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*** Level I
Question 1: What does the weak-form efficient market hypothesis
(EMH) assume?
a) That current stock prices reflect all public and private
information
b) That current stock prices move in predictable patterns
c) That current stock prices reflect all security-market
information
d) That current stock prices reflect all easily obtainable
information
e) That current stock prices reflect all public information
Question 2: What is a filter rule?
a) A fundamental-analysis technique
b) A test of the semi-weak-form EMH
c) A test of the strong-form EMH
d) A test of the weak-form EMH
e) A trading technique
f) A test of the semistrong-form EMH
Question 3: Event studies test
a) market reaction to private information.
b) long-term market trends.
c) the strong-form EMH.
d) the semistrong-form EMH.
e) the weak-form EMH.
Question 4: Evidence for the semistrong-form EMH is
a) weak. Event studies and studies predicting rates of return
over time or for a cross section of stocks tend not to support
the semistrong-form EMH.
b) strong. Event studies and studies predicting rates of return
over time or for a cross section of stocks strongly support the
semistrong-form EMH.
c) mixed. Event studies tend not to support the semistrong-form
EMH, while studies predicting rates of return over time or for a
cross section of stocks do tend to support it.
d) mixed. Event studies tend to support the semistrong-form EMH,
while studies predicting rates of return over time or for a cross
section of stocks tend not to support it.
Answer 1: c
Rationale & Reference:
The weak-form EMH assumes that current stock prices reflect all
security-market information, which includes historic sequence of
prices, rates of return, trading volume data, and other
market-generated information such as odd-lot transactions and
block trades.
Reilly & Brown, p. 211
Answer 2: e
Rationale & Reference:
A filter rule is a decision rule for technical analysis, which
assumes that security-market information can be used to generate
above-average profits. With a filter rule, an investor trades a
stock when the price change exceeds a filter value. For example,
if there is a 5% filter, a technician would buy the stock if it
rose by more than 5% because of anticipated further gains. If the
stock fell by more than 5%, a technician would sell the stock if
it was in his portfolio, or perhaps even sell it short, to take
advantage of anticipated further declines.
Reilly & Brown, p. 214
Answer 3: d
Rationale & Reference:
Event studies test the effects on securities prices of the
announcement of public information concerning important events.
The weak-form EMH only assumes that security-market information
is reflected in prices. Most of the events studied instead
provide nonmarket public information, so event studies are more
suited for testing the semistrong-form EMH, which does assume
that nonmarket public information is reflected in prices. The
strong-form EMH, while also assuming that this type of
information is reflected in prices, also assumes that private
information is reflected in prices as well, so tests of the
effects of private information on returns are better suited to
testing the strong-form EMH.
Reilly & Brown, p. 229
Answer 4: d
Rationale & Reference:
Evidence from the tests of the semistrong-form EMH is mixed. The
hypothesis received very strong support from event studies, with
only exchange listing studies providing mixed results. By
contrast, studies on predicting rates of return over time or for
a cross section of stocks tended not to support the
semistrong-form EMH. Studies presenting evidence contrary to the
hypothesis included those on dividend yields, risk premiums,
calendar patterns, quarterly earnings surprises, firm size, level
of firm neglect and the E/P and BV/MV ratios.
Reilly & Brown, p. 234
*** Level II
Question: Describe the focus competitive strategy.
Answer:
In a focus strategy, a firm selects a segment or group of
segments in the industry and tailors its strategy to serving them
to the exclusion of others. The focuser seeks to achieve a
competitive advantage in its target segments even though it does
not have a competitive advantage overall.
The focus strategy has two variants:
1. In cost focus, a firm seeks a cost advantage in its target
segment. Cost focus exploits difference in cost behavior in some
segments.
2. In differentiation focus, a firm seeks differentiation in its
target segment. Differentiation focus exploits the special needs
of buyers in certain segments.
Both variants rest on differences between a focuser's target
segments and other segments in the industry. Target segments must
either have buyers with unusual needs or else the production and
delivery system that best serve the target segment must differ
from that of other industry segments. Cost focus exploits
differences in cost behavior in some segments, while
differentiation focus exploits the distinct needs of buyers in
certain segments. A focuser can achieve competitive advantage by
dedicating itself to the segments exclusively.
A company adhering to a focus strategy should serve and
capitalize on limited industry segments because other firms may
not be minimizing costs in each segment or satisfying each
segment's specific needs. A focuser takes advantage of
suboptimization in either direction by broadly targeted
competitors. Competitors may be underperforming in meeting the
needs of a particular segment, which opens the possibility for
differentiation focus. Competitors may also overperform, which
results in them bearing higher than necessary costs.
If a firm can reach prolonged cost or differentiation focus in
its segment and the segment is structurally attractive, the
focuser will be an above-average performer.
Porter, pp. 15-16
*** Level III
Question: The real needs for liquidity fall into what five
categories?
Answer:
The five categories are:
1. Emergency Cash: The emergency cash reserve is usually measured
at two to three months' spending, but it could be more if the
individual's source of income is at risk or volatile. This sum is
usually set aside in money market funds and is not considered
part of the investment portfolio.
2. Goal Spending: These needs vary with the individual, but for
known goals due within five years, at least the amount needed to
achieve these goals should be in assets with relatively good
liquidity.
3. Income Taxes: Known lump-sum tax payments are usually set
aside in cash equivalents maturing no later than the tax due
date.
4. Estate Transfer Taxes: For individuals wealthy enough not to
need life insurance for loss-of-income protection, the money for
estate taxes must come out of the estate's assets. Aside from
some long-term tax payment plans for estates involving family
farms and businesses, this argues for sufficient funds to pay
whatever estate taxes will be due nine months after their date of
death.
5. Investment Flexibility: The ability to take advantage of
market opportunities as asset classes become overvalued and
undervalued is an argument for liquidity. Perhaps two-thirds of a
portfolio should be able to be liquidated within a matter of
weeks for optimum liquidity. This would still allow for some
substantial commitment to illiquid opportunities such as real
estate and venture capital.
Kaiser, pp. 3-21 - 3-22
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