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If in an efficient market all prices are correct and reflect market fundamentals, which of the
following is a false statement?
A) A stock that has done poorly in the past is more likely to do well in the future
B) One investment is as good as any other because the securities' prices are correct
C) A security's price reflects all available information about the intrinsic value of the security
D) Security prices can be used by managers to assess their cost of capital accurately
Answer: A
Diff: 3 Type: MC Page Ref: 149 - 153
Skill: Applied
Objective List: 7.2 Determine how information in the market affects asset prices
According to the efficient markets hypothesis, purchasing the reports of financial analysts
____.
A) is likely to increase one's returns by an average of 10 percent
B) is likely to increase one's returns by about 3 to 5 percent
C) is not likely to be an effective strategy for increasing financial returns
D) is likely to increase one's returns by an average of about 2 to 3 percent
Answer: C
Diff: 3 Type: MC Page Ref: 150
Skill: Recall
Objective List: 7.2 Determine how information in the market affects asset prices
You have observed that the forecasts of an investment advisor consistently outperform the
other reported forecasts. The efficient markets hypothesis says that future forecasts by this
advisor ____.
A) may or may not be better than the other forecasts Past performance is no guarantee of the
future
B) will always be the best of the group
C) will definitely be worse in the future What goes up must come down
D) will be worse in the near future, but improve over time
Answer: A
Diff: 3 Type: MC Page Ref: 151
Skill: Recall
Objective List: 7.2 Determine how information in the market affects asset prices
Sometimes one observes that the price of a company's stock falls after the announcement of
favorable earnings. This phenomenon is ____.
A) clearly inconsistent with the efficient markets hypothesis
B) consistent with the efficient markets hypothesis if the earnings were not as high as anticipated
C) consistent with the efficient markets hypothesis if the earnings were not as low as anticipated
D) consistent with the efficient markets hypothesis if the favorable earnings were expected
Answer: B
Diff: 3 Type: MC Page Ref: 151 - 152
Skill: Recall
Objective List: 7.2 Determine how information in the market affects asset prices