Test Bank for Investments: Analysis and Management, 14th Edition, Charles P. Jones Gerald R.

Test Bank for Investments: Analysis and

Management, 14th Edition, Charles P. Jones Gerald
R. Jensen

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Type: Multiple Choice
1. What is meant by the statement that an efficient market prices securities “correctly?”

a. The prices reported by the securities exchanges accurately reflect real transactions.
b. Riskier securities are priced to yield higher returns.
c. The expected return on securities is equal to the risk-free rate of return.
d. Both buyers and sellers agree that the prices are fair.

Ans: b
Difficulty: Easy
Ref: The Concept of an Efficient Market

2. What is the most important determinant of stock price in an efficient market?

a. Information about past events and beliefs about future events

b. The trading system that connects buyers and sellers within the market
c. The number of traders participating in the market
d. The ability of investors to perfectly adjust prices based on new information

Ans: a
Difficulty: Easy
Ref: The Concept of an Efficient Market

3. A characteristic of an efficient market is that:

a. prices adjust perfectly to new information.

b. announced information events tend to be dependent on one another.
c. investors are price takers.
d. individual investors have the ability to affect security prices.

Ans: c
Difficulty: Easy
Ref: The Concept of an Efficient Market

4. An efficient market requires that:

a. all investors are rational and react quickly to new information.

b. information can be obtained at a considerable cost by investors.
c. new information does not have a significant effect on market prices.
d. investors react quickly and fully to new information.

Ans: d
Difficulty: Medium
Ref: The Concept of an Efficient Market
5. In an efficient market, the expected abnormal return on a security is:
a. equal to zero.
b. equal to the risk-free rate of return.
c. equal to the security’s required return.
d. greater than the security’s required return.

Ans: a
Difficulty: Medium
Ref: The Concept of an Efficient Market

6. Which of the following statements regarding Warren Buffett’s wager with Protege Funds
is most accurate?

a. The index fund is outperforming the hedge funds, thus supporting market efficiency.
b. The index fund is outperforming the hedge funds, thus countering market efficiency.
c. The index fund is underperforming the hedge funds, thus supporting market efficiency.
d. The index fund is underperforming the hedge funds, thus countering market efficiency.

Ans: a
Difficulty: Medium
Ref: The Concept of an Efficient Market

7. A test which investigates whether publicly available financial accounting information can
be used to generate abnormal returns is a direct test of:

a. weak form market efficiency.

b. semi-strong form market efficiency.
c. strong form market efficiency.
d. mean variance market efficiency.

Ans: b
Difficulty: Easy
Ref: How to Test for Market Efficiency

8. Using technical analysis to consistently earn abnormal returns is consistent with which
form of the Efficient Market Hypothesis?

a. None
b. Weak form
c. Semi-strong form
d. Strong form

Ans: a
Difficulty: Medium
Ref: How to Test for Market Efficiency
9. What is meant by the expression stock prices follow a “random walk?”
a. The best prediction of next period’s price change is last period’s price change.
b. Stock price changes do not depend statistically on prior price changes.
c. Stock price changes tend to be positive.
d. Stock price changes do not reflect market information.

Ans: b
Difficulty: Medium
Ref: How to Test for Market Efficiency

10. According to the strong form of the efficient market hypothesis, which investors should
expect to earn abnormal returns?

a. Investors with superior analytic ability

b. Investors with access to nonpublic information
c. Investors with access to public and nonpublic information
d. No investors

Ans: d
Difficulty: Medium
Ref: Forms of Market Efficiency

11. Research suggests company insiders earn abnormal returns on their stock transactions.
What does this research mean for the efficient market hypothesis (EMH)?

a. Insider trading has nothing to do with the EMH.

b. Profitable insider trading contradicts all forms of the EMH.
c. Profitable insider trading contradicts only the weak form of the EMH.
d. Profitable insider trading contradicts only the strong form of the EMH

Ans: d
Difficulty: Medium
Ref: How to Test for Market Efficiency

12. Which of the following is the best definition of “behavioral finance?”

a. Behavioral finance studies how financial market participants behave.

b. Behavioral finance studies the ethical behavior of investors.
c. Behavioral finance studies what investors should do to optimize performance.
d. Behavioral finance studies how investor biases and emotions affect stock prices.

Ans: d
Difficulty: Easy
Ref: Behavioral Finance

13. Which of the following is an investment strategy that relies on the “overreaction
hypothesis?”
a. Buy and hold
b. Value investing
c. Momentum
d. Contrarian

Ans: d
Difficulty: Medium
Ref: Market Anomalies

14. What is meant by the “disposition effect?”

a. Investors are more likely to sell winners than losers.

b. Investors are more likely to sell losers than winners.
c. Investors sell both winners and losers too soon.
d. Investors hold both winners and losers too long.

Ans: a
Difficulty: Easy
Ref: Behavioral Finance

15. Research suggests that low P/E stocks outperform high P/E stocks. Why is this finding an
anomaly?

a. Low P/E stocks tend to have higher risk than high P/E stocks.
b. Low P/E stocks are temporarily out of favor but may have strong prospects.
c. The low P/E effect contradicts the Efficient Market Hypothesis.
d. Low P/E stocks are often weak companies.

