1. It has been documented that there is significant negative autocorrelation in the returns on stocks when their annualized volatility exceeds 50%. Which is the weakest form of the efficient market hypothesis this is not consistent with? a. Strong. b. Semi-strong. c. Semi-weak. d. Weak. e. a and b.
2. The Wall Street Journal publishes the trades of insiders one month after the trades have been made. It has been documented that you can make significantly positive abnormal trading profits by simply trading in the same way that insiders have one month after they have traded. Which form or forms of the efficient market hypothesis is this consistent with?
a. Strong. b. Semi-strong. c. Semi-weak. d. Weak. e. a and b.
3. Which of the following facts is/are inconsistent with CAPM but consistent with the weak form of the Efficient Market Hypothesis?
a. The strategy that buys securities with betas greater than 1.5 earns higher returns than the market on average.
b. Every time the market drops more than 3 percent in one day, the next day the return on a positive beta security is positive on average.
c. Every time the market drops more than 3 percent in one day, the next day the excess return on a positive beta security is negative on average.
d. Although there is no correlation between a securities idiosyncratic volatility and its beta (systematic risk), those securities with high idiosyncratic volatility have higher returns on average than those with low idiosyncratic volatility.
e. a. and b.
4. Which of the following is/are inconsistent with the weak form of market efficiency?
a. On average, when a firm announces a takeover, the stock price of the target firm jumps up on the announcement.
b. On average, when a firm announces a takeover, the stock price of the bidding firm falls on the announcement.
c. On average, when a firm announces it will raise its dividend, the stock price rises on the announcement.
d. On average, when a firm announces it will raise its dividend at the market open, the return from the close of the market that day to the close of the market the following day exceeds that predicted by CAPM.
e. None of the above.