FIN 501 – FINAL EXAM QUESTIONS AND
ANSWERS 100% PASS 2026 EDITION
Bond rating - ANS Letter grades that designate investment quality and are assigned to a bond
issue by rating agencies. Best-know rating agencies are Moody's, standard & poor's and fitch.
Random walk Hypothesis - ANS The theory that stock price movements are unpredictable, so
there's no way to know where prices are headed.
Efficient market hypothesis (EMH) - ANS Basic theory of the behavior of efficient markets, in
which there are large number of knowledgeable investors who react quickly to new
information, causing securities prices to adjust quickly and accurately.
Market anomalies - ANS Irregularities or deviations from the behaviour one would expect in
an efficient market. Four effects: Calendar effect, small-firm effect, post earning announcement
drift (or momentum), and value effect.
Weak form (EMH) - ANS A form of the EMH. Holding that past data on stock prices are no use
in predicting future prices. Prices follow random walk.
Semi-strong form (EMH) - ANS A form of the EMH. Holding that abnormally large profits
cannot be consistently earned using publicly available information. Stock prices will adjust to
news before you can trade the stock.
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@2026 EDITION ALLRIGHTS RESERVED
,Strong form (EMH) - ANS Form of the EMH that holds that there is no information, public or
private, that allows investors to consistently earn abnormal profits. Insider trading.
Arbitrage - ANS A transaction in which an investor simultaneously buys and sells identical
assets at different prices to earn an instant, risk-free profit.
Calendar effect - ANS A form of market anomalies. Stock returns may be closely tied to the
time of the year or time of the week.
January effect - ANS Tendency for small-cap stocks to outperform large stocks by an
unusually wide margin.
Small-firm effect - ANS A form of market anomalies. Small firms tend to earn positive
abnormal returns of as much as 5% to 6% per year.
Post earnings announcement drift (or momentum): - ANS A form of market anomalies.
Another market anomaly has to do with how stock prices react to earnings announcements.
Stock prices that are gone up will keep going up and vice versa.
Value effect - ANS A form of market anomalies. Best way to make money in the market is to
buy stocks that have relatively low prices relative to some measure of fundamental value such
as book value or earnings.
Behavioral finance - ANS The body of research into the role that emotions and other
subjective factors play in investment decisions. Some behaviour factors are: overconfidence,
self-attribution bias, loss aversion, representativeness, narrow framing, belief perseverance,
anchoring and familiarity bias.
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@2026 EDITION ALLRIGHTS RESERVED
, Overconfidence - ANS The tendency to overestimate one's ability to perform a particular
task.
Self-attribution bias - ANS The tendency to overestimate the role that one's intelligence or
skill plays in brining about a favourable investment result and to underestimate the role of
chance in that result.
Loss aversion - ANS A situation in which the desire to avoid losses is so great that investors
who are otherwise risk-averse will exhibit risk-seeking behavior in an attempt to avoid a loss.
Representativeness - ANS Cognitive biases that occur because people have difficult thinking
about randomness in outcomes.
Narrowing framing - ANS Analyzing an investment problem in isolation or in a particularly
narrow context rather than looking at all aspects of the problem.
Belief Perseverance - ANS The tendency to ignore or discount evidence contrary to one's
existing belief.
Anchoring - ANS A phenomenon in which individuals place too much weight on information
that they have at hand, even when that information is not particularly relevant.
Familiarity Bias - ANS The tendency to invest in securities simply because they are familiar to
the investors.
Technical Analysis - ANS The study of the various forces at work in the marketplace and their
effect on stock prices.
3
@2026 EDITION ALLRIGHTS RESERVED
ANSWERS 100% PASS 2026 EDITION
Bond rating - ANS Letter grades that designate investment quality and are assigned to a bond
issue by rating agencies. Best-know rating agencies are Moody's, standard & poor's and fitch.
Random walk Hypothesis - ANS The theory that stock price movements are unpredictable, so
there's no way to know where prices are headed.
Efficient market hypothesis (EMH) - ANS Basic theory of the behavior of efficient markets, in
which there are large number of knowledgeable investors who react quickly to new
information, causing securities prices to adjust quickly and accurately.
Market anomalies - ANS Irregularities or deviations from the behaviour one would expect in
an efficient market. Four effects: Calendar effect, small-firm effect, post earning announcement
drift (or momentum), and value effect.
Weak form (EMH) - ANS A form of the EMH. Holding that past data on stock prices are no use
in predicting future prices. Prices follow random walk.
Semi-strong form (EMH) - ANS A form of the EMH. Holding that abnormally large profits
cannot be consistently earned using publicly available information. Stock prices will adjust to
news before you can trade the stock.
1
@2026 EDITION ALLRIGHTS RESERVED
,Strong form (EMH) - ANS Form of the EMH that holds that there is no information, public or
private, that allows investors to consistently earn abnormal profits. Insider trading.
Arbitrage - ANS A transaction in which an investor simultaneously buys and sells identical
assets at different prices to earn an instant, risk-free profit.
Calendar effect - ANS A form of market anomalies. Stock returns may be closely tied to the
time of the year or time of the week.
January effect - ANS Tendency for small-cap stocks to outperform large stocks by an
unusually wide margin.
Small-firm effect - ANS A form of market anomalies. Small firms tend to earn positive
abnormal returns of as much as 5% to 6% per year.
Post earnings announcement drift (or momentum): - ANS A form of market anomalies.
Another market anomaly has to do with how stock prices react to earnings announcements.
Stock prices that are gone up will keep going up and vice versa.
Value effect - ANS A form of market anomalies. Best way to make money in the market is to
buy stocks that have relatively low prices relative to some measure of fundamental value such
as book value or earnings.
Behavioral finance - ANS The body of research into the role that emotions and other
subjective factors play in investment decisions. Some behaviour factors are: overconfidence,
self-attribution bias, loss aversion, representativeness, narrow framing, belief perseverance,
anchoring and familiarity bias.
2
@2026 EDITION ALLRIGHTS RESERVED
, Overconfidence - ANS The tendency to overestimate one's ability to perform a particular
task.
Self-attribution bias - ANS The tendency to overestimate the role that one's intelligence or
skill plays in brining about a favourable investment result and to underestimate the role of
chance in that result.
Loss aversion - ANS A situation in which the desire to avoid losses is so great that investors
who are otherwise risk-averse will exhibit risk-seeking behavior in an attempt to avoid a loss.
Representativeness - ANS Cognitive biases that occur because people have difficult thinking
about randomness in outcomes.
Narrowing framing - ANS Analyzing an investment problem in isolation or in a particularly
narrow context rather than looking at all aspects of the problem.
Belief Perseverance - ANS The tendency to ignore or discount evidence contrary to one's
existing belief.
Anchoring - ANS A phenomenon in which individuals place too much weight on information
that they have at hand, even when that information is not particularly relevant.
Familiarity Bias - ANS The tendency to invest in securities simply because they are familiar to
the investors.
Technical Analysis - ANS The study of the various forces at work in the marketplace and their
effect on stock prices.
3
@2026 EDITION ALLRIGHTS RESERVED
