Question 1

The efficient markets hypothesis suggests that if an unexploited profit opportunity arises in an efficient market

Accepted Answer

A)  it will tend to go unnoticed for some time.
B)  it will be quickly eliminated.
C)  financial analysts are your best source of this information.
D)  all profits will be eliminated through taxation.E) A) and B)
F) B) and C)

Question 2

Does the efficient markets hypothesis imply that the average investor will not earn anything by purchasing stock?

Accepted Answer

A)  No,the efficient market hypothesis implies that the average investor should not expect to receive abnormally high returns on a consistent basis.
B)  Yes,the efficient markets hypothesis implies that the best that the average investor can do is break even.
C)  No,the efficient market hypothesis implies that the investor will consistently earn abnormally high returns by purchasing stock.
D)  Yes,the efficient markets hypothesis implies that stock purchases are extremely risky and that the average investor has no hope of recovering any loss.E) B) and D)
F) A) and D)

Question 3

Using the Gordon growth model,a stock's current price will increase if

Accepted Answer

A)  the dividend growth rate increases.
B)  the growth rate of dividends falls.
C)  the required rate of return on equity rises.
D)  the expected sales price rises.E) None of the above
F) A) and C)

Question 4

If market participants notice that a variable behaves differently now than in the past,then,according to rational expectations theory,we can expect market participants to

Accepted Answer

A)  change the way they form expectations about future values of the variable.
B)  begin to make systematic mistakes.
C)  no longer pay close attention to movements in this variable.
D)  give up trying to forecast this variable.E) B) and D)
F) A) and B)

Question 5

A stockholder's ownership of a company's stock gives her the right to

Accepted Answer

A)  vote and be the primary claimant of all cash flows.
B)  vote and be the residual claimant of all cash flows.
C)  manage and assume responsibility for all liabilities.
D)  vote and assume responsibility for all liabilities.E) A) and C)
F) All of the above

Question 6

According to the efficient markets hypothesis,the current price of a financial security

Accepted Answer

A)  is the discounted net present value of future interest payments.
B)  is determined by the lowest successful bidder.
C)  fully reflects all available relevant information.
D)  is a result of none of the above.E) B) and C)
F) C) and D)

Question 7

According to rational expectations

Accepted Answer

A)  expectations of inflation are viewed as being an average of past inflation rates.
B)  expectations of inflation are viewed as being an average of expected future inflation rates.
C)  expectations formation indicates that changes in expectations occur slowly over time as past data change.
D)  expectations will not differ from optimal forecasts using all available information.E) A) and B)
F) C) and D)

Question 8

Using the one-period valuation model,assuming a year-end dividend of $0.11,an expected sales price of $110,and a required rate of return of 10%,the current price of the stock would be

Accepted Answer

A)  $110.11.
B)  $121.12.
C)  $100.10.
D)  $100.11E) C) and D)
F) A) and D)

Question 9

The small-firm effect refers to the

Accepted Answer

A)  negative returns earned by small firms.
B)  returns equal to large firms earned by small firms.
C)  abnormally high returns earned by small firms.
D)  low returns after adjusting for risk earned by small firms.E) C) and D)
F) A) and B)

Question 10

A phenomenon closely related to market overreaction is

Accepted Answer

A)  the random walk.
B)  the small-firm effect.
C)  the January effect.
D)  excessive volatility.E) All of the above
F) B) and D)

Question 11

The efficient markets hypothesis predicts that stock prices follow a "random walk." The implication of this hypothesis for investing in stocks is

Accepted Answer

A)  a "churning strategy" of buying and selling often to catch market swings.
B)  turning over your stock portfolio each month,selecting stocks by throwing darts at the stock page.
C)  a "buy and hold strategy" of holding stocks to avoid brokerage commissions.
D)  following the advice of technical analysts.E) B) and C)
F) A) and B)

Question 12

In the generalized dividend model,if the expected sales price is in the distant future

Accepted Answer

A)  it does not affect the current stock price.
B)  it is more important than dividends in determining the current stock price.
C)  it is equally important with dividends in determining the current stock price.
D)  it is less important than dividends but still affects the current stock price.E) C) and D)
F) A) and C)

Question 13

The elimination of unexploited profit opportunities requires that ________ market participants be well informed.

Accepted Answer

A)  all
B)  a few
C)  zero
D)  manyE) A) and C)
F) B) and C)

Question 14

Your best friend calls and gives you the latest stock market "hot tip" that he heard at the health club. Should you act on this information? Why or why not?

Accepted Answer

No,if this informati...

Question 15

To say that stock prices follow a "random walk" is to argue that stock prices

Accepted Answer

A)  rise,then fall,then rise again.
B)  rise,then fall in a predictable fashion.
C)  tend to follow trends.
D)  cannot be predicted based on past trends.E) All of the above
F) C) and D)

Question 16

In the one-period valuation model,an increase in the required return on investments in equity

Accepted Answer

A)  increases the expected sales price of a stock.
B)  increases the current price of a stock.
C)  reduces the expected sales price of a stock.
D)  reduces the current price of a stock.E) All of the above
F) A) and D)

Question 17

Studies of mutual fund performance indicate that mutual funds that outperformed the market in one time period usually

Accepted Answer

A)  beat the market in the next time period.
B)  beat the market in the next two subsequent time periods.
C)  beat the market in the next three subsequent time periods.
D)  do not beat the market in the next time period.E) A) and C)
F) B) and C)

Question 18

The major criticism of the view that expectations are formed adaptively is that

Accepted Answer

A)  this view ignores that people use more information than just past data to form their expectations.
B)  it is easier to model adaptive expectations than it is to model rational expectations.
C)  adaptive expectations models have no predictive power.
D)  people are irrational and therefore never learn from past mistakes.E) None of the above
F) A) and C)

Question 19

Suppose Barbara looks out in the morning and sees a clear sky so decides that a picnic for lunch is a good idea. Last night the weather forecast included a 100% chance of rain by midday but Barbara did not watch the local news program. Is Barbara's prediction of good weather at lunch time rational? Why or why not?

