Question

For each question, select the correct answer then briefly in one or two sentences explain the...

For each question, select the correct answer then briefly in one or two sentences explain the ratoniale beyond the answer.

(1) Which of the following contradicts the proposition that the stock market is weakly efficient?

(A) An analyst is able to identify mispriced stocks by looking at stock charts.

(B) Mutual funds do not outperform the market on average.

(C) Some investors can earn abnormal profits.

(D) The autocorrelations of stock returns are not significantly different from zero

(2) Which of the following would provide the strongest evidence against the semi-strong form of the efficient market theory?

(A) Fundamental analysis does not help generate abnormal returns.

(B) Technical analysis is worthless in identifying mispriced stocks.

(C) Stock prices response to firms earnings announcements gradually.

(D) Mutual fund managers do not beat the market on average.

(3) A random walk occurs when

(A) Stock price changes are random but predictable.

(B) Stock prices respond slowly to both new and old information.

(C) Past information is useful in predicting future prices.

(D) Future price changes are uncorrelated with past price changes

(4) Which of the following statements is true about the efficient market hypothesis?

(A) It implies a rational market.

(B) It implies that everyone makes zero profit from trading.

(C) It implies perfect forecasting ability.

(D) It implies that prices do not fluctuate.

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Homework Answers

Answer #1

(1) B

Contradicting the hypothesis that market is weakly efficient, we want to mean that market is strongly efficient. It means, current price reflects the true picture and nobody has got any special inof by twhich traders will ear extra super normal profit. Hence, mutual fund managers cant beat average return

2) C

It is neither strong nor weak. So it may be fact that somebody may have special info which may affect the price. So with the announcement of earning of a company, stock price will increase or change.

3) D

Random walk suggest the incidents which are very random and cant be predicted. hence, change in future priuce cant be prodicted with change of older one.

4) B

Strong from means, price captures all the info. Hence, traders wont make any profit.

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