Chapter 9 Market Efficiency, Behavioral Finance, and Technical Analysis & Chapter 14 Options: Puts and Calls

In an efficient market, the only means of achieving high returns is to invest in high-risk securities. T
In an efficient market, fundamental analysis still provides value to an investor. T
If stock prices move randomly, charting and technical analysis are useful investment tools. F
Recent academic studies in behavioral finance confirm that markets are even more efficient than previously believed. F
The efficient market hypothesis means that trades can be executed quickly, easily, and inexpensively. F
Advocates of the weak-form efficient market hypothesis claim that past price movements are the best predictors of future price movements. F
Available evidence does not support the strong form of the efficient market hypothesis. T
Even if the semi-strong form of the efficient market hypothesis is true, trading on illegal insider information may lead to abnormal profits. T
The market reaction to quarterly earnings announcements tends to support the strong form of the efficient market hypothesis. F
The random walk hypothesis implies that security analysis is unable to predict future market behavior.
Which of the following statements concerning options are correct?I. Options are derivative securities.II. The value of an option is dependent upon the value of the underlying security.III. The seller of the option retains the option premium whether or not the option is exercised.IV. Options can provide leverage benefits. I, II, III and IV
Which of the following is true about rights? They are a type of short-lived call option.
The maker of a put or call is the party who writes the option.
One reason that writing options can be a viable and profitable investment strategy is that most options expire unexercised
The ability to obtain a given equity position at a reduced capital investment, and therefore magnify returns, is known as leverage
LEAPS are a special type of option that may have an expiration date as long as three years.
Warrants are generally created when the issuing corporation decides to sweeten a bond issue
Warrants have a stipulated price and an expiration date.
Many options expire without being exercised T
American style options can only be exercised on their expiration dates. F
The party that accepts the legal obligation to stand behind the option is the buyer of the contract. F
Listed options trade over-the-counter. F
Over-the-counter options are less structured than listed options and are primarily purchased by individual investors. F
The majority of today’s options are stock options traded primarily on the CBOE and on AMEX T
Technically, listed options expire on the Saturday following the third Friday of the expiration month. T
European options can only be sold on the expiration date. F
Standardized options expire on the last business day of the expiration month. F
The buyer of a listed American option has which of the following rights?I. the right to change the expiration dateII. the right to change the strike priceIII. the right to resell the optionIV. the right to let the option expire unexercised III and IV only
The writer of a put is betting the price of the underlying security will increase in value.
Which of the following is a possible official expiration date for a standardized option contract? Saturday, October 17
Which one of the following was the first listed exchange for stock options in the United States? Chicago Board Options Exchange
The strike price of a put option is the price the price at which the underlying stock can be sold.
Listed options have readily available price information.
Stocks options that trade in the January cycle will have contracts available that expire in January, February, April, and July.
The two provisions which investors should carefully consider when evaluating stock options are the time until expiration and the strike price.
For a call purchased on an organized security exchange, the strike price specifies the contractual price at which each of the shares of the underlying stock can be bought.
For all practical purposes, listed stock options always expire on the third Friday of the expiration month.
The buyer of a put expects the price of the underlying stock to rise. F
The value of a call increases as the price of the underlying security rises. T
The value of a put increases as the price of the underlying security rises. F
The option premium is the price of the option. T
The price behavior of the underlying security is the primary determinant of the price of an option. T
A put option has a strike price of $32. The current price of the stock is $34. The put option is said to be “in-the-money.” F
Grant purchased one call on XYZ stock at an exercise price of $25. The market price of XYZ stock when Grant purchased the call was $24 a share. XYZ is currently priced at $30 a share. Grant paid $120 to buy the call. How much profit will Grant make if he exercises the option today and then sells the shares? Ignore all transaction-related costs. $380
Rex bought a put on Alpha stock with a strike price of $35 when the market price of Alpha stock was $33 a share. Alpha is currently selling at $34 a share. Which of the following statements are true given this information?I. Rex’s option is worth at least $100 today.II. Rex’s option is worthless today.III. Rex’s option has more value today than when he bought it.IV. Rex’s option has less value today than when he bought it. I and IV only
One of the major disadvantages of options is their lifespan.
The most important factor affecting the market price of a put or call is the price behavior of the underlying common stock.
NZMA stock is currently selling for $128. Which of the following options is “in-the-money”? February 125 call
Which of the following affect the value of puts and calls written on shares of common stock?I. price volatility of the underlying stockII. current market price of the underlying stockIII. length of time until the option expiration dateIV. current market interest rate I, II, III and IV
Lew paid $300 to purchase a call on Delta stock with a strike price of $25. What does the market price of Delta have to be for Lew to break-even on his option investment? Ignore transaction costs and taxes. $28
14) Andrea wrote a three-month call on Echo stock. The option cost $200 and the strike price was $10. What does the market price of Echo have to be for Andrea to break-even on this investment if the option is exercised? Ignore transaction construed taxes. $12
Jason purchased a six-month put on ABC stock at a cost of $100. The strike price was $15. At what market price does Jason just break-even on this investment? Ignore transaction costs and taxes. $14
Jaime wrote a nine-month put on Beta stock. The strike price was $25 and the market price at the time the option was written was $24. The total price of the option was $150. At what market price will Jamie just break-even on this investment? Ignore transaction costs and taxes. $23.50
A put has fundamental value as long as the market price of the underlying financial asset is less than the strike price.
What is the fundamental value of a call with a strike price of $30 and a market price of $33? $300
Which of the following represent in-the-money options?I. a call when the market price exceeds the strike priceII. a call when the strike price exceeds the market priceIII. a put when the market price exceeds the strike priceIV. a put when the strike price exceeds the market price I and IV only
What is the time premium of a put with a strike price of $25 when the option price is $2 and the underlying common stock sells for $24? $100
What is the fundamental value of a put contract with a strike price of $25 when the option price is $1.50 and the underlying common stock sells for $26? 0
Which of the following increase(s) the time premium of a call option?I. a market price that exceeds the strike priceII. increasing volatility in the market price of the underlying securityIII. decreasing market interest ratesIV. decreasing the time to option expiration II only
(a) A six-month put that carries a $40 strike price on a stock that is currently trading at $35.84, given that the put trades at a 15 percent investment premium; or (b) A six-month call that carries a $50 strike price on a stock that currently trades at $54.75, while the call trades with a 12 percent investment premium? (a) Value of put = ($40.00 – $35.84) = $4.16 Price of put = [{(0.15)($4.16)} + $4.16] [100] = $478.40(b) Value of call = ($54.75 – $50.00) = $4.75 Price of call = [{(0.12)($4.75)} + $4.75] [100] = $532.00
Options can provide a lot of price action for a limited dollar investment. T
One of the primary advantages of options is the leverage they provide. T
The maximum amount the buyer of a put can lose is the cost of the option. T
The writer of a call option is theoretically exposed to an unlimited loss. T
If you expect the price of a security to decline, you could buy a call to protect your financial position. F
Once the call premium is recouped, the profit from a call is only limited by the price increases of the underlying stock prior to the contract expiration. T
If a stock price does not rise or fall by the amount of the option premium, the option will not be exercised. F
The longer the time to expiration, the lower the option time premium tends to be. F
The maximum loss that can be incurred as the buyer of an option is the amount of the option premium. T
Option writing can be very profitable because the majority of options are never exercised. T
A naked option is a conservative investment with limited risk. F
An option straddle is the simultaneous purchase (or sale) of both a put and a call option on the same underlying security. T
Kyle believes the price of Ajax stock is about to decrease. If he wants to profit from the decline in price, he should ________ on Ajax stock. buy a put
Roselle paid $250 to buy one put option with a strike price of $35. What is the maximum profit Roselle can earn on her option contract? $3,250
The price of ABC stock is currently $42 per share, but in six months you expect it to rise to $50. ABC does not pay a dividend. You buy a six-month call on ABC, with a strike price of $45. The option cost $200. What holding period return do you expect on this call? Ignore transaction costs and taxes. 150%
Tiffany would like to own shares of Blackwood, Inc. but only if she can acquire them at a total cost of $30 a share or less. Blackwood is currently trading at $31.76. Cynthia should ________ with a strike price of $30. Ignore transaction costs. buy a call
Fred bought 600 shares of Edgewood stock at a price of $19. The stock is currently selling for $53 a share. To protect his profits, Fred should buy 6 put options with a strike price of $50.
18) Shares of Lakewood, Inc. are currently selling for $52.63. You believe the stock will decline in price ranging from $30 to $32 in the next few months. Which of the following strategies will allow you to profit if your prediction is correct?I. short the stockII. buy a call at 50III. write a call at 55IV. buy a put at 45 I, III and IV only
In January, JB stock was selling for $50 per share. When the calls and the puts with a strike price of $45 expired on March 20, JB was selling at $46. Which investors made a profit?I. the writer of the callII. the buyer of the callIII. the writer of the putIV. the buyer of the put I and III
In nearly all cases, the purpose of a hedge is to reduce or eliminate risk.
Which one of the following actions would be the most appropriate hedge to a short sale of common stock? purchase of a call
22) Steve bought 300 shares of stock at a price of $20 per share. The price of the stock then went up to $33 per share so Steve decided to hedge his position by purchasing 3 puts at a cost of $120 each. The puts have an exercise price of 30. One week prior to the expiration of the puts, the price of the stock was at $22 per share. If Steve closed out all of his positions at that time, he would have earned a net profit of $2,640.
Allison bought 100 shares of MIKO, Inc. stock at a price of $35 a share. In addition, she bought a 35 put on MIKO at a cost of $125. Which of the following are true about Allison’s position from now until the option expiration date?I. Her maximum loss is $3,625.II. Her maximum loss is $125.III. Her minimum gain is $125.IV. Her maximum profit is unlimited. II and IV only3
Mathew simultaneously sold a July 40 put on ZXY stock for $200 and bought a July 35 put for $75. His maximum loss is ________ and his maximum gain is ________. $375, $125
The purchase of a June 25 call on XXO stock and the sale of a June 30 call on XXO stock is known as a vertical spread.
A long straddle is a strategy that produces profits when the price of the underlying security moves significantly in either direction.
A long straddle is a strategy that produces profits when the price of the underlying security moves significantly in either direction.
What is the difference between a naked call option and a covered call option? Which one is riskier and why? In a naked call, the option writer does not own the stock against which he/she is writing the option. Should the option be exercised, the writer would have to purchase shares at the market price to cover the call. The potential loss is considered unlimited. In a covered call, the investor writes an option against stock that he/she already owns. This is a very conservative strategy.
30) Alan just bought 100 shares of Global, Inc. (GLO) at $45 per share and as protection he also bought a three-month put with a $45 strike price at a cost of $400. One of two scenarios is expected to occur in the next three months: (a) GLO stock declines to $33; and (b) GLO stock rises to $61. Calculate the profit or loss under each scenario and explain how the hedge has provided protection for Alan’s position in GLO. Ignore transaction costs. Cost of GLO = ($45)(100) = $4,500Cost of put = $400In three months:(a) GLO at $33 Total loss = {($45 – $45)(100)} – $400 = $-400(b) GLO at $61 Total gain = {($61 – $45)(100)} – $400 = $1,200
For the writer of in-the-money covered calls , losses on the options contract will be nullified by gains on the stock. T
Writing covered calls may result in a profit to the writer even if the stock price does not change. T
Writing covered calls protects the writer from losses if the price of the underlying stock declines. F
Covered call writers have unlimited loss exposure as well as unlimited profit potential. F
Matt owns 500 shares of IKM stock. The market price of IKM is $51.74. Matt just sold five calls on IKM with a strike price of $50. This is known as writing a covered call.
Bill owns 200 shares of EG stock. In November, the market price of EG was $15.45. Bill sold two March 16 calls on EG for $246. Between November and March, EG stock fluctuated between $14.75 and $15.85. EG paid a quarterly dividend of $0.40 per share on January 31. Over the November-March period, Bill earned $336.
Mary wrote a 40 call on ABC stock at a price of $275. She does not own any shares of ABC. Mary hasI. limited her losses to $275.II. unlimited loss potential.III. limited her gains to $275.IV. unlimited profit potential. II and III only
The writer of a covered call has taken a(n) conservative investment position with limited profits.
While stock index options can be used to play the market as a whole, they are also effective in protecting equity portfolios against falling markets. T
To exercise a call option on the Dow Jones Industrial Average, an investor would need to actually buy all 30 stocks at the strike price. F
Long-term Equity AnticiPation Securities (LEAPS) are a form of option that gives the holder the right to buy newly-issued shares of stock directly from the issuing corporation. F
If the S&P 500 index is at 1,061, then the cash value of an S&P 500 index option is $106,100.
One could temporarily protect profits on a highly diversified portfolio of large company stocks by buying S&P 500 Index put options.
Bob’s DJIA Index option had a strike price of 98. When he exercised the option, the Dow was at 10,050. market becomes more volatile.
ETF options are settled in ETF shares.
Anthony is confident that shares of SolarTech will greatly increase in value, but thinks that it may be a year or more before that happens. He should buy LEAP calls.
Stock index options can be used for which of the following investment purposes?I. protect a portfolio from market declinesII. speculate on the price appreciation of a particular common stockIII. take advantage of a leverage opportunityIV. create a portfolio hedge I, III and IV only
The value of an interest rate call option increases when the yield on the underlying Treasury security rises.
If the Canadian dollar became stronger relative to the U.S. dollar, the price of a call option on the Canadian dollar will increase.
The currency option strike price of 163 means that one unit of the foreign currency is worth $1.63.
Which of the following statements concerning Long-term Equity AnticiPation Securities (LEAPS) is correct? LEAPS typically have a higher quoted price than that of a regular option.
Which of the following characteristics apply to warrants?I. Warrants are similar to call LEAPS.II. Warrants pay quarterly dividends.III. Warrants can generate capital gains.IV. Warrants normally cover two or less shares of the underlying security.A) I, II and III only I, III and IV only
Explain how an investor can use a stock market index option to hedge a portfolio of common stocks. An investor can buy enough index puts to protect the portfolio against a decline in value. Losses in the portfolio due to a market decline will be offset by profits from the puts.
Individuals tend to invest in mutual funds that have recently been performing well. T
Self attribution bias causes investors to attribute their successes to skill and failures to chance. T
Some behavioral characteristics cause investors to realize lower investment returns. T
Investor overconfidence leads to overly optimistic predictions.
Investors who buy mutual funds that have had large gains over the last few years are exhibiting a tendency known as representativeness.
Which of the following accurately reflect appropriate investment guidelines?I. always invest in last year’s best performing mutual fundII. trade frequently to increase your investment returnsIII. sell losing stocks unless you are willing to buy them at the current priceIV. take corrective action when so indicated B) III and IV only
Technical analysts believe that some of the key elements of market behavior-called technicalindicators-can provide valuable insights about the condition of the market. Briefly discuss each of the following indicators. Market volume Breadth of the market Short-interest Odd-lot trading Market volume reflects the level of investor interest. The market is strong whenvolume increases in a rising market or drops in a declining market. Breadth of the market analyzes the spread between the number of stocks that advance in price and the number that decline. The market is strong when the number of stocks advancing exceeds the number that are declining.Short interest refers to the number of stocks sold short. The future market is viewed optimistically when the level of short interest is relatively high. Odd-lot trading is used to determine the sentiment of small investors. The theory is that the best investment strategy is to do the opposite of what the small investor is doing.
What are some of the more important disagreements between the efficient market hypothesisand the findings of behavioral finance. For a market to be efficient, investors must react in a rational manner and respondpromptly to market events. If investors base their decisions on misperceptions caused by overconfidence or emotional factors such as loss aversion, rather than objective information, they may either overreact or under react, and markets will not be as efficient as the EMH makes them out to be.
Historically higher returns on the stocks of small companies can be completely explained by their higher risk. F
Which one of the following statements is correct? Low P/E stocks tend to outperform high P/E stocks on a risk-adjusted basis.
Investors should never combine fundamental analysis and technical analysis. F
Resources for technical analysis are readily available on the internet. T
Technical analysis primarily monitors shifts in the ________ in the market. supply and demand forces
The principal objective of technical analysis is determining the best time to get into the market.
Investors who live in cities with NFL teams should be especially happy when their team winsthe Super Bowl. T
Market volume is a function of market demand for and supply of stocks. T
An oversold market is generally considered to be overvalued. F
Charts are only used to confirm past trends. F
The Dow Theory states that the market’s performance can be described by long-term price trends.
The confidence index indicates a strong stock market when the ratio of the average yield on high-grade corporate bonds to the average yield on low-grade corporate bonds rises.
The odd-lot trading theory advocates that small investors tend to buy high and sell low.
The relative strength index compares a security’s price relative to itself over a period of time. T
Point-and-figure charts have no time dimension. T
The simple moving average is a weighted average. F
The advance/decline line is be used to time both the purchase and the sale of securities. T
The theory behind the mutual fund cash ratio is when mutual fund managers hold high levels of cash, they must eventually buy stocks with it.
A high TRIN value is considered bad for the market when the trading volume in the declining stocks is rising.
The on balance volume (OBV) indicator indicates an up market when heavy volume accompanies price increases.
Which one of the following statements is correct? A point-and-figure chart consists of columns of X’s and O’s.
According to chartists, a breakout below a support level is a sell signal.
Explain why technical analysts use charts so extensively. Charts provide a visual picture of numerical data. This visual image allows analysts to see trends and patterns that cannot be spotted simply by looking at the numbers.
