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.

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