Ans: c
Difficulty: Medium
Ref: Market Anomalies

16. Which of the following best describes the so-called size effect?

a. On average, small cap stocks return more than large cap stocks.
b. On average, large cap stocks return more than small cap stocks.
c. On average, small cap stocks earn abnormal returns.
d. Small cap stocks tend to perform exceptionally well during bull markets.

Ans: c
Difficulty: Difficult
Ref: Market Anomalies

17. The momentum effect indicates that stocks with the:

a. best long-term past performance will continue to perform well.
b. best short-term past performance will continue to perform well.
c. worst long-term past performance will reverse course and perform well.
d. worst short-term past performance will reverse course and perform well.

Ans: b
Difficulty: Medium
Ref: Market Anomalies

18. Which of the following observations is most consistent with the EMH?

a. The January effect

b. The random walk
c. The low P/E effect
d. The success of the Value Line Investment Survey

Ans: b
Difficulty: Medium
Ref: Market Anomalies

19. The January effect can be largely attributed to the exceptional performance of:

a. low P/E stocks in January.

b. winner stocks in January.
c. loser stocks in January.
d. small stocks in January.

Ans: d
Difficulty: Easy
Ref: Some Conclusions about Market Efficiency

20. Which of the following is not an investor trading bias?

a. Loss aversion
b. Framing
c. Overconfidence
d. Mean reversion

Ans: d
Difficulty: Medium
Ref: Behavioral Finance
21. In tests of market efficiency, CAR refers to:

a. cumulative average return.

b. compound average return.
c. compound annual return.
d. cumulative abnormal return.

Ans: d
Difficulty: Medium
Ref: How to Test for Market Efficiency

22. The SUE effect suggests that superior performance is associated:

a. with stocks exhibiting strong recent price performance.

b. with stocks exhibiting weak long-term past price performance.
c. with stocks that have beat their earnings estimate.
d. with stocks that have low price multiples.

Ans: c
Difficulty:
Ref: Market Anomalies

23. The overconfidence bias tends to encourage investors to:

a. trade too much.

b. trade too infrequently.
c. sell winners to early.
d. hold losers to long.

Ans: a
Difficulty: Medium
Ref: Behavioral Finance

24. The value effect suggests that investors can earn abnormal returns by holding stocks
with:

a. low price multiples.

b. high price multiples.
c. small size and strong recent performance.
d. large size and strong recent performance.

Ans: a
Difficulty:
Ref: Market Anomalies
25. Data mining refers to the search for security return patterns by:

a. regressing firm stock returns against firm price multiples.

b. calculating CARs relative to firm earnings announcements.
c. applying various investment techniques to a set of return data.
d. applying filter tests to very large samples of return data.

Ans: c
Difficulty:
Ref: Tests of Market Efficiency

Type: True/False

1. The financial markets in the U.S. are less efficient than financial markets in less
developed countries.

Ans: False
Difficulty: Easy
Ref: The Concept of an Efficient Market

2. Evidence indicates that the majority of actively-managed, large cap equity funds
outperform the S&P 500 Index.

Ans: False
Difficulty: Easy
Ref: Some Conclusions about Market Efficiency

3. Efficient markets imply investors can not earn abnormal returns.

Ans: True
Difficulty: Medium
Ref: Market Anomalies

4. Financial economists have tested various technical trading rules and found they fail to
earn consistent abnormal returns.

Ans: True
Difficulty: Easy
Ref: How to Test for Market Efficiency
5. “Event studies” study return patterns around specific events such as stock splits or
dividend announcements.

Ans: True
Difficulty: Medium
Ref: The Concept of an Efficient Market

6. The SEC has laws to punish insider trading, which implies that the SEC believes in the
strong form of the Efficient Market Hypothesis.

Ans: False
Difficulty: Difficult
Ref: How to Test for Market Efficiency

7. If a public company reports earnings substantially lower than expected, the stock should
subsequently earn a positive abnormal return.

Ans: False
Difficulty: Easy
Ref: Market Anomalies

8. Historically, stock returns for companies with low P/E ratios have been better than
returns for stocks with high P/E ratios.

Ans: True
Difficulty: Easy
Ref: Market Anomalies

9. On average, small, less well-known companies have lower long-run returns than larger,
more well-known companies.

Ans: False
Difficulty: Easy
Ref: Market Anomalies

10. To have strong form market efficiency, semi-strong form efficiency is necessary.

Ans: True
Difficulty: Easy
Ref: The Concept of an Efficient Market
Test Bank for Investments: Analysis and Management, 14th Edition, Charles P. Jones Gerald R.

11. Behavioral finance integrates sociology with finance. It argues that investors often make
systematic mistakes when processing social information about market participants.

Ans: False
Difficulty: Medium
Ref: Behavioral Finance

12. One explanation for the January effect is that tax-induced sales in December temporarily
depress prices, and these prices tend to recover in January.

Ans: True
Difficulty: Medium
Ref: Market Anomalies

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