1. Tim observed that company XYZ’s share price reacts gradually to the public release of its annual report. With respect to efficient markets, which of the following most likely indicates the market where company XYZ trades?
A. The market is weak-form efficient.
B. The market is strong-form efficient.
C. The market is waiting for new information to be released.
2. Which of the following is least likely to explain the January effect anomaly?
A. Tax selling.
B. Most companies perform poorly in January.
C. Window dressing of portfolio holdings.
3. In an inefficient market, investors will most likely benefit from a(n):
A. passive investment strategy.
B. active investment strategy.
C. active or passive investment strategy
1. C is correct. Based on the convention used in the curriculum, the term ‘with respect to efficient markets’ implies that the markets are efficient. If the market is efficient, the most likely reason for the stock price to ‘react gradually’ is that the market is waiting for additional information
2. B is correct. Tax-selling and window dressing are two reasons generally given for the January effect.
3. B is correct. In an inefficient market, investors might be able to earn superior risk adjusted returns since opportunities for it exist in the market e.g. due to mispricing. However, in an efficient market a passive investment strategy would be preferred to an active strategy for its lower costs and because opportunities for earning superior risk adjusted returns in an efficient market are negligible.