Question

Someone who invests in the hedge funds could most accurately be described as using which approach?

Multiple Choice

• Technical management

• Active management

• Arbitrage management

• Passive investment

Which of the following contradicts the proposition that the stock market is semistrong-form efficient?

Multiple Choice

• Over 25% of mutual funds outperform the market on average.

• Insiders earn abnormal trading profits.

• Applications of technical trading rules fail to earn abnormal returns.

• Every January, the stock market earns above-normal returns.

Assume that a company announces unexpectedly low earnings in a particular quarter. In an efficient market one might expect _____________.

Multiple Choice

• an abnormal price increase before the announcement

• an abnormal price increase immediately after the announcement

• an abnormal price decrease after the announcement

• no abnormal price change before or after the announcement

Which of the following statements is (are) not correct?

Multiple Choice

• If a market is semistrong-form efficient, it is also weak-form efficient.

• If a market is weak-form efficient, it is also semistrong-form efficient.

• If a market is strong-form efficient, it is also semistrong- and weak-form efficient.

• None of the above.

An implication of the efficient market hypothesis is that __________.

Multiple Choice

• high-beta stocks are consistently overpriced

• stocks are consistently fairly priced

• nonzero beta will quickly disappear

• low-beta stocks are consistently overpriced

Which of the following is (are) the characteristics of growth stocks?

I. Higher prices and higher risk.
II. Higher price/earnings ratio but lower price/book ratio.
III. Higher beta.

IV. Higher alpha.

Multiple Choice

• I and III only

• I, III and IV only

• II and III only

• III only

Answer 1

Q1) Active Management

Explanation:- A hedge fund uses active management because there is high risk involved with it and also needs to outperform the benchmark.

Q2) Over 25% of mutual funds outperform the market on average

Explanation:- If a market is semi-strong form efficient, then all the available public information is included in the price, and stocks are fairly priced. Thus over 25% of mutual fund cannot outperform the market as all the informations are included in price.

Increase in stock return in January is an anomaly called January effect.

Q3) An abnormal price decrease after the announcement

Explanation:- An unexpected low earnings decrease the demand for the stock , and hence decreases the price of stock.

Q4) If a market is weak form efficient, it is also semi strong form efficient.

Explanation:- This is a wrong statement as weak form market doesn't include all the publicly available information, so it cannot be semi-strong form efficient.

Q5) Stocks are consistently fairly priced

Explanation:- An efficient Market hypothesis implies that stocks are consistently priced

Q6) 1,3 and 4 only

Explanation:-A growth stock generally has high price and high risk, which leads to high beta. A growth stock generally outperforms the benchmark and hence has higher alpha.