Practice Quiz

FRM Financial Risk Manager Practice Test

Category - Anomaly

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There is evidence for a stock market that rates of return on shares tend to be lower Monday compared with other days of the week. Which of the following is true?
  1. If conventional wisdom is that rates of return should be approximately the same each day, this is evidence of an anomaly.
  2. If conventional wisdom is that rates of return should be affected by events on Saturdays and Sundays, this is evidence that the market is weak-form inefficient.
  3. The evidence shows that asset markets are semi-strong-form inefficient but may be weak-form efficient.
  4. The evidence shows that noise-traders dominate the market.
Explanation
An anomaly is a trend in the markets that violates conventional wisdom, which is the prediction of the “orthodox” model of efficiency market hypothesis.

Key Takeaway: A market anomaly is a distortion in price or return in the market. Some well-known anomalies: Calendar effects (the January effect and Monday blues weather) and firm-size effects. The effects of an anomaly should diminish as the market is made aware of them.
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