Equity Investments MCQ - Equity Investments Section 1

71 Dean Jones is using trading rules to generate abnormal profits. He is most likely acting on the assumption that the market is:

Trading rules that consistently generate abnormal risk-adjusted returns after trading costs contradict the weak form of market efficiency. Under weak form of market efficiency, securities fully reflect all past market data. This refers to all historical price and trading volume information forming the basis of technical analysis. Hence, past trading data is already reflected in current prices and returns cannot be generated by extrapolating price trends to forecast future price movements.

72 Considering markets are inefficient, which one of the following is most likely correct about passive portfolio management strategies?

In an inefficient market, an active investment strategy outperforms passive investment strategy as several opportunities may exist to earn superior returns.

73 If a market is weak-form efficient, then the return of a passively managed portfolio is likely to be:

In a weak-form efficient market, active portfolio strategies based on fundamental analysis can be used to outperform passive portfolio strategies.

74 Taylor observes that stock X’s price is on an upward trend. He expects this upward trend to continue and decides to buy the stock. Taylor assumes that the market is:

Taylor is acting as a technical analyst. He is using past prices and volume to predict future prices, which contradicts weak-form market efficiency.

75 Jacob is interested in buying shares of GSK. He, therefore, does a thorough research on pharma sector and studies GSK in depth. His analysis involves the estimation of an asset’s value using earnings and sales forecasts, and risk estimates as well as economic growth, inflation and interest rates prevailing. In such a scenario, Jacob’s analysis for investment in GSK assumes markets are:

Jacob is acting as a fundamental analyst by using publicly available information to estimate a security‟s intrinsic value to determine if the security is mispriced, which contradicts semi-strong form of market efficiency.