Market Efficiency

8 questions

1. 1. According to the strong form of efficient market hypothesis, the stock prices incorporate ________ about the company.
   All publicly available informationAll privately available informationAll publicly and privately available information
2. 2. Which of the following statements is FALSE about short selling?
   Short selling increases market efficiencyShort selling helps in price discoveryAn investor will generally short sell if he feels that the stock is underpriced.
3. 3. Which of the following statements about efficient market hypothesis (EMH) is TRUE?
   According to the strong form, the stock prices reflect all the information that can be derived by examining market trading data.According to the semi strong form, a firm's stock price reflects all publicly available information about a firm's prospects.According to the weak form, traders can use past data to earn abnormal returns.
4. 4. According to the semistrong form of the efficient market hypothesis, the stock prices fully reflect:
   All historical price information. All publicly available information. All relevant information including insider information.
5. 5. Assume that a company announces a large special dividend. Assume that the markets are efficient and there is no information leak. You would expect
   An abnormal price change at the announcement.An abnormal price increase before the announcement.An abnormal price decrease after the announcement.
6. 6. Which of the following is TRUE, according to the efficient market hypothesis?
   High-beta stocks are consistently overpriced Low-beta stocks are consistently underpriced If stocks have positive alpha it will disappear quickly
7. 7. According to the efficient markets view, value stocks earn higher expected return than growth stocks because:
   Value stocks are less risky than growth stock Value stocks have higher expected future payoffs than growth stockValue stocks have lower expected future payoffs than growth stock
8. 8. Which of the following is not a possible explanation for the market anomaly known as January effect?
   Investors sell their loser stocks at the end of the year to off-set any capital gains. This leads to a fall in the prices of such stocks which the investor then picks up early in January at attractive prices.Portfolio managers are expected to present their annual reports on December 31. They drop their riskier stocks during December to make the portfolio look more stable. Then in January the risky stocks are picked back up to earn higher returns.There is high IPO activity in January and investors sell their other holdings in December and subscribe to these new IPOs in January.