRUE/FALSE QUESTIONS 1. Successful securities analysis only identifies securities that are likely to have future stock returns below the returns of other equity securities of similar risk. (easy, L.O. 1, Section 1, false) 2. The market could be efficient with respect to some, but not all, of the information in a particular information set. (moderate, L.O. 2, Section 2, true) 3. We can evaluate the efficiency of the market relative to several different information sets. (moderate, L.O. 2, Section 2, false) 4. Price changes are not really random, but are caused by the arrival of unpredictable information. (moderate, L.O. 3, Section 3, true) 5. A strong-form efficient market is one in which prices reflect not only all public information per se but also everything that can be inferred from that information. (moderate, L.O. 3, Section 3, false) 6. Prices constantly reflect expectations for the future. (easy, L.O. 3, Section 3, true) 7. A positive earnings surprise is a situation in which positive earnings are reported when the market does not expect them. (easy, L.O. 3, Section 3, true) 8. Truly random prices would move without regard to relevant information or changed expectations. (moderate, L.O. 3, Section 3, true) 9. In theory a market whose prices are unrelated to relevant information about the underlying values of securities is not sustainable. (moderate, L.O. 3, Section 3, true) 10. A graph that charts a security’s prices at certain points in time or after certain events is called a price path. (easy, L.O. 3, Section 3, true) 11. In an efficient market, investors will continue a buy/sell process until they believe the prices of securities 9
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are correct. (easy, L.O. 4, Section 4, true) 12. If a market reflects a certain piece of information, then only certain individuals can profit from knowledge of that information. (moderate, L.O. 5, Section 5, false) 13. An investor who expects investments to earn returns greater than the market average will be inclined to do fundamental analysis. (moderate, L.O. 6, Section 5, false) 14. It is quite possible to test whether a single stock is priced correctly. (moderate, L.O. 7, Section 6, false) 15. Cross-sectional tests focus on weak-form and semistrong-form efficiency.
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