The Small-Firm Effect Refers to the Observation That Small Firms

question 7

Multiple Choice

The small-firm effect refers to the observation that small firms' stocks

• A) follow a random walk but large firms' stocks do not.
• B) have earned abnormally low returns given their greater risk.
• C) have earned abnormally high returns even taking into account their greater risk.
• D) sell for lower prices than do large firms' stocks.

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Definitions:

Caveat Emptor

“Let the buyer beware.”

Unmerchantable

Referring to goods or products that fail to meet minimum quality standards for sale to consumers or are otherwise unfit for their intended purpose.

Merchantability

A warranty that goods sold meet reasonable quality and usage standards as per the market.

Implied Warranty

A legal assumption that a product will meet certain standards of quality and reliability even if not explicitly stated.