Week7Mock Exam Questions with answers
Mock Exam Questions Set 1
1. Identify and briefly describe the three forms of the efficient market hypothesis.
The three forms of the efficient market hypothesis (EMH) are:
The weak form. The weak form asserts that current stock prices fully reflect all available security market data
The semi strong form. The semi strong form of the EMH asserts that public security prices fully reflect all information (including security market data).
The strong form. The strong form of the EMH asserts that security prices fully reflect all information: market, non-market public, and private. This implies perfect markets in that no group can have monopolistic access to valuable information.
2. If markets are completely efficient, discuss the appropriate role of a portfolio manager. If security markets are completely efficient, portfolio managers will not be able to earn above-market returns. In this case, the portfolio manager has several responsibilities. First, the portfolio manager should seek optimal diversification while minimizing transaction costs. Second, the portfolio manager should help clients understand and quantify their risk tolerances and return needs. Finally, the portfolio manager should monitor both the clients' needs and circumstances and changes in the capital markets.
3. Research shows that some publicly available information such as dividend yields can be used to predict future security returns. Discuss whether this fact violates any form of the efficient market hypothesis.
The ability to use public information such as dividend yields to predict future stock returns is a violation of the semi strong form of the efficient market hypothesis
(EMH). Public information, such as dividend yields should be fully reflected in current security prices if the semi strong form of the EMH holds. The fact that these anomalies exist is evidence that disputes the semi strong form of the EMH. If the semi strong form of the EMH does not holds, the
1. Identify and briefly describe the three forms of the efficient market hypothesis.
The three forms of the efficient market hypothesis (EMH) are:
The weak form. The weak form asserts that current stock prices fully reflect all available security market data
The semi strong form. The semi strong form of the EMH asserts that public security prices fully reflect all information (including security market data).
The strong form. The strong form of the EMH asserts that security prices fully reflect all information: market, non-market public, and private. This implies perfect markets in that no group can have monopolistic access to valuable information.
2. If markets are completely efficient, discuss the appropriate role of a portfolio manager. If security markets are completely efficient, portfolio managers will not be able to earn above-market returns. In this case, the portfolio manager has several responsibilities. First, the portfolio manager should seek optimal diversification while minimizing transaction costs. Second, the portfolio manager should help clients understand and quantify their risk tolerances and return needs. Finally, the portfolio manager should monitor both the clients' needs and circumstances and changes in the capital markets.
3. Research shows that some publicly available information such as dividend yields can be used to predict future security returns. Discuss whether this fact violates any form of the efficient market hypothesis.
The ability to use public information such as dividend yields to predict future stock returns is a violation of the semi strong form of the efficient market hypothesis
(EMH). Public information, such as dividend yields should be fully reflected in current security prices if the semi strong form of the EMH holds. The fact that these anomalies exist is evidence that disputes the semi strong form of the EMH. If the semi strong form of the EMH does not holds, the