FIN380 FINAL EXAM PRACTICE TEST| ACCURATE REAL EXAM
QUESTIONS AND VERIFIED ANSWERS WITH DETAILED RATIONALES
EACH | CURRENTLY TESTING AND FREQUENTLY TESTED
QUESTIONS |EXPERT VERIFIED
GRADED A+
PART 1: EFFICIENT MARKET HYPOTHESIS (Questions 1-25)
Q1. Stock market analysts have tended to be __________ in their
recommendations
to investors.
A) Slightly overly optimistic
B) Overwhelmingly optimistic
C) Slightly overly pessimistic
D) Overwhelmingly pessimistic
Answer: B
Rationale: Studies consistently show that stock market analysts are
overwhelmingly optimistic in their recommendations. The vast majority of
analyst recommendations are "buy" or "strong buy" rather than "sell" or
"strong sell." Option A is incorrect because it understates the extent of
optimism; it is not slight but overwhelming. Option C is incorrect because
analysts are not pessimistic; they are optimistic. Option D is incorrect
because pessimism is the opposite of what the evidence shows.
Q2. The tendency when the __________ performing stocks in one period are the
best performers in the next and the current __________ performers are lagging
the market later is called the reversal effect.
A) Worst; Best
B) Worst; Worst
C) Best; Worst
D) Best; Best
1
,Answer: A
Rationale: The reversal effect describes the phenomenon where the worst-
performing stocks in one period become the best performers in the next
period, and vice versa. This is a contrarian pattern. Option B is incorrect
because it describes the same group continuing to underperform, which is a
momentum pattern, not reversal. Option C is incorrect because it describes
best performers becoming worst, which is also reversal but incorrectly
phrased for the blank order. Option D is incorrect because it describes
best performers staying best, which is momentum.
Q3. Which of the following would violate the efficient market hypothesis?
A) Intel has consistently generated large profits for years
B) High-earnings growth stocks fail to generate higher returns for investors
than low earnings growth stocks
C) Prices for stocks before stock splits show, on average, consistently
positive abnormal returns
D) Investors earn abnormal returns months after a firm announces surprise
earnings
Answer: D
Rationale: If investors can earn abnormal returns months after a firm
announces surprise earnings, this suggests that information is not rapidly
incorporated into stock prices, violating the efficient market hypothesis.
Option A is incorrect because a company's profitability does not violate
EMH; stock prices should reflect this profitability. Option B is incorrect
because this is consistent with EMH; high growth does not guarantee high
returns. Option C is incorrect because if this pattern were consistently
exploitable, it would violate EMH, but evidence on stock splits is mixed.
2
,Q4. According to the semistrong-form of the efficient market hypothesis:
A) Stock prices do not rapidly adjust to new information
B) Future changes in stock prices cannot be predicted from any information
that is publicly available
C) Corporate insiders should have no better investment performance than
other investors even if allowed to trade freely
D) Arbitrage between futures and cash markets should not produce
extraordinary profits
Answer: B
Rationale: The semistrong-form EMH states that all publicly available
information is already reflected in stock prices. Therefore, future price
changes cannot be predicted from public information. Option A is incorrect
because the semistrong-form actually states that prices do rapidly adjust
to new information. Option C is incorrect because insider trading can
produce abnormal returns, which would violate the strong-form but not the
semistrong-form. Option D is incorrect because arbitrage profits can occur
even in semistrong-form efficient markets.
Q5. Evidence suggests that there may be __________ momentum and
__________
reversal patterns in stock price behavior.
A) Short-run; short-run
B) Long-run; long-run
C) Long-run; short-run
D) Short-run; long-run
Answer: D
Rationale: Empirical evidence indicates short-run momentum patterns (stocks
that perform well continue to perform well in the short term) and long-run
3
, reversal patterns (stocks revert to mean performance over longer periods).
Options A and B are incorrect because they incorrectly pair the same time
frame for both patterns. Option C is incorrect because it reverses the
correct pairing; momentum is short-run, not long-run, and reversal is
long-run, not short-run.
Q6. According to Markowitz and other proponents of modern portfolio theory,
which of the following activities would not be expected to produce any
benefits?
A) Diversifying
B) Investing in treasury bills
C) Investing in stocks of utility companies
D) Engaging in active portfolio management to enhance returns
Answer: D
Rationale: Modern portfolio theory suggests that diversification provides
benefits through risk reduction. However, active portfolio management to
enhance returns does not consistently produce benefits in efficient markets.
Options A, B, and C are incorrect because diversifying, investing in T-bills,
and investing in utilities can all provide benefits in terms of risk-return
tradeoffs.
