Chapter 11 - The Efficient Market Hypothesis

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.

• Semistrong

• strong

• Weak

• All of the options are Correct.

• None of the options are correct.

A hybrid strategy is one where the investor

• uses both fundamental and technical analysis to select stocks.

• selects the stocks of companies that specialize in alternative fuels.

• selects some actively-managed mutual funds on their own and uses an investment

  advisor to select other actively-managed funds.

• Maintains a passive core and augments the position with an actively-managed portfolio.

Proponents of the EMH typically advocate

• an active trading strategy

• investing in an index fund

• a passive investment strategy

• an active trading strategy and investing in an index fund

• investing in an index fund and a passive investment strategy

_________ above which it is difficult for the market to rise.

• A book value is a value

• A resistance level is a value

• A support level is a value

• A book value and a resistance level are values

• A book value and a support level are values

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

• Semistrong

• Strong

• Weak

• All of the options are correct

• None of the options are correct

The debate over whether markets are efficient will probably never be resolved because of:

• the lucky event issue.

• the magnitude issue.

• the selection bias issue.

• All of the options are correct.

• None of the options are correct.

Basu (1977, 1983) found that firms with low P/E ratios

• earned higher average returns than firms with high P/E ratios.

• earned the same average returns as firms with high P/E ratios.

• earned lower average returns than firms with high P/E ratios.

• had higher dividend yields than firms with high P/E ratios.

Proponents of the EMH think technical analysts

•  should focus on relative strength

• should focus on resistance levels

• should focus on support levels.

• should focus on financial statements.

• are wasting their time.

Studies of positive earnings surprises have shown that there is:

• a positive abnormal return on the day positive earnings surprises are announced

• a positive drift in the stock price on the days following the earnings surprise

  announcement.

• a negative drift in the stock price on the days following the earnings surprise

  announcement.

• a positive abnormal return on the day positive earnings surprises are announced

  and a positive drift in the stock price on the days following the earnings surprise

  announcement.

• a positive abnormal return on the day positive earnings surprises are announced

  and a negative drift in the stock price on the days following the earnings surprise announcement.

On November 22, the stock price of Walmart was $69.50, and the retailer stock index was 600.30. On November 25, the stock price of Walmart was $70.25, and the retailer stock index was 605.20.

Consider the ratio of Walmart to the retailer index. On November 22 and November 25. Walmart is _______ the retail industry, and technical analysts who follow relative strength would advise _______ the stock.

• outperforming; buying

• outperforming; selling

• underperforming; buying

• underperforming; selling

• equally performing; neither buying nor selling

Answer explanation

Nov22 = Walmart 69.5/R.Index 600.3 = 11.58%

Nov25 = Walmart 70.25/R.Index 605.2 = 11.61%

Hence, Walmart is outperforming so we should buy it.