Question 1
Flukey Gold Mines makes an unexpected announcement regarding gold production at 2 p.m. Shares of the company were traded at 12 p.m., 2.10 p.m., 2.30 p.m. and 4 p.m. If the market for Flukey Gold Mines' shares is efficient, then at which trade will the newly established share price fully reflect the new information?
Answer
a. 12 p.m.
b. 2.10 p.m.
c. 2.30 p.m.
d. 4 p.m.
Question 2
Which of the following results may be inconsistent with semi-strong form market efficiency?
Answer
a. Share returns follow a predictable trend after a profit announcement.
b. Share prices react instantaneously to profit announcements.
c. Abnormal returns are not detected around profit announcements.
d. None of the given options.
Question 3
If the stock market is efficient with respect to the incorporation of publicly available information, then:
Answer
a. charting a company's share prices is likely to be profitable.
b. technical analysis is likely to be profitable.
c. fundamental analysis is unlikely to be profitable.
d. insider information is unlikely to lead to abnormal profits.
Question 4
Which of the following statements is the most consistent with evidence provided on the EMH?
Answer
a. Technical analysis is a worthwhile trading strategy for most investors.
b. Most investors have access to private information.
c. Most investors should adopt a passive buy-and-hold strategy, most of the time.
d. Fundamental analysis is a worthwhile trading strategy for most investors.
Question 5
According to Liquidity Preference Theory long-term government bonds have a risk premium above short-term rates because:
Answer
a. the government cannot easily raise tax dollars to repay the bonds
b. long-term government bonds do not have risk premium
c. they are not guaranteed by the government
d. both long-term government bonds do not have risk premium and they are not guaranteed by the government
e. of longer time to maturity
Question 6
In an efficient market the current price is:
Answer
a. always lower
b. always higher
c. the prices do not change
d. neither too low nor too high
e. none of the given answers
Question 7
Spreading an investment across many assets will eliminate:
Answer
a. systematic risk
b. market risk
c. unsystematic risk
d. both systematic risk and market risk
e. none of the given answers
Question 8
The expectations theory of the term structure of interest implies:
Answer
a. that interest received on securities is in accordance with term to maturity.
b. that investors can expect to achieve the same return over any future period, regardless of the security in which they invest.
c. there is a premium due to uncertainty about the future level of interest rates.
d. there is a risk that borrowers may default on the payment of the principal.
Question 9
Liquidity premium theory suggests that:
Answer
a. there is a downward bias in the yield curve.
b. the market for some securities may be thinly traded; hence, investors require a reward for this risk.
c. there is an upward bias in the yield curve because interest rate risk decreases with term to maturity.
d. there is a premium on longer maturities versus shorter maturities due to increasing uncertainty about the future level of interest rates as maturity increases..
Question 10
The following one-year "forward" rates exist for each of the years 2012-2016:
1/1/12 - 31/12/12 20.00%
1/1/13 - 31/12/13 25.00%
1/1/14 - 31/12/14 20.00%
1/1/15 - 31/12/15 20.00%
1/1/16 - 31/12/16 11.11%
Calculate the 1, 2, 3, 4, and 5 year spot rates as at 1/1/12. Accuracy to two decimal places is required.
Answer
a. 1-year rate = 20% 2-year rate = 22.50% 3-year rate = 21.67% 4-year rate = 21.25% 5-year rate = 19.22%
b. 1-year rate = 20% 2-year rate = 22.47% 3-year rate = 21.64% 4-year rate = 21.23% 5-year rate = 19.13%
c. 1-year rate = 20% 2-year rate = 25% 3-year rate = 20% 4-year rate = 20% 5-year rate = 11.11%
d. Cannot be calculated as more information is required.