Which category of tests assumes that, in an efficient market, securities lie on the security market line? A) Cross-sectional tests. B) Event studies. C) Time-series tests. D) Anomaly studies. don’t just pick an answer, give an explanation as to why you pick the answer too…
B. Since the Event studies support the Semi-strong form of the EMH. Thus, if a security is properly priced it will fall on the SML.
Cross sectional test. it assumes securities lie on SML in efficient market, mean return should directly relate to beta.
A. cross sectional assumes that mkts are efficient when all securities’ returns are on the SML. after you adjust for risk, all securities should be comparable. ---- time series has something to do with the best estimate of a security’s future returns is to look at the long-run historial rate of return. event studies deals something with xs returns after the release of co specific info, like earnings announcements, stock splits, etc. an anomoly study would be looking at why you can potentially earn xs return if the markets are truly efficient. ie. size effect, neglected firm effect - basically you can potentially earn an xs return b/c these companies do not have as much analyst coverage. thus, info is less efficient. i think the cfai book adds to this by by indicating that superior analysts should research small or midsize co’s to look for intrinsic value instead of researching large co’s where everyone and their mother is looking. boy, i hope i’m right after typing all this stuff…
definitely A.
did you guys all studied used schweser study notes? or stalla study what did the study notes have for these tests? can someone paste them on this thread?
My thoughts exactly…Liaaba, I studied solely from schweser and none of this makes any sense to me.
is this Greek?
Latin or more like an unheard language… thus far… it’s scaring me!!!
it maybe funny the first couple times, but it’s just getting old, how come every thread has to turn into one of these…
everyone’s so stressed out, we are all looking for an out… and some thread pops up, providing us with some way to vent out…
not everyone, it’s always the same ppl…
Sorry I have read Schweser Notes for my preparation and don’t quiet remember the context on which this question is based, Could you just point out some refrences? Disclaimer: I have totally lost my mental equilibrium studying for this exam. - Dinesh S
Why would it be scary? I think it should be logical but i might make a mistake 
A) Cross-sectional tests. Looks at all the investments at one point in time, a snapshot- seems the most appropriate to me B) Event studies. They just tell you that return is influenced by certain events C) Time-series tests. this looks at an investment from historical point of view but we are looking at how investments are ranked at a point given D) Anomaly studies. Anomaly studies just say how return of stock acts in special conditions so it shouldn’t be related to how investors require certain return for an amount of risk So i will go with A
for those look for where to get the answer - if you have schweser secret sauce…go to page 134-135. i dont have the schweser books. i use cfai books and qbank. cfai books are actually really good w/ great examples, case studies - but it’s alot of reading.
Check schweser book 4 pg 110 - 111, I think it should make perfect sense if you spend 10 -20 mins on it.
Schweser book 4 page 147: “Cross-sectional tests pf the semistrong-form of the EMH are based on the assumption that markets are efficient when all securities’ returns lie along the SML.”
Thanks Webwister & Sondin…