Accepted Answer

No,this prediction is not using rational...

Question 20

________ is the field of study that applies concepts from social sciences such as psychology and sociology to help understand the behavior of securities prices.

Accepted Answer

A)  Behavioral finance
B)  Strategical finance
C)  Methodical finance
D)  Procedural financeE) B) and C)
F) None of the above

Exam 7: The Stock Market, the Theory of Rational Expectations, and the Efficient Market Hypothesis

To say that stock prices follow a "random walk" is to argue that stock prices

Correct Answer
verified

Your best friend calls and gives you the latest stock market "hot tip" that he heard at the health club. Should you act on this information? Why or why not?

Correct Answer
verified
No,if this informati...
View Answer

According to the efficient markets hypothesis,the current price of a financial security

Correct Answer
verified

A phenomenon closely related to market overreaction is

Correct Answer
verified

In the one-period valuation model,an increase in the required return on investments in equity

Correct Answer
verified

In the generalized dividend model,if the expected sales price is in the distant future

Correct Answer
verified

According to rational expectations

Correct Answer
verified

The efficient markets hypothesis predicts that stock prices follow a "random walk." The implication of this hypothesis for investing in stocks is

Correct Answer
verified

Using the Gordon growth model,a stock's current price will increase if

Correct Answer
verified

A stockholder's ownership of a company's stock gives her the right to

Correct Answer
verified

Using the one-period valuation model,assuming a year-end dividend of $0.11,an expected sales price of $110,and a required rate of return of 10%,the current price of the stock would be

Correct Answer
verified

The efficient markets hypothesis suggests that if an unexploited profit opportunity arises in an efficient market

Correct Answer
verified

________ is the field of study that applies concepts from social sciences such as psychology and sociology to help understand the behavior of securities prices.

Correct Answer
verified

Studies of mutual fund performance indicate that mutual funds that outperformed the market in one time period usually

Correct Answer
verified

The elimination of unexploited profit opportunities requires that ________ market participants be well informed.

Correct Answer
verified

The major criticism of the view that expectations are formed adaptively is that

Correct Answer
verified

Does the efficient markets hypothesis imply that the average investor will not earn anything by purchasing stock?

Correct Answer
verified

The small-firm effect refers to the

Correct Answer
verified

If market participants notice that a variable behaves differently now than in the past,then,according to rational expectations theory,we can expect market participants to

Correct Answer
verified

Correct Answer
verified
No,this prediction is not using rational...
View Answer

Exam 7: The Stock Market, the Theory of Rational Expectations, and the Efficient Market Hypothesis

To say that stock prices follow a "random walk" is to argue that stock prices

Correct AnswerverifiedShow Answer

Your best friend calls and gives you the latest stock market "hot tip" that he heard at the health club. Should you act on this information? Why or why not?

Correct AnswerverifiedNo,if this informati...View AnswerShow Answer

According to the efficient markets hypothesis,the current price of a financial security

Correct AnswerverifiedShow Answer

A phenomenon closely related to market overreaction is

Correct AnswerverifiedShow Answer

In the one-period valuation model,an increase in the required return on investments in equity

Correct AnswerverifiedShow Answer

In the generalized dividend model,if the expected sales price is in the distant future

Correct AnswerverifiedShow Answer

According to rational expectations

Correct AnswerverifiedShow Answer

The efficient markets hypothesis predicts that stock prices follow a "random walk." The implication of this hypothesis for investing in stocks is

Correct AnswerverifiedShow Answer

Using the Gordon growth model,a stock's current price will increase if

Correct AnswerverifiedShow Answer

A stockholder's ownership of a company's stock gives her the right to

Correct AnswerverifiedShow Answer

Using the one-period valuation model,assuming a year-end dividend of $0.11,an expected sales price of $110,and a required rate of return of 10%,the current price of the stock would be

Correct AnswerverifiedShow Answer

The efficient markets hypothesis suggests that if an unexploited profit opportunity arises in an efficient market

Correct AnswerverifiedShow Answer

________ is the field of study that applies concepts from social sciences such as psychology and sociology to help understand the behavior of securities prices.

Correct AnswerverifiedShow Answer

Studies of mutual fund performance indicate that mutual funds that outperformed the market in one time period usually

Correct AnswerverifiedShow Answer

The elimination of unexploited profit opportunities requires that ________ market participants be well informed.

Correct AnswerverifiedShow Answer

The major criticism of the view that expectations are formed adaptively is that

Correct AnswerverifiedShow Answer

Does the efficient markets hypothesis imply that the average investor will not earn anything by purchasing stock?

Correct AnswerverifiedShow Answer

The small-firm effect refers to the

Correct AnswerverifiedShow Answer

If market participants notice that a variable behaves differently now than in the past,then,according to rational expectations theory,we can expect market participants to

Correct AnswerverifiedShow Answer

Correct AnswerverifiedNo,this prediction is not using rational...View AnswerShow Answer

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No,if this informati...
View Answer

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Correct Answer
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No,this prediction is not using rational...
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