Q7. The primary objective of fundamental analysis is to identify:
A) Well-run firms
B) Poorly run firms
C) Mispriced stocks
D) High P/E stocks
Answer: C
4
QUESTIONS AND VERIFIED ANSWERS WITH DETAILED RATIONALES
EACH | CURRENTLY TESTING AND FREQUENTLY TESTED
QUESTIONS |EXPERT VERIFIED
GRADED A+
PART 1: EFFICIENT MARKET HYPOTHESIS (Questions 1-25)
Q1. Stock market analysts have tended to be __________ in their
recommendations
to investors.
A) Slightly overly optimistic
B) Overwhelmingly optimistic
C) Slightly overly pessimistic
D) Overwhelmingly pessimistic
Answer: B
Rationale: Studies consistently show that stock market analysts are
overwhelmingly optimistic in their recommendations. The vast majority of
analyst recommendations are "buy" or "strong buy" rather than "sell" or
"strong sell." Option A is incorrect because it understates the extent of
optimism; it is not slight but overwhelming. Option C is incorrect because
analysts are not pessimistic; they are optimistic. Option D is incorrect
because pessimism is the opposite of what the evidence shows.
Q2. The tendency when the __________ performing stocks in one period are the
best performers in the next and the current __________ performers are lagging
the market later is called the reversal effect.
A) Worst; Best
B) Worst; Worst
C) Best; Worst
D) Best; Best
1
,Answer: A
Rationale: The reversal effect describes the phenomenon where the worst-
performing stocks in one period become the best performers in the next
period, and vice versa. This is a contrarian pattern. Option B is incorrect
because it describes the same group continuing to underperform, which is a
momentum pattern, not reversal. Option C is incorrect because it describes
best performers becoming worst, which is also reversal but incorrectly
phrased for the blank order. Option D is incorrect because it describes
best performers staying best, which is momentum.
Q3. Which of the following would violate the efficient market hypothesis?
A) Intel has consistently generated large profits for years
B) High-earnings growth stocks fail to generate higher returns for investors
than low earnings growth stocks
C) Prices for stocks before stock splits show, on average, consistently
positive abnormal returns
D) Investors earn abnormal returns months after a firm announces surprise
earnings
Answer: D
Rationale: If investors can earn abnormal returns months after a firm
announces surprise earnings, this suggests that information is not rapidly
incorporated into stock prices, violating the efficient market hypothesis.
Option A is incorrect because a company's profitability does not violate
EMH; stock prices should reflect this profitability. Option B is incorrect
because this is consistent with EMH; high growth does not guarantee high
returns. Option C is incorrect because if this pattern were consistently
exploitable, it would violate EMH, but evidence on stock splits is mixed.
2
,Q4. According to the semistrong-form of the efficient market hypothesis:
A) Stock prices do not rapidly adjust to new information
B) Future changes in stock prices cannot be predicted from any information
that is publicly available
C) Corporate insiders should have no better investment performance than
other investors even if allowed to trade freely
D) Arbitrage between futures and cash markets should not produce
extraordinary profits
Answer: B
Rationale: The semistrong-form EMH states that all publicly available
information is already reflected in stock prices. Therefore, future price
changes cannot be predicted from public information. Option A is incorrect
because the semistrong-form actually states that prices do rapidly adjust
to new information. Option C is incorrect because insider trading can
produce abnormal returns, which would violate the strong-form but not the
semistrong-form. Option D is incorrect because arbitrage profits can occur
even in semistrong-form efficient markets.
Q5. Evidence suggests that there may be __________ momentum and
__________
reversal patterns in stock price behavior.
A) Short-run; short-run
B) Long-run; long-run
C) Long-run; short-run
D) Short-run; long-run
Answer: D
Rationale: Empirical evidence indicates short-run momentum patterns (stocks
that perform well continue to perform well in the short term) and long-run
3
, reversal patterns (stocks revert to mean performance over longer periods).
Options A and B are incorrect because they incorrectly pair the same time
frame for both patterns. Option C is incorrect because it reverses the
correct pairing; momentum is short-run, not long-run, and reversal is
long-run, not short-run.
Q6. According to Markowitz and other proponents of modern portfolio theory,
which of the following activities would not be expected to produce any
benefits?
A) Diversifying
B) Investing in treasury bills
C) Investing in stocks of utility companies
D) Engaging in active portfolio management to enhance returns
Answer: D
Rationale: Modern portfolio theory suggests that diversification provides
benefits through risk reduction. However, active portfolio management to
enhance returns does not consistently produce benefits in efficient markets.
Options A, B, and C are incorrect because diversifying, investing in T-bills,
and investing in utilities can all provide benefits in terms of risk-return
tradeoffs.
Q7. The primary objective of fundamental analysis is to identify:
A) Well-run firms
B) Poorly run firms
C) Mispriced stocks
D) High P/E stocks
Answer: C
4
