Chapter 11 The Efficient Market Hypothesis

Chapter 11 The Efficient Market Hypothesis - Chapter 11 The...

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Chapter 11 The Efficient Market Hypothesis Multiple Choice Questions 1. If you believe in the ________ form of the EMH, you believe that stock prices reflect all relevant information including historical stock prices and current public information about the firm, but not information that is available only to insiders. A) semistrong B) strong C) weak D) A, B, and C E) none of the above Answer: A Difficulty: Easy Rationale: The semistrong form of EMH maintains that stock prices immediately reflect all historical and current public information, but not inside information. 2. Proponents of the EMH typically advocate A) an active trading strategy. B) investing in an index fund. C) a passive investment strategy. D) A and B E) B and C Answer: E Difficulty: Easy Rationale: Believers of market efficiency advocate passive investment strategies, and an investment in an index fund is one of the most practical passive investment strategies, especially for small investors. 3. If you believe in the _______ form of the EMH, 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. A) semistrong B) strong C) weak D) all of the above E) none of the above Answer: C Difficulty: Easy Rationale: The information described above is market data, which is the data set for the weak form of market efficiency. The semistrong form includes the above plus all other public information. The strong form includes all public and private information. 237
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The Efficient Market Hypothesis 4. If you believe in the _________ form of the EMH, you believe that stock prices reflect all available information, including information that is available only to insiders. A) semistrong B) strong C) weak D) all of the above E) none of the above Answer: B Difficulty: Easy Rationale: The strong form includes all public and private information. 5. If you believe in the reversal effect, you should A) buy bonds in this period if you held stocks in the last period. B) buy stocks in this period if you held bonds in the last period. C) buy stocks this period that performed poorly last period. D) go short. E) C and D Answer: C Difficulty: Easy Rationale: The reversal effect states that stocks that do well in one period tend to perform poorly in the subsequent period, and vice versa. 6. __________ focus more on past price movements of a firm's stock than on the underlying determinants of future profitability. A) Credit analysts B) Fundamental analysts C) Systems analysts D) Technical analysts E) All of the above Answer: D Difficulty: Easy Rationale: Technicians attempt to predict future stock prices based on historical stock prices. 238
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This note was uploaded on 05/09/2011 for the course MGMT 223 taught by Professor Zhenxi during the Spring '11 term at HKU.

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Chapter 11 The Efficient Market Hypothesis - Chapter 11 The...

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