Which of the following statements is most accurate7 A continuous market most likely exists for a stock when:
A. numerous dealers are willing to make a market in the stock.
B. an overnight buildup of buy and sell orders for the stock occurs.
C. significant new information about the company is released to market participants.
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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.
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.
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