Chapter Eight Test Bank

Chapter Eight

The Capital Markets and Market Efficiency

B 1. Capital markets trade securities with a life of

a. less than one year
b. more than one year
c. more than ten years
d. more than fifteen years

A 2. The most important function of the capital markets is the ___ function.
a. economic
b. continuous pricing
c. fair price
d. taxation

A 3. Which function of the capital markets facilitates the flow of capital from savers
to borrowers?
a. Economic
b. Continuous pricing
c. Fair price
d. Taxation

B 4. Which function of the capital markets enables market participants to get

accurate, up-to-date price information?
a. Economic
b. Continuous pricing
c. Fair price
d. Taxation

C 5. The ______ function of the capital markets removes the fear of buying or
selling at an unreasonable price.
a. economic
b. continuous pricing
c. fair price
d. taxation

D 6. Fair pricing of securities is associated with the

a. fair pricing theory
b. separation theorem
c. central limit theorem
d. efficient market hypothesis

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A 7. The “efficiency” referred to in the efficient market hypothesis is ______

efficiency.
a. informational
b. operational
c. taxation
d. inflation adjusted

C 8. The weak form of the efficient market hypothesis states that _____ are of no
use in predicting future stock prices.
a. balance sheets
b. earnings reports
c. charts
d. annual reports

D 9. People who employ charting techniques in the analysis of securities are called
a. operational security analysts
b. fundamental security analysts
c. informational security analysts
d. technical security analysts

D 10. To an investment professional, which of the following is most important?

a. Past prices
b. Past and present prices
c. Future prices
d. Present and future prices

A 11. A means of investigating the weak form of market efficiency is via a _____
test.
a. runs
b. charting
c. subjective
d. psychological

D 12. How many runs are in the following sequence? HHHTTTHTHTHHHTTH

a. 6
b. 7
c. 8
d. 9

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B 13. The _____ form of the efficient market hypothesis states that security prices
fully reflect all relevant publicly available information.
a. weak
b. semi-strong
c. strong
d. semi-efficient

B 14. Tests regarding stock splits or dividends are usually tests of the _____ form of
market efficiency.
a. weak
b. semi-strong
c. strong
d. semi-efficient

C 15. Inside information is associated with the ____ form of market efficiency.
a. weak
b. semi-strong
c. strong
d. semi-efficient

D 16. The notion that some stocks are priced more efficiently than others is
associated with the
a. weak form of the EMH
b. semi-strong form of the EMH
c. strong form of the EMH
d. semi-efficient market hypothesis

D 17. The random walk idea says that

a. stock prices move randomly
b. interest rates change randomly
c. the stock market averages change randomly
d. the news arrives randomly

A 18. In finance, the term _____ is associated with an unexplained result that
deviates from that expected by finance theory.
a. anomaly
b. paradigm
c. inefficiency
d. abnormal profit

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B 19. There is some evidence that ___ PE stocks outperform stocks with ____ PEs.
a. high, lower
b. low, higher
c. extreme, more normal
d. median, more unusual

A 20. The small firm effect states that

a. firms with low capitalizations outperform larger firms
b. firms with high capitalizations outperform smaller firms
c. firms with average capitalizations outperform average size firms
d. firms with large or small capitalizations outperform average size firms

A 21. Stock returns are inexplicably high in

a. January
b. May
c. September
d. November

B 22. A subfield of physics that is being applied to finance is

a. quantum mechanics
b. chaos theory
c. angular momentum
d. harmonic motion

B 23. Which of the following is a Fibonacci number?

a. 12
b. 13
c. 14
d. 15

A 24. An odd thing about Fibonacci numbers is

a. the frequency with which they appear in nature
b. their predictive ability
c. the fact that they are all even
d. the fact that they are all odd

B 25. The first five Fibonacci numbers are 1, 1, 2, 3, and 5. What is the sixth?
a. 6
b. 8
c. 12
d. Cannot be determined

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D 26. Leonardo Fibonacci discovered the sequence of numbers that bears his name
while exploring
a. the stars
b. the behavior of ants
c. scores of dart contests
d. the reproduction rates of rabbits

C 27. Which of the following is NOT one of the three primary functions of capital
markets?
a. Economic function
b. Continuous pricing function
c. Social welfare function
d. Fair price function

C 28. The small firm effect means that

a. small firms affect the market more than large firms
b. small firms affect the market less than large firms
c. low capitalization stocks tend to have a higher risk-adjusted return
d. low capitalization stocks tend to have a lower risk-adjusted return

A 29. The neglected firm effect means

a. stocks with a small security analyst following have a higher return
b. stocks with a large security analyst following have a higher return
c. stocks that investment managers monitor frequently have a higher return
d. stocks that investment managers monitor infrequently have a higher
return

B 30. The overreaction effect states that for stocks that experience extreme long-
term gains or losses
a. past winners significantly outperform past losers
b. past losers significantly outperform past winners
c. security analysts tend to exaggerate the impact of new information
d. security analysts tend to dampen the impact of new information

C 31. The day of the week effect states that the returns on
a. Tuesday and Thursday are higher than Monday, Wednesday, and Friday
b. Monday, Wednesday, and Friday are higher than Tuesday and Thursday
c. Monday are lower than returns on Wednesday and Friday
d. Monday are higher than returns on Wednesday and Friday

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