Financial Management, Answers
THE UNIVERSITY OF WARWICK Examination: Summer 2009 FINANCIAL MANAGEMENT
SPECIMEN ANSWERS
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IB1140 Page 2 of 18 ---------------------------------------------------------------------------------------------------------------SECTION A Answer ALL of the questions in this section Each question is worth 2 marks ---------------------------------------------------------------------------------------------------------------1. Which of the following statements is most consistent with the evidence on market efficiency? (a) (b) (c) (d) (e)
Security prices rapidly reflect new relevant information. It is easy to forecast the direction of future security price changes in the short run. Short-run price changes occur independently of information reaching the market. On average, most securities are mis-priced. In the absence of legal constraints, investors with inside information are not able to earn excess returns. (2 marks) ---------------------------------------------------------------------------------------------------------------2. If a firm’s share price decreased during the past week, what is the best forecast that one can make about this week’s price change? (a) (b) (c) (d) (e) The share price will reverse all of last week’s loss and more. The share price will continue last week’s decline. The share price will not change until new information is released. The share price is equally likely to increase or decrease. The share price is more likely to decrease than increase.
(2 marks) ---------------------------------------------------------------------------------------------------------------3. If investors can consistently profit from analysing published financial information, then the market can, at best, be characterised as: (a) (b) (c) (d) (e)
weak-form efficient. semi-strong-form efficient. strong-form efficient. inefficient. Impossible to say without knowing more about the published information. (2 marks)
SPECIMEN ANSWERS
Turn Over
IB1140 Page 2 of 18 ---------------------------------------------------------------------------------------------------------------SECTION A Answer ALL of the questions in this section Each question is worth 2 marks ---------------------------------------------------------------------------------------------------------------1. Which of the following statements is most consistent with the evidence on market efficiency? (a) (b) (c) (d) (e)
Security prices rapidly reflect new relevant information. It is easy to forecast the direction of future security price changes in the short run. Short-run price changes occur independently of information reaching the market. On average, most securities are mis-priced. In the absence of legal constraints, investors with inside information are not able to earn excess returns. (2 marks) ---------------------------------------------------------------------------------------------------------------2. If a firm’s share price decreased during the past week, what is the best forecast that one can make about this week’s price change? (a) (b) (c) (d) (e) The share price will reverse all of last week’s loss and more. The share price will continue last week’s decline. The share price will not change until new information is released. The share price is equally likely to increase or decrease. The share price is more likely to decrease than increase.
(2 marks) ---------------------------------------------------------------------------------------------------------------3. If investors can consistently profit from analysing published financial information, then the market can, at best, be characterised as: (a) (b) (c) (d) (e)
weak-form efficient. semi-strong-form efficient. strong-form efficient. inefficient. Impossible to say without knowing more about the published information. (2 marks)