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CHAPTER 6 EFFICIENT CAPITAL MARKETS TRUE/FALSE QUESTIONS (t) 1 Prices in efficient capital markets fully reflect all available information and rapidly adjust to new information. (t) 2 An efficient market requires a large number of profit-maximizing investors. (f) 3 If the efficient market hypothesis is true price changes are independent and biased. (t) 4 The random walk hypothesis contends that stock prices occur randomly. (f) 5 In his original article, Fama divided the efficient market hypothesis into two subhypotheses. (f) 6 The weak form of the efficient market hypothesis contends that stock prices fully reflect all public and private information. (t) 7 The weak form of the efficient market hypothesis contends that technical trading rules are of little value. (f) 8 Tests have shown that if small filters are used in simulating trading rules, these trading rules have produced above average returns after transactions costs are factored in. (f) 9 In tests of the semistrong-from EMH, it is not necessary to use risk-adjusted rates of return. (t) 10 Results of initial public offering (IPOs) studies tend to support the semi-strong EMH, because it appears that prices adjusted rapidly after initial underpricing. (t) 11 Results from studies on the effects of unexpected world events have consistently indicated that the price change is so rapid, that it takes place between the close of one day and the opening of the next day. (t) 12 Studies concerning quarterly earnings reports indicate that information in quarterly statements is of value and can provide an above-average risk- adjusted return. (t) 13 Results of studies concerning corporate insider trading indicate that corporate insiders generally enjoy above-average returns.
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(f) 14 The strong form of the efficient market hypothesis contends that only insiders can earn abnormal returns. (f) 15 Technical analysis and the efficient market hypothesis have a consistent set of assumptions concerning stock market behavior. (f) 16 Even when fees and costs are considered most mutual fund managers outperform the aggregate market. (f) 17 When considering markets in Europe, it is inappropriate to assume a level of efficiency similar to that for U.S. markets. MULTIPLE CHOICE CONCEPT QUESTIONS (e) 1 Which of the following would be inconsistent with an efficient market? a) Information arrives randomly and independently. b) Stock prices adjust rapidly to new information. c) Price changes are independent. d) Price changes are random. e) Price adjustments are biased. (a) 2 Fusion investing is the integration of the following elements of investment valuation: a) Fundamental value and investor sentiment. b) Fads and fashions. c) Technical analysis and investor sentiment. d) Historical prices and returns. e) Transaction costs and fundamental value.
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