Equity Investments MCQ - Equity Investments Section 1

66 Tim observed that company XYZ’s share price reacts gradually to the public release of its annual report. With respect to efficient markets, which of the following most likely indicates the market where company XYZ trades?

Based on the convention used in the curriculum, the term „with respect to efficient markets‟ implies that the markets are efficient. If the market is efficient, the most likely reason for the stock price to „react gradually‟ is that the market is waiting for additional information.

67 If investors are able to earn abnormal returns by trading on non-public information, markets are least likely to be:

In both weak-form and semi-strong-form efficient markets, investors are able to earn abnormal returns by trading on private information.

68 An observation that the stocks with an above-average price-to-book ratio have consistently under performed those with below-average price-to-book ratio least likely contradicts:

This observation contradicts semi-strong and strong form market efficiency. Semi-strong-form efficient markets reflect all publically available information which includes financial statement data (including book value of a company) and financial market data (market price of a security). A strong-form efficient market is, by definition, also semi-strong and weak form efficient. This observation is not a contradiction to weakform market efficiency as financial statement data is not reflected in a security‟s price in such markets.

69 After the public announcement of higher than expected earnings, an investor makes abnormal returns by going long on the firm. This most likely violates which form of market efficiency?

In semi-strong efficient market, prices adjust quickly and accurately to new information and investors cannot earn abnormal profits on public announcements. Thus, the market is not semi-strong efficient. A market that is not semi-strong efficient is also not strong form efficient. However, the market could still be weak form efficient because past prices are not being used to make abnormal profits.

70 Which of the following is most likely to be a characteristic of an efficient security market?

In an efficient market, prices should be expected to react only to the “unexpected” or “surprise” element of information releases. Investors process the unexpected information and revise expectations accordingly.