If a firm announces an unexpectedly large cash dividend, the efficient market hypothesis (EMH) would predict which of the following price changes at the announcement
An abnormal price change to occur before the announcement.
B. An abnormal price change to occur at the time of the announcement.
C. A gradual price change to occur for several weeks after the announcement.
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Documented market anomalies include all of the following EXCEPT:
A. the greater the ratio of book value/market value, the greater the risk-adjusted rate of return.
B. low P/E ratio stocks experience superior results to the market.
C. the ability for an investor to profit by buying stocks on Friday and selling them on Monday.
Cross-sectional returns studies contend that:
A. all securities should have equal risk-adjusted returns because security prices should reflect all public information that would influence the security’s risk.
B. all securities should have equal risk-adjusted returns because security prices should not reflect all public information that would influence the security’s risk.
C. securities should not have equal risk-adjusted returns because security prices should not reflect all public information that would influence the security’s risk.
Which of the following statements best describes the limits of arbitrage in correcting market anomalies
A. When fundamentals indicate that a stock is overvalued or undervalued, trading based on this information will be immediately profitable.
B. Arbitrage is not always risk-less as was shown during the internet stock bubble of the 1990s, when traders were short a stock and had to cover their positions at a much higher takeover price.
C. There is no limitation to arbitrage in correcting market anomalies because it is a risk-less trading activity and once there is a mispricing it will be exploited to its fullest.
Which of the following statements about arbitrage and market anomalies is most accurate
A. Investors of the funds that arbitrageurs and traders use are generally too patient and fail to remove funds in a timely manner when trades go against them.
B. Arbitrageurs have more capital at their disposal than they require enabling them to pursue any security mispricing.
C. In pairs trading, where an arbitrageur purchases the underpriced security and shorts the overpriced security, stock-specific risk remains.
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