Module 5: Multiple Choice Questions

For students

Last updated: 17/08/2025 15:00

The questions are based on or inspired by the following references:

• Berk & DeMarzo, Corporate Finance, 5th ed. (2020)
  
• Brealey & Myers, Principles of Corporate Finance, 13th ed. (2020)

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💡 You can also press Ctrl + P (or Cmd + P on Mac) to print or save your responses as a .pdf file.

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⚠️ These exercises are powered by AI-assisted technologies and may contain occasional formatting or logic errors. Please report any issues you encounter so I can improve the experience.

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📘 Part 1 (until Midterm)

Module	Chapter	Slides	T/F	MCQ	Numeric	Long
5	ch13	🎞️	✅	❓	🔢	📝

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Answer the following questions based on the discussions in class.

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Q1.

According to the Efficient Market Hypothesis (EMH), in its semi-strong form, which type of information is already reflected in stock prices?

A. Only past prices
B. All publicly available information
C. Insider private information
D. Technical signals only
E. None of the above

✅ Correct: B. Semi-strong efficiency asserts that all publicly available information is incorporated into prices.

Q2.

Which of the following biases describes investors’ tendency to hold on to losing investments too long while selling winners too early?

A. Overconfidence bias
B. Herding behavior
C. Disposition effect
D. Familiarity bias
E. Anchoring bias

✅ Correct: C. The disposition effect leads investors to prematurely sell winners and retain losers.

Q3.

Which anomaly challenges the CAPM by showing that past winners tend to outperform past losers in the short term?

A. Value effect
B. Size effect
C. January effect
D. Overconfidence
E. Momentum effect

✅ Correct: E. Momentum is an empirical anomaly where recent winners continue to perform well, inconsistent with CAPM.

Q4.

Which form of EMH implies that even insider (private) information is reflected in stock prices?

A. Strong form
B. Semi-strong form
C. Weak form
D. Rational expectations form
E. Adaptive markets hypothesis

✅ Correct: A. Strong-form efficiency assumes even insider information is incorporated into prices.

Q5.

Which behavioral bias explains why investors may prefer to invest heavily in their employer’s stock instead of diversifying?

A. Herding
B. Overconfidence
C. Anchoring
D. Familiarity bias
E. Disposition effect

✅ Correct: D. Familiarity bias leads investors to overinvest in assets they know, such as employer stock, limiting diversification.

Q6.

Which strategy exploits the tendency of small-cap stocks to outperform large-cap stocks, historically observed in data?

A. Momentum strategy
B. Contrarian strategy
C. Size effect strategy
D. Value investing
E. Smart Beta investing

✅ Correct: C. The size effect describes the historical excess returns of small-cap stocks compared to large-cap stocks.

Q7.

Which of the following is a direct implication of overconfidence in financial markets?

A. Investors delay realizing losses
B. Investors trade excessively
C. Investors mimic others’ trades
D. Investors prefer domestic assets
E. Investors use stop-loss orders

✅ Correct: B. Overconfident investors believe too strongly in their skill, leading to excessive trading volume and lower net returns.

Q8.

Which of the following anomalies cannot be explained by the standard CAPM?

A. Market portfolio returns
B. Diversification benefits
C. Expected return and beta relation
D. Risk-return tradeoff
E. Value and momentum effects

✅ Correct: E. Value and momentum anomalies show systematic deviations from CAPM predictions.

Q9.

Which of the following is the best description of herding behavior in financial markets?

A. Investors follow the trades of others rather than their own information
B. Investors prefer assets they are familiar with
C. Investors trade excessively due to overconfidence
D. Investors systematically underreact to news
E. Investors overweight past performance

✅ Correct: A. Herding occurs when investors imitate others’ actions, often disregarding their own signals or analysis.

Q10.

According to behavioral finance, what is the main cause of excessive volatility in financial markets compared to fundamentals?

A. Rational arbitrage
B. Strong-form efficiency
C. Lack of trading volume
D. Investor sentiment and psychological biases
E. Perfect diversification

✅ Correct: D. Behavioral finance argues that investor sentiment and biases drive volatility beyond what fundamentals justify.