Corporate Finance Test #2 (10, 13-15, 17-19) || with Exact
Answers.
The statement that stock prices follow a random walk implies that correct answers successive
price changes are independent of each other.
Which of the following is a statement of weak-form efficiency? correct answers If markets are
efficient in the weak form, then it is impossible to make consistently superior profits by using
trading rules based on past returns.
Which of the following statements is (are) true if the strong-form efficient market hypothesis
holds? correct answers Stock prices reflect all available information.
If the weak form of market efficiency holds, then correct answers technical analysis is useless,
stock prices reflect all information contained in past prices, and stock price returns follow a
random walk.
Informational efficiency in financial markets results in stock prices being correct answers fairer
If markets are efficient, which of the following investors should achieve superior returns over
time? correct answers Investors who choose stocks by throwing darts at a list of stocks in the
financial pages of a newspaper
Analysts who spend considerable time evaluating the best stocks to buy
Mutual fund managers who manage other people's money for a living
None of the options are correct (correct)
The semistrong form of efficiency focuses on the economic ineffectiveness of the following type
of information: correct answers publicly available information.
An abnormal stock return is calculated as the correct answers return on the stock minus the
return on the market.
For most stocks, a scatter plot chart of stock returns versus past stock returns will appear as
correct answers a shotgun pattern centered close to the origin.
Analysis of past monthly movements in Wal-Mart's stock price has produced the following
estimates: a = -0.45 percent and b = 0.5. If the market index subsequently rises by 5 percent
while Wal-Mart's stock price rises by 3 percent, what is the abnormal change in Wal-Mart's stock
price? correct answers Expected change: -0.45 + 0. 5(+5) = 2.05; Abnormal return = 3 - 2.05
= +0.95%.
, If the abnormal return for a stock during the first week is +5 percent and +3 percent during the
second week, what is the abnormal return for the two-week period? correct answers Abnormal
return = (1.05)(1.03) - 1
= 8.15%.
In order to test the strong form of market efficiency, researchers have examined the correct
answers recommendations of professional security analysts, performance of mutual funds, and
performance of pension funds.
Suppose that a lawyer works for a firm that advises corporate firms planning to sue other
corporations for antitrust damages. He finds that he can "beat the market" by short selling the
stock of firms that will be sued. This hypothetical finding would violate the correct answers
strong-form hypothesis of market efficiency.
The following are anomalies countering the efficient market hypothesis except correct answers
trading rules based on patterns.
The study of behavioral finance has best helped explain which of the following investor
behaviors? correct answers Investors are generally too slow to update their beliefs in the face of
new evidence.
If stock returns follow a random walk pattern, then knowing the history of stock returns is not
useful for predicting future stock returns. correct answers True
In an efficient market, information is costless. correct answers False
The weak form of efficient market theory implies that technical analysis is valuable. correct
answers False
The small-firm effect may constitute evidence against market efficiency. correct answers True
Behavioral finance deals with the idea that individual investors have built-in biases and
misconceptions that can drive prices away from fair values. correct answers True
Chapter 14 correct answers McGraw Hill Connect
The change in a firm's retained earnings is correct answers the difference between the net income
earned and the dividends paid during a year.
Internally generated cash is calculated as correct answers retained earnings plus depreciation.
Generally, nonfinancial U.S. corporations have financed their capital expenditures through
correct answers internally generated cash.
Answers.
The statement that stock prices follow a random walk implies that correct answers successive
price changes are independent of each other.
Which of the following is a statement of weak-form efficiency? correct answers If markets are
efficient in the weak form, then it is impossible to make consistently superior profits by using
trading rules based on past returns.
Which of the following statements is (are) true if the strong-form efficient market hypothesis
holds? correct answers Stock prices reflect all available information.
If the weak form of market efficiency holds, then correct answers technical analysis is useless,
stock prices reflect all information contained in past prices, and stock price returns follow a
random walk.
Informational efficiency in financial markets results in stock prices being correct answers fairer
If markets are efficient, which of the following investors should achieve superior returns over
time? correct answers Investors who choose stocks by throwing darts at a list of stocks in the
financial pages of a newspaper
Analysts who spend considerable time evaluating the best stocks to buy
Mutual fund managers who manage other people's money for a living
None of the options are correct (correct)
The semistrong form of efficiency focuses on the economic ineffectiveness of the following type
of information: correct answers publicly available information.
An abnormal stock return is calculated as the correct answers return on the stock minus the
return on the market.
For most stocks, a scatter plot chart of stock returns versus past stock returns will appear as
correct answers a shotgun pattern centered close to the origin.
Analysis of past monthly movements in Wal-Mart's stock price has produced the following
estimates: a = -0.45 percent and b = 0.5. If the market index subsequently rises by 5 percent
while Wal-Mart's stock price rises by 3 percent, what is the abnormal change in Wal-Mart's stock
price? correct answers Expected change: -0.45 + 0. 5(+5) = 2.05; Abnormal return = 3 - 2.05
= +0.95%.
, If the abnormal return for a stock during the first week is +5 percent and +3 percent during the
second week, what is the abnormal return for the two-week period? correct answers Abnormal
return = (1.05)(1.03) - 1
= 8.15%.
In order to test the strong form of market efficiency, researchers have examined the correct
answers recommendations of professional security analysts, performance of mutual funds, and
performance of pension funds.
Suppose that a lawyer works for a firm that advises corporate firms planning to sue other
corporations for antitrust damages. He finds that he can "beat the market" by short selling the
stock of firms that will be sued. This hypothetical finding would violate the correct answers
strong-form hypothesis of market efficiency.
The following are anomalies countering the efficient market hypothesis except correct answers
trading rules based on patterns.
The study of behavioral finance has best helped explain which of the following investor
behaviors? correct answers Investors are generally too slow to update their beliefs in the face of
new evidence.
If stock returns follow a random walk pattern, then knowing the history of stock returns is not
useful for predicting future stock returns. correct answers True
In an efficient market, information is costless. correct answers False
The weak form of efficient market theory implies that technical analysis is valuable. correct
answers False
The small-firm effect may constitute evidence against market efficiency. correct answers True
Behavioral finance deals with the idea that individual investors have built-in biases and
misconceptions that can drive prices away from fair values. correct answers True
Chapter 14 correct answers McGraw Hill Connect
The change in a firm's retained earnings is correct answers the difference between the net income
earned and the dividends paid during a year.
Internally generated cash is calculated as correct answers retained earnings plus depreciation.
Generally, nonfinancial U.S. corporations have financed their capital expenditures through
correct answers internally generated cash.
