Quiz 2 Finance Theory

Random stock price changes are evidence against the:

• semi-strong form of the EMT.

• strong form of the EMT.

• random stock price changes are evidence for all forms of the EMT.

• weak form of the EMT.

Suppose that weather predictions published in an almanac could be used successfully to predict future prices of certain securities. This would provide evidence against the:

• This finding does not provide evidence against any form of the EMT.

• strong form of the EMT..

• weak form of the EMT.

• semi-strong form of the EMT.

Which of the following statements is true?

I. In a strong form efficient market, there are no mispriced assets.

II. In a strong form efficient market, all information is equally available to all investors.

• both I and II.

• II only.

• neither I nor II.

• I only.

If you can use _____ information to earn abnormal returns consistently, then the market cannot be _____ form efficient.

• public, semi-strong

• private, weak

• public, weak

• private, semi-strong

The evidence that stocks with low price-to-earnings ratios tend to have higher returns is an example of:

• seasonal anomalies.

• accounting anomalies.

• firm anomalies.

• event anomalies.

• statistical anomalies.

The term "capital structure" refers to:

• long-term debt, preferred stock, and common stock equity.

• current assets and current liabilities.

• total assets minus liabilities.

• shareholders' equity.

The traditional approach towards the valuation of a company assumes:

• that the overall capitalization rate holds constant with changes in financial leverage.

• that there is an optimum capital structure.

• that total risk is not altered by changes in the capital structure.

• that markets are perfect.

Two firms that are virtually identical except for their capital structure are selling in the market at different values. According to M&M

• one will be at greater risk of bankruptcy.

• the firm with greater financial leverage will have the higher value.

• this proves that markets cannot be efficient.

• this will not continue because arbitrage will eventually cause the firms to sell at the same value.

According to the concept of financial signaling, management behavior results in new debt issues being regarded as " news" by investors.

• good

• bad

• non-event

• risk-neutral

The cost of monitoring management is considered to be a (an):

• bankruptcy cost.

• transaction cost.

• agency cost.

• institutional cost.