Evidence of market inefficiency occurs when investors earn abnormal returns: Only in the short term. In any given quarter. In any given year. Consistently over the long term. All of the above answers are correct. None of the above answers is correct.

Evidence of market inefficiency occurs when investors earn abnormal returns: Only in the short term. In any given quarter. In any given year. Consistently over the long term. All of the above answers are correct. None of the above answers is correct.

Auditing: A Risk Based-Approach to Conducting a Quality Audit

10th Edition

ISBN:9781305080577

Author:Karla M Johnstone, Audrey A. Gramling, Larry E. Rittenberg

Publisher:Karla M Johnstone, Audrey A. Gramling, Larry E. Rittenberg

Chapter16: Advanced Topics Concerning Complex Auditing Judgments

Section: Chapter Questions

Problem 54RSCQ

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Concept explainers

Market Efficiency

Market efficiency refers to the market's ability to provide investors with all available information about investment options for buying and selling securities. Market efficiency reflects the true value of securities without undervaluing or overvaluing them. When the quality and quantity of information increase, the market becomes more efficient, allowing it to reduce arbitrage and obtain higher market returns from investment. In a well-functioning market, everyone receives all information completely and immediately at no cost. It opens up a plethora of opportunities for investors to access various investment options.

Question

Evidence of market inefficiency occurs when investors earn abnormal returns:

Only in the short term.
In any given quarter.
In any given year.
Consistently over the long term.
All of the above answers are correct.
None of the above answers is correct.

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Given the following anomalies, which is inconsistent with weak-form market efficiency? Day-of-the-week effect. Value effect. Earnings surprise. Stock split effect. All of the above answers are inconsistent with weak-form market efficiency. None of the above answers is consistent with weak-form market efficiency.
Beta calculations are subject to which of the following limitations? a. The market's rate of return varies from year to year. b. Beta is known to be erratic and unpredictable. c. Collecting rate of return data on individual assets is difficult. d. Beta is determined from historical data, and the stock's characteristics might have changed since hte measurement was performed.
Which of the following contradicts weak form efficiency? Group of answer choices 1- Stock prices do not reflect information that is only available to insiders. 2- Good or bad recent stock return performance continues over the next three months. 3- The cumulative abnormal returns continue to increase until six months after a firm announces a good unexpected earnings. 4- Technical analysis could not provide abnormal returns. Fundamental analysis could not provide abnormal returns.
Which of the following sources of market inefficiency would be most easily exploited?a. A stock price drops suddenly due to a large sale by an institution.b. A stock is overpriced because traders are restricted from short sales.c. Stocks are overvalued because investors are exuberant over increased productivity in the economy.
The efficient markets hypothesis identifies three forms of market efficiency. (a) You observed that high-level managers make superior returns on investments in their company’s stock. Would this be a violation of weak-form market efficiency? Would it be a violation of strong-form market efficiency? (b) If the weak form of the efficient market hypothesis is valid, must the strong form also hold? Conversely, does strong form efficiency imply weak form efficiency? (c) Stock XYZ, which traded for several months at a price of K72, and then declines to K65. if the stock eventually begins to increase in price, K72 is considered a resistance level because investors who bought originally at K72 will be eager to sell their shares as soon as they can break even on their investment. If everyone in the market believes in resistance levels, why do these beliefs not become self-fulfilling prophecies?
Suppose that, after conducting an analysis of past stock prices, you come up with the following observations. Which would appear to contradict the weak form of the efficient market hypothesis? A. The average rate of return is significantly greater than zero. B. The correlation between the return during a given week and the return during the following week is zero. C. One could have made superior returns by buying stock after a 10% rise in price and selling after a 10% fall. D. One could have made higher-than-average capital gains by holding stocks with low dividend yields.
Which of the following empirical observations appear to contradict weak form market efficiency? a. The average rate of return of stocks is significantly greater than zero b. The month-to-month time series autocorrelation of stock returns is not significantly different from zero c. A strategy of buying recent high-return stocks (winners) and shorting recent low-return stocks (losers) provides significant positive alpha d. Low dividend stocks provide higher-than-average capital gains e. None of the above
The weak form of the efficient market hypothesis implies that: CHOOSE ONE A. Investors can achieve abnormal returns, on average, using technical analysis, after adjusting for transaction costs and taxes. B. Insiders, such as specialists and corporate board members, cannot achieve abnormal returns on average. C. No one can achieve abnormal returns using market information. D. NONE OF THE ABOVE
Suppose that, after conducting an analysis of past stock prices, you come up with the following observations. Which would appear to contradict the weak form of the efficient market hypothesis? Explain.a. The average rate of return is significantly greater than zero.b. The correlation between the return during a given week and the return during the following week is zero.c. One could have made superior returns by buying stock after a 10% rise in price and selling after a 10% fall.d. One could have made higher-than-average capital gains by holding stocks with low dividend yields.
If markets systematically overreact, then the best stocks to buy today are those stocks which have: a. Recently performed exceedingly well b. Recently performed poorly c. Not yet reacted to economic changes d. Moved sharply above its recent high price
Describe clearly how theories from behavioural finance can justify the following abnormal phenomena of investment: (1) Investors exhibit tendency to overpay for assets with poor average return but a potential to deliver a huge payoff, such as penny stocks or corporate bonds of financially distressed companies. (2) Investors exhibit tendency to sell winning stocks too early but hold losing stocks for too long
Suppose company Z is already in financial distress and the equity holders are very close to default. Suddenly there is a shock that causes an increase in the standard deviation of the return on company Z's assets. Which of the following correctly describes the new situation faced by company Z? A) Debt value will increase with the shock and equity holder are more likely to default. B) Equity value will increase with the shock and equity holder are less likely to default. C) Both Debt value and equity value will increase but the likelihood of default is unchanged. D) Both debt value and equity value will decrease and the likehood of default will increase.