CFA Exam Question of the Day

Level I | Level II | Level III

2025-02-09

Question:
The ________ spread is the difference between the long-term Aaa yield and the yield on 1-month Treasury bills.

Select an Answer:
term structure
historical
long-term
default
Rationale:
The term-structure (or horizon) spread is the difference between the long-term Aaa yield and the yield on 1-month Treasury bills.

2025-02-08

Question:
Which of the following will lead to a decrease in the price of a stock, all else equal?

I. An increase in the systematic risk of the stock

II. An increase in the total variance of the stock

III. A decrease in its covariance with the market

IV. An increase in the growth rate of its dividends

Select an Answer:
I and III
II only
I only
IV only
III only
Rationale:
An increase in the stock's expected rate of return decreases the price of the stock. This will happen if the stock's systematic risk increases so I is a correct choice. Note that the systematic risk decreases when the security's covariance with the market decreases. Hence, III is excluded.

An increase in the variance of the stock does not necessarily change its expected return. Only if the systematic component of the stock's variance changes will the expected return change, causing a price change. Therefore II is not a correct choice.

Finally, an increase in the growth rate of dividends will increase the stock price, so IV is also not a correct choice.

2025-02-07

Question:
Which of the following assumptions are central to the efficient capital market hypothesis?

Select an Answer:
A large number of profit maximizers analyze and value securities.
Investors adjust security prices only after careful analysis.
Information comes to the market in a cyclical fashion.
All of these answers are correct.
Rationale:
An efficient capital market is one in which security prices adjust rapidly to the arrival of new information. Such an informationally-efficient market is based on three assumptions:
  1. That a large number of competing participants analyze and value securities independently.
  2. That new information comes to the market in a random fashion.
  3. That competing investors attempt to adjust security prices rapidly to reflect the new information's effects.

2025-02-06

Question:
Which of the following statements is true?

Select an Answer:
A fundamental premise of technical analysis is that financial ratios and other market information can be used to spot stock trends that can be exploited for profit opportunities. Successful technical analysis and any form of the EMH are incompatible.
A fundamental premise of technical analysis is that market experts act on information before other investors do, which is compatible with only the weak and semi-strong form EMHs.
Successful technical analysis is not ruled out by the weak-form EMH, although it is by the two higher forms of the hypothesis.
Successful technical analysis and efficient capital markets are incompatible. A fundamental premise of technical analysis is that stock prices move in trends, which is contrary to any form of the EMH.
Efficient capital markets do not preclude the possibility of successful technical analysis. Under efficient capital markets, the technical analysis claim that investment professionals can outperform the general market is not in dispute.
Rationale:
The theory behind technical analysis asserts that stock prices move in trends that persist. This is the result of an uneven distribution of information, wherein investment professionals are the first to act upon new information. They are then followed by aggressive investors, and then the remaining majority of investors, resulting in price movement trend rather than in an instantaneous adjustment. Technical analysis attempts to find and take advantage of these ongoing price trends through past market data (rather than nonmarket data such as financial ratios). But under efficient capital markets and any form of the EMH, past market data is already reflected in current prices, and cannot be used to discover trends.

2025-02-05

Question:
Corporate insiders:

Select an Answer:
have been found not to experience abnormal positive returns. This finding supports the semi-strong form EMH, but is irrelevant to the weak-form EMH.
have been found not to experience abnormal positive returns. In fact, they have tended to have abnormal negative returns. This finding does not support the strong-form EMH.
have been found to experience abnormal positive returns. This finding does not support the semi-strong form of the EMH.
have been found to experience abnormal positive returns. This finding does not support the strong-form EMH.
have been found not to experience abnormal positive returns. In fact, they have tended to have abnormal negative returns, which supports the strong-form EMH.
have been found not to experience abnormal positive returns. This finding supports the strong-form EMH.
Rationale:
The strong-form EMH asserts that securities prices reflect all information, public and private. The theory thus contends that corporate insiders should not earn abnormal positive returns. In fact, it must contend that they as a group do not have access to any private information, because having such information would make above-average returns an essentially unavoidable result. The weaker forms of the EMH do not make any claims about the private information, making the performance of corporate insiders irrelevant to them.