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

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?

Stockholders are residual claimants, meaning that they

If a forecast made using all available information is not perfectly accurate, then it is

Using the Gordon growth model, if D_{1 is $.50,} k_{e is 7%, and g is 5%, then the present value of the stock is}

Another way to state the efficient markets condition is: in an efficient market,

Rational expectations forecast errors will on average be ________ and therefore ________ be predicted ