Question

Strong form market efficiency states that the market incorporates all information in the stock price. Strong form efficiency implies that: I) An investor can only earn risk-free rates of return II) An investor can always rely on technical analysis III) An insider or corporate officer can not outperform the market by trading on the inside information

	A.	III only
	B.	I, II, and III
	C.	I only
	D.	II only

If a stock's beta is 0.8 during a period when the market portfolio was down by 10%, then we could expect the return on this individual stock to

	A.	gain less than 10%.
	B.	lose more than 10%.
	C.	gain more than 10%.
	D.	lose, but less than 10%.

Why do stock market investors appear not to be concerned with unique risks when calculating expected rates of return?

	A.	There is no method to quantify unique risks
	B.	Unique risks are compensated by the risk-free rate
	C.	Beta includes a component to compensate unique risk
	D.	Unique risks are assumed to be diversified away

If Treasury bills return is 10% at a time when the market risk premium is 6%, then the

	A.	market portfolio return should be 6%.
	B.	market portfolio return should be 16%.
	C.	market portfolio return should be 22%.
	D.	market portfolio return should be 4%.

Answer 1

A strong form of market efficiency states that the investors cannot make any profits as the markets completely incorporate all information, which includes even the insider information. No kind of information can give the investors any edge over the market. Technical analysis cannot be used to earn superior returns.

So, the correct option is option 1.

If the beta is 0.8 and the market is down by 10%, then as the beta is positive it will move in the same direction as the beta. If the market moves by 10%, the stock will move by less than 10%.

So, the correct option is option D.

Unique risks cannot be quanitified and cannot be diversified away as this risk in unique to a particular industry.

So, the correct option is option A.

The market portfolo should be , as market risk premium is 6%,

(Rm - rf) * beta = 6%

As beta of market portfolio is 1,

(Rm - 10%) = 6%

So, the return on the market is 16%.

So, the correct option is option B.