Which one of the following statements is correct concerning moving averages? A moving average helps remove short-term fluctuations from the analysis.
A sell signal is indicated by a security’s price falling below the moving average.
On a given day, 200 of the S&P 500 stocks were up, 300 were down. Volume for up stocks was 500 million, volume for down stocks was 700 million. The Trading Index or TRIN for that day was .48.
What is the ten-day simple moving average if the latest daily closing prices are $5, $7, $8, $5, $4, $6, $7, $8, $9, $10? $6.90
Which of the following are contrary indicators? investment newsletter sentiment index and odd-lot trading
The on balance volume (OBV) indicator is used to confirm price trends.
Which one of the following statements is correct concerning the mutual fund cash ratio (MFCR)? A low MFCR indicates that fund managers might be forced to sell securities should investors wish to withdraw funds.
Which one of the following statements concerning technical indicators is true? The market is expected to continue along its current trend when there is little difference between the volume of odd-lot purchases and sales.
Which one of the following combinations best signals a strong market?I. a greater number of advancing stocks than declining stocksII. a greater number of declining stocks than advancing stocksIII. a greater volume in rising stocks than in declining stocksIV. a greater volume in declining stocks than in advancing stocks I and III
On a given trading day, 700 stocks advanced and 1,200 stocks declined. The volume of declining stocks was 280 million while the volume of advancing stocks was 530 million. What is the TRIN value for the day? 0.31
The new highs-new lows indicator is based on prices over the past year.
Which one of the following relative strength values would most indicate that a stock is oversold? 20
The mutual fund cash ratio (MFCR) compares the percentage of an investor’s portfolio held in cash to the percentage held in mutual funds. F
Point-and- figure charts and moving averages both reduce the effect of random, short-term market fluctuations. T
The Dow theory holds that a change in the primary trend has occurred when a rise or fall in the Dow Jones Industrial Averages is confirmed by a similar movement in the Dow Jones Transportation Average.
Technical analysts consider the stock market to be strong when volume ________ in a rising market and ________ during a declining market. increases; decreases
Chartists advocate that history repeats itself.
One type of chart designed to keep track of emerging price patterns which has no time dimension and uses a series of X’s and O’s is known as a point-and-figure chart.
One of the most popular tools of technical analysis is charting.
A technical analyst tends to employ multiple market measures in his/her analysis.
The practice of charting focuses onI. historical price dataII. interest rate dataIII. economic dataIV. volatility data I only
A technical analyst might have an interest in which of the following? I. level of short interestII. relative price levelIII. point-and-figure chartsIV. odd-lot transactions I, II, III and IV
Which of the following are used as indicators of a strong market in the future? I. The advance-decline spread is increasing at a time when the advances outnumber the declines.II. The level of short interest is relatively high.III. The net difference of odd-lot purchases minus odd-lot sales begins increasing.IV. The trading volume increases in a declining market. I and II only
Which of the following are classified as trading action approaches to market analysis?I. Super Bowl effectII. Primary trend with confirmation effectIII. January effectIV. White House re-election effect I, III and IV only
Charts are useful as a means of spotting developing trends. T
You are most likely better off doing the opposite of what most investment newsletter expertsadvise doing. T
The odd-lot theory supports buying into the market when the number of odd-lot trades rises. F
Technical analysis is a mechanical approach to investing. T
A relatively high level of short sells is an indicator of a current bull market. F
The breadth of the market refers to the spread between the number of stocks advancing and those declining in value. T
The stock market is considered strong when the market volume decreases in a declining market. T
The Dow Theory is used to predict when the markets will change direction based on the long-term trends in the market. F
Technical analysis is used for which of the following purposes?I. Deciding when to enter the market. II. Deciding whether to sell a stock.III. Deciding which stocks to buy.IV. Deciding whether basic economic conditions are favorable for investing. I, II and III only
Which of the following are included in technical analysis?I. charting price movementsII. tracking trading volumeIII. determining the investor’s risk toleranceIV. monitoring odd-lot trading I, II, and IV
For technical analysts, the forces of supply and demand have an important effect on the prices of securities. T
A principal objective of technical analysis is trying to determine when to invest. T
Market anomalies are caused by some poorly understood combination of factors.
Which of the following is true. Historically, low P/E or value stocks have outperformed high P/E or growth stocks.
