FInance 383 Study Guide Exam 2

We might be cooked...

Random Walk

Stock prices should follow a random walk; The hypothesis that prices of securities fully reflect available information about securities

Efficient Market Hypothesis

The hypothesis that prices of securities fully reflect available information about securities

Weak-form EMH

Stock prices already reflect all past information

Semistrong-form EMH

Stock prices already reflect all publicly available information

Strong-form EMH

Stock prices already reflect all relevant information

Insiders are able to profitably trade and earn abnormal returns prior to the announcement of positive news. This is violation of which form of efficiency?

Strong-form efficiency

Which of the following is correct?

If a strong market is semi strong-form efficient, it is also strong-form efficient

Technical Analysis

Research on recurrent/predictable price patterns and on proxies for buy/sell pressure in market

Resistance level

Unlikely for stock/index to rise aboveuS

Support level

Unlikely for stock/index to fall below

Fundamental Analysis

Research of determinants of stock value

Which of the following is not a method employed by followers of technical analysis?

Earning forecasting

Passive Investment Strategy

Proponents of the EMH typically advocate a passive investment strategy

Someone who invests in Vanguard Index 500 mutual fund could most accurately be described as using which approach?

Passive investment

Active management

assumes market inefficiency

Passive management

consistent with semistrong efficiency

Magnitude issue

Efficiency is relative

Selection bias issue

Investors who find successful investment schemes are less inclined to share findings

Lucky event issue

Lucky investments receive disproportionate attention

Which of the following is not a topic related to the debate over market efficiency?

IPO results

Momentum effect (short horizons)

Tendency of poorly- or well-performing stocks to continue abnormal performance in following periods

Reversal effect (long horizons)

Tendency of poorly- or well-performing stocks to experience reversals in following periods

Anomalies

Price behavior that differs from the behavior predicted by the efficient market hypothesis

Interpreting Anomalies

identifying data points that deviate significantly from the norm, analyzing their context, determining if they represent errors, fraud, or legitimate new trends