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Give an explanation of each answer and choose the most correct:
1. If you believe in the form of the EMH, you believe that stock prices reflect all
relevant information including historical stock prices and current public information
about the firm, but not information that is available only to insiders.
A) semistrong
B) strong
C) weak
D) A, B, and C
E) none of the above
The efficient market hypothesis (EMH), alternatively known as the efficient market theory, is a
hypothesis that states that share prices reflect all information and consistent alpha generation is
impossible.
2. Proponents of the EMH typically advocate
A) an active trading strategy.
B) investing in an index fund.
C) a passive investment strategy.
D) A and B
E) B and C
The efficient market hypothesis (EMH) or theory states that share prices reflect all information.
The EMH hypothesizes that stocks trade at their fair market value on exchanges.
Proponents of EMH posit that investors benefit from investing in a low-cost, passive portfolio.
Opponents of EMH believe that it is possible to beat the market and that stocks can deviate
from their fair market values.
3. If you believe in the form of the EMH, you believe that stock prices reflect all
information that can be derived by examining market trading data such as the history of
past stock prices, trading volume or short interest.
A) semistrong
B) strong
C) weak
D) all of the above
E) none of the above
The weak-form hypothesis asserts that stock prices already reflect all the information that can be
derived by examining market trading data, such as the history of past prices, trading volume, or
short interest. This implies that trend analysis is fruitless: if such data ever conveyed reliable
signals about future performance, all investors would have become familiar with such signals
already.
4. If you believe in the form of the EMH, you believe that stock prices reflect all
available information, including information that is available only to insiders.
A) semistrong
B) strong
C) weak
D) all of the above
E) none of the above
The strong-form hypothesis states that stock prices reflect all information (from public and private
sources) relevant to the firm, including information available only to company insiders. This
version of EMH encompasses both the weak-form and the semi-strong-form EMH. It is quite
extreme. It implies that no investor has monopolistic access to information that influences prices.
Thus, no investor can consistently derive risk-adjusted excess returns. In fact, the strong-form
EMH assumes perfect markets, in which all information is cost-free and available to everyone at
the same time. In contrast, in an efficient market prices adjust rapidly to new public information.
5. If you believe in the reversal effect, you should
A) buy bonds in this period if you held stocks in the last period.
B) buy stocks in this period if you held bonds in the last period.
C) buy stocks this period that performed poorly last period.
D) go short.
E) C and D
A reversal is a change in the price direction of an asset. A reversal can occur to the upside or
downside. Following an uptrend, a reversal would be to the downside. Following a downtrend, a
reversal would be to the upside. Reversals are based on overall price direction and are not
typically based on one or two periods/bars on a chart.
6. focus more on past price movements of a firm's stock than on the underlying
determinants of future profitability.
A) Credit analysts
B) Fundamental analysts
C) Systems analysts
D) Technical analysts
E) Specialists
The assumptions of technical analysis directly oppose the notion of efficient markets.
The process of disseminating new information takes time.
Stock prices move to new equilibriums in a gradual manner.
Hence, stock prices move in trends that persist.
Therefore, technical analysts believe that good traders can detect the significant stock price
changes before others do. However, as confirmed by most studies, the capital market is weak-
form efficient as prices fully reflect all market information as soon as the information becomes
public. Though prices may not be adjusted perfectly in an efficient market, it is unpredictable
whether the market will over-adjust or under-adjust at any time. Therefore, technical analysts
should not generate abnormal returns and no technical trading system should have any value.
7. A long term movement of prices, lasting from several months to years is called .
A) a minor trend
B) a primary trend
C) an intermediate trend
D) trend analysis
E) B and D
Minor trends are merely day-to-day price movements; intermediate trends are "corrections", or
offsetting movements in one direction after longer-term movements in another direction; trends
lasting for the period described above are primary trends
8. above which it is difficult for the market to rise.
A) Book value is a value
B) Resistance level is a value
C) Support level is a value
D) A and B
E) A and C
It is difficult to identify specific factors that influence the market as a whole. The stock market is
a complex, interrelated system of large and small investors making uncoordinated decisions about
a huge variety of investments. "The market," so to speak, is not a living entity. Instead, it is just
shorthand for the collective values of individual companies.
There are basic economic principles that can help explain any up and down market movements,
and with experience and data, there are more specific indicators market experts have identified as
being significant.
9. was the grandfather of technical analysis.
A) Harry Markowitz
B) William Sharpe
C) Charles Dow
D) Benjamin Graham
E) none of the above
Charles Henry Dow (November 6, 1851 – December 4, 1902) was an American journalist who
co-founded Dow Jones & Company with Edward Jones and Charles Bergstresser. Dow also co-
founded The Wall Street Journal, which has become one of the most respected financial
publications in the world. He also invented the Dow Jones Industrial Average as part of his
research into market movements. He developed a series of principles for understanding and
analyzing market behavior which later became known as Dow theory, the groundwork
for technical analysis.
10. A daily fluctuation of little importance is called .
A) a minor trend
B) a primary trend
C) an intermediate trend
D) a market trend
E) none of the above
Trend minors usually last from a few days to several weeks. This is commonly described as a
small wave on a wave. The line is simply a horizontal line extending on the daily chart. Usually
formed in anticipation of some important news or economic announcements. Or in short, the Dow
Theory states that a Major Trend in a market can be more than one year or even several years.
Secondary Trend that occurs as a result of a momentary correction, is considered a natural or
temporary decline in the Major Trend and has a time limit of between three weeks to three
months. Meanwhile, Minor Trend, which has the shortest time limit, generally lasts less than three
weeks. Minor Trend This is the price fluctuation that occurs in the Secondary Trend. These trends
interact with each other over an indefinite period of time, from very short spanning minutes per
minute, to very long periods of time.
11. A trin ratio of less than 1.0 is considered as a .
A) bearish signal
B) bullish signal
C) bearish signal by some technical analysts and a bullish signal by other technical
analysts
D) bullish signal by some fundamentalists
E) C and D
Bullish divergences are, in essence, the opposite of bearish signals. Despite their ease of use and
general informational power, trading oscillators tend to be somewhat misunderstood in the trading
industry, even considering their close relationship with momentum. At its most fundamental level,
momentum is actually a means of assessing the relative levels of greed or fear in the market at a
given point in time
12. the return on a stock beyond what would be predicted from market movements
alone.
A) An excess economic return is
B) An economic return is
C) An abnormal return is
D) A and B
E) A and C
The correlation coefficient between stock returns for two non-overlapping periods should be zero.
If not, one could use returns from one period to predict returns in later periods and make abnormal
profits
13. The debate over whether markets are efficient will probably never be resolved because of
A) the lucky event issue.
B) the magnitude issue.
C) the selection bias issue.
D) all of the above.
E) none of the above.
Markets can be efficient even if some investors earn returns above the market average. Consider
the Lucky Event issue: Ignoring transaction costs, about 50% of professional investors, by
definition, will “beat” the market in any given year. The probability of beating it three years in a
row, though small, is not insignificant. Beating the market in the past does not predict future
success as three years of returns make up too small a sample on which to base correlation let
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