Even after adjusting for risk,________ firms earn have, over long periods of time, earned higher returns than ________ firms. small, large
One of the calendar effect market anomalies indicates that ________ in value during January. small cap stocks tend to increase
The anomaly known as post-earnings announcement drift or momentum describes thetendency of stock prices to rise or fall for several ________ after unexpectedly good or bad earnings announcements. weeks
Stocks of small companies have a historical tendency to do especially well in the month of January. T
Investors skilled in exploiting behavioral errors and market anomalies can consistentlyoutperform the market by a wide margin. F
Evidence suggests that growth stocks tend to outperform value stocks. F
Market bubbles such as the technology bubble of the 1990’s and the housing bubble of 2004-2007 are best explained by behavioral finance and economics.
Evidence suggests that the price of a stock continues to move up or down for a period of 6 to 12 months.
Which of the following statements correctly present recommendations based on behavioralfinance?I. Don’t hesitate to sell a losing stock.II. Trade frequently.III. Chase performance.IV. Be humble and open-minded. I and IV only
Investors who obsessively monitor their last few stock purchases while paying little attentionto the rest of their portfolio are exhibiting the tendency known as narrow framing.
The tendency of investors to take greater risks after a large loss and fewer risks after a largegain can be attributed to loss aversion.
People tend to ignore information that contradicts their current beliefs.
Which of the following characteristics are referred to as representativeness?I. hesitating to sell stocks at a lossII. basing conclusions on small samplesIII. underestimating the effects of random chanceIV. underestimating the level of risk in an investment II and III only
The tendency to hold onto losing stocks in the hope that they will recoup is called loss aversion.
The tendency of investors to blame others for their failures and take personal credit for their successes is referred to as biased self-attribution.
There is strong evidence that investors who trade frequently outperform the market. F
Analysts tend to issue similar recommendations on individual securities. T
Fund managers tend to have too little confidence in their abilities leading them to be excessively cautious. F
Behavioral finance suggests that investors react to new information in an efficient mannersuch that security prices accurately reflect the new information. F
An efficient market reflects all information including predictions about future information.
Which of the following activities would be most useful in an efficient market. Buying and holding a diversified portfolio.
Security markets have been described as random walks and efficient markets. What does each of these terms mean and how do they relate to the stock market? What makes a market efficient and what are the consequences of efficiency for fundamental and technical analysis? Random walk refers to the belief that price changes in the market do not follow anypattern but occur on a purely random basis.An efficient market means that information is quickly and accurately reflected in security prices. The quick and widespread availability of information, and the fact that people conduct security analysis, makes the market efficient.In an efficient market, neither fundamental nor technical analysis is of real value. If markets are totally efficient, then it is impossible to consistently outperform the market.
There is evidence to support the contention that company insiders can profit in a manner that counters the strong form of the efficient market hypothesis.
Based on the semi-strong form of the efficient market theory, an investor reacting immediately to a news flash on the television generally is too late to make an exceptional profit.
The strong form of the efficient market hypothesis contends that no one can consistently earn abnormal profits.
The weak form of the efficient market theory contends that past price performance is useless in predicting future price movements.
Followers of the efficient market hypothesis believe that investors react quickly and accurately to new information.
Which one of the following best describes the term “efficient market”? New information is quickly reflected in security prices.
The efficient market hypothesis rests on which of the following assumptions?I. Information is widely available to all investors almost simultaneously.II. Investors react quickly to new information.III. Accounting information accurately portray a company’s economic situation.IV. Events which affect the market occur randomly. I, III and IV only
In an efficient market, prices appear to move randomly because only new information affects stock prices.
A type of mutual fund with particular appeal to investors who accept the efficient market hypothesis is index fund.
Which one of the following statements concerning the random walk hypothesis is correct? Random price movements support the weak form efficient market hypothesis.
Followers of the random walk hypothesis believe that the price movements of stocks are unpredictable, and therefore security analysis will not helpto predict future market behavior.
Which one of the following statements concerning options is correct? Option holders can profit on movements of the price of the underlying security.
Rights are call options issued to current owners of the stock and normally expire within a short period of time. T
Purchasers of stock options have the right to buy or sell a certain number of underlying shares.
Rights are long-term call options attached to bonds while warrants are short-term call options attached to stock. F
Warrants are options that are attached to bond issues to make the bonds more attractive to investors T
Warrants are short-term options usually expiring within a year or less. F
Because puts and calls derive their value from the behavior of some other real or financial asset, they are known as derivative securities. True
Puts and calls are issued by the same corporation that issued the underlying stock. F
Investors who purchase options acquire nothing more than the right to buy or sell the shares of the underlying security. T
Options are created by investors. T

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