Select an Answer: have been used in conjunction with event studies to test the semi-strong form EMH. The returns on stocks have been examined after stock splits were announced. These studies indicate that there are no abnormal returns following stock splits. This finding supports the semi-strong form EMH. have generally been accompanied by decreased dividends. Thus, stock splits have an informational effect implying lower dividends, leading to lower stock prices when stock splits are announced. have been used in conjunction with event studies to test the strong-form EMH. The returns on stocks have been examined after stock splits were announced. These studies indicate that there are no abnormal returns following stock splits. This finding does not support the strong-form EMH.
have been used in conjunction with event studies to test the weak-form EMH. The returns on stocks have been examined after stock splits were announced. These studies indicate that there are no abnormal returns following stock splits. This finding supports the weak-form EMH. have been used in conjunction with event studies to test the weak-form EMH. The returns on stocks have been examined after stock splits were announced. These studies indicate that there are abnormally high returns following stock splits, which does not support the weak-form EMH.
Rationale:
Stock splits have tended to be accompanied by dividend increases, making stock splits carry an informational effect. Stock prices have tended to increase prior to stock splits because of this informational effect. After the splits, firms that did not actually increase dividends experienced abnormal price decreases, while those that did increase dividends experienced no abnormal returns. These findings support the semi-strong form EMH, which holds that the actual stock split would not affect prices because it is irrelevant to firm value.
2025-05-08
Question: Which of the following statements about Global Equity Indexes is correct?
Select an Answer: The correlations between the three major global indexes indicate significant measurement problems in the construction of these indexes.
The FT/S&P - Actuaries World Indexes cover stocks in the UK. The Dow Jones World Stock Index combines over 2,200 companies worldwide and is quoted on a weekly basis. Several companies have developed country indexes in a consistent manner so the indexes can be directly compared. The Morgan Stanley Capital International Indexes are a compilation of various geographic indexes.
Rationale:
The FT/S&P Actuaries World Index cover stocks from 24 different countries. The Morgan Stanley Capital International Indexes are a compilation of various regional indexes.
The Dow Jones World Stock Index combines 2,200 companies worldwide and is quoted on a daily basis. The correlations between the three major global indexes are high, indicating consistency and accuracy in their results.
2025-05-07
Question: The theory of weak-form market efficiency implies which of the following?
I. Technical analysis is a waste of time.
II. Fundamental analysis is a waste of time.
III. It is fruitless to try and find patterns in security market data.
Select an Answer: I, II, and III III only
I and III II only II and III
Rationale:
The weak form of market efficiency maintains that security prices reflect all securities market information, including historical prices, trading volume, transactions characteristics, etc. in an unbiased fashion. Since technical analysis tries to find hidden patterns in data in the hopes of exploiting such information for future gains, a direct implication of the weak form of efficiency is that technical analysis is a complete waste of time. You should remember that there is an extraordinary amount of research which seems to confirm this tenet so you should always view technical analysis with suspicion.
2025-05-06
Question: An efficient capital market is one in which:
Select an Answer: transaction costs are low. trades occur continuously. the bid-ask spread is low. security prices adjust rapidly to the arrival of new information.
Rationale:
An efficient capital market is fundamentally one in which current prices reflect all information about the security. Some of the most important academic research over the past 20 years has analyzed whether capital markets are efficient. Opinions about relative efficiency continue to differ widely.
2025-05-05
Question: Suppose a researcher observes the following strategy in his studies:
If a company has been doing poorly and its CEO is deposed suddenly, buy its stock 5 days after the announcement and sell it after a month. On the other hand, if the company has been doing well, short-sell the stock 5 days after the announcement and close out the position after a month.
He finds that over the past 5 years, this strategy has yielded significantly positive abnormal returns. Which of the following statements is consistent with the above?
I. The results are due to data-mining.
II. The market is not efficient in the semi-strong sense.
III. The market is not efficient in the weak-form sense.
IV. The results are due to an improper model of risk and return.
Select an Answer: I, II, and IV IV only
I, II, and III I, III, and IV III only
II only
Rationale:
The fact that a strategy has worked in the past does not automatically mean that markets are inefficient. With potentially tens of thousands of schemes being tested by hundreds of researchers, it shouldn't be surprising that there will be many schemes which appear to be money-making machines. Only if the scheme holds for a very long period of time and works "out-of-sample" will it even be a candidate for challenging market efficiency. Further, there is also a concern that the model used to adjust for risks might be an incomplete model in that it does not capture all the sources of risk (e.g., CAPM versus the Fama-French 3-factor model).
Of course, it is also possible that markets are inefficient. In this case, the fact that a public piece of information like the deposition of the CEO is not impounded in the price of the stock 5 days after it becomes knowledge could indicate a violation of the semi-strong form of market inefficiency, though not the weak-form.
