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Investments, 4th Canadian Edition, 4/e

Zvi Bodie, Boston University School of Management
Alex Kane, University of California, San Diego
Alan Marcus, Boston College
Stylianos Perrakis, Concordia University
Peter Ryan, University of Ottawa

Market Efficiency

Multiple Choice Quiz

Prepared by William Lim, University of New Brunswick.


1	Proponents of the EMH typically advocate
		A)	a. a passive investment strategy
		B)	b. investing in an index fund
		C)	c. an active trading strategy
		D)	a. and b.
		E)	b. and c.


2	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 this period that performed poorly last period
		C)	buy stocks in this period if you held bonds in the last period
		D)	go short
		E)	None of the above


3	The EMH states that stock prices should follow
		A)	a market trend
		B)	a primary trend
		C)	a predictable walk
		D)	a random walk
		E)	none of the above


4	The debate over whether markets are efficient will probably never be resolved because of
		A)	the selection bias issue
		B)	the magnitude issue
		C)	the lucky event issue
		D)	all of the above
		E)	none of the above


5	A common strategy for passive management is ____________.
		A)	creating an investment club
		B)	creating a small firm fund
		C)	creating an index fund
		D)	investing in cash only
		E)	investing in bonds only


6	Researchers in the early 1980s have found that most of the small firm effect occurs
		A)	during the summer months
		B)	during the spring months
		C)	in January
		D)	in December
		E)	randomly


7	A study by Ball, Kothari and Shanken (1995) examines the reversal effect and finds
		A)	the reversal effect is substantially diminished when portfolios are formed based on mid-year performance rather than December results.
		B)	the reversal effect seems to be concentrated in low-priced shares.
		C)	the risk-adjusted return from trying to exploit the reversal effect is effectively zero.
		D)	all of the above are true.
		E)	none of the above.


8	Proponents of the EMH think technical analysts
		A)	are wasting their time
		B)	should focus on resistance levels
		C)	should focus on support levels
		D)	should focus on financial statements
		E)	should focus on relative strength


9	Fama and French (1988) found that the return on the aggregate stock market
		A)	is higher when bank failures are high
		B)	is lower when the dividend yield is high
		C)	is unrelated to the dividend yield
		D)	is higher when the dividend yield is high
		E)	is unrelated to the economy


10	In an efficient market the correlation coefficient between stock returns for two non-overlapping time periods should be
		A)	positive and large.
		B)	positive and small.
		C)	negative and large.
		D)	negative and small.
		E)	zero

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