Test for Chapter 14

Which one of these is the best means of creating a valuable financing opportunity?

• Fool investors in an efficient market

• Reduce a tax subsidy

• Create new securities to minimize tax benefits

• Create a new security to meet the needs of an unsatised clientele

• Issue new securities in a market niche of satisfied clientele

The market price of a stock tends to fluctuate throughout every trading day. This fluctuation is:

• consistent with the strong form of market efficiency because prices are controlled by insiders

• consistent with the semistrong form of the efficient market hypothesis because daily prices should adjust as new information becomes available

• inconsistent with the semistrong form of the efficient market hypothesis because prices should be stable

• inconsistent with the weak form of the ecient market hypothesis because all past information should already be included in the price

• a strong indicator that abnormal profits can be realized

In the three years prior to a forced departure of a top manager, stock prices, adjusted for market performance, on average

• decline about 40 percent

• decline about 60 percent

• remain stable

• increase about 20 percent

• decline about 20 percent

The Kolasinski and Li study of earnings surprises showed that

• earnings surprises tend to be predicted such that prices adjust prior to the announcement

• prices tend to adjust rapidly and efficiently to these announcements

• prices adjust slowly to earnings announcements

• prices tend to be unaffected by these types of announcements

• prices tend to overreact and then properly adjust the following day

An overconfident investor will tend to

• trade primarily in securities from their local area

• trade less frequently than an average investor

• underestimate their ability to pick a winning stock

• suer from the disposition effect

• underperform due to excess trading

The disposition effect refers to

• selling any security that creates a tax liability

• the urge to sell all your securities when market values decline

• the underreaction of investors to bad news

• selling your winners while holding your losers

• the hesitancy to sell a security of any firm with which you are affiliated

Ritter's study of SEO’s suggests that

• managers tend to be incorrect in their market assessment of the market movement of their firm’s stock price

• returns on SEO-issuing rms are statistically the same as those of style-matched non-issuers for the ve years following issuance

• managers appear to be able to successfully time SEO issues when the stock is overpriced

• firms are better at timing IPOs than they are at timing SEOs

• managers can only successfully time SEO issuance by pure chance

If financial markets are efficient, then attempting to accurately predict interest rates is

• relatively easy to do if you have a general understanding of finance and economics

• a relatively easy and accurate exercise

• an endeavor best left to corporate executives

• a waste of good time

• a little tricky but wise managers tend to succeed at it on an ongoing basis

If a market is strong form efficient then

• abnormal profits are obtainable by any and all investors

• technical analysts who study past market performance have a market advantage

• all investments should have positive NPVs

• company insiders have no advantage over John Q. Public investor

• company insiders are the only investors capable of earning an abnormal profit

An investor discovers that predictions about weather patterns published years in advance and found in the Farmer's Almanac are amazingly accurate. In fact, these predictions enable the investor to predict the health of the farm economy and therefore certain security prices. This finding is a violation of the

• semistrong form of the efficient market hypothesis

• efficient market hypothesis at all levels

• moderate form of the efficient market hypothesis

• weak form of the efficient market hypothesis

• strong form of the efcient market hypothesis