10. The Efficiency of Financial Markets

1. Which one of the following observations is evidence against the semi-strong form version of the efficient market hypothesis?

Fund managers on the average do not outperform the market. Some 50% of fund managers outperform the market. High beta stocks tend to have higher returns than low beta stocks. A stock price rises 50% after the announcement of profits and forecasts in line with market expectations.

2. A share price is said to follow a random walk when:

the share price has a clear pattern of a series of upward price movements followed by series downward price movements. the share price movement can be predicted from previous price movements. there is zero correlation between future and past price movements of the share. future share price movements are predictable to the extent that upward (downward) price movements are likely to be followed by further upward (downward) price movements.

3. Which one of the following is contrary to the weak form of market efficiency?

The average rate of return on shares is greater than zero. Excess returns cannot be made by buying shares that have risen most in the past. In January the market seems to consistently produce excess returns. A mutual fund has performed better than its rivals for 6 years in a row.

4. Which one of the following is contrary to the strong-form of market efficiency?

Stock prices tend to follow a random walk Stock prices fully reflect all available information. Stock prices reflection all information both public and private. Participants using inside information can make excess returns from stock purchases.

5. Which one of the following results is contrary to the weak form of market efficiency?

On average excess returns cannot be made using a filter rule compared to a buy-hold strategy. Share prices tend to follow a random walk. Excess profits can be made by insiders that buy shares using inside information. Stock prices react slowly to the arrival of new information.

6. In an efficient market which one of the following is FALSE?

Share prices react speedily to the arrival of new information. Future price movements cannot be predicted from past price movements. Share prices are generally not far from prices justified by their risk-return characteristics. Share prices do not reflect all publicly available information.

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