Although the verdict is not yet in the available

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43) Although the verdict is not yet in, the available evidence indicates that, for many purposes, the efficient market hypothesis is A) a good starting point for analyzing expectations. B) not a good starting point for analyzing expectations. C) too general to be a useful tool for analyzing expectations. D) none of the above. Answer: A 44) The efficient market hypothesis suggests that 10.2 True/False 1) Evidence that stock prices sometimes fall when a firm announces good news contradicts the efficient market hypothesis. Answer: FALSE 2) If the security markets are truly efficient, there is no need to pay for help selecting securities. Answer: TRUE 3) Evidence that a mutual fund has performed extraordinarily well in the past contradicts the efficient market hypothesis. Answer: FALSE 4) In an efficient market, every stock is a good choice. Answer: TRUE 5) Technical analysts look at historical prices for information to project future prices. Answer: TRUE 6) The evidence suggests technical analysts are not superior stock pickers. Answer: TRUE 7) If the markets are efficient, the optimal investment strategy will be to buy and hold so as to minimize transaction costs. Answer: TRUE 139 8) In an efficient market, abnormal returns are not possible even using inside information. Answer: FALSE 9) It is probably a good use of an investor's time to watch as many shows featuring technical analysts as possible. Answer: FALSE 10.3 Essay 1) How is it possible that a firm can announce a record breaking loss, yet its stock price rise when the announcement is made? 2) What is the optimal investment strategy according to the efficient market hypothesis? Why? 3) Explain what the market reaction will be in an efficient market if a firm announces a fully anticipated filing for bankruptcy. 4) Explain how the market's reaction to a mispriced security will lead to the correct pricing of all securities. 5) What is the role of the required return on investments in equity in stock valuation models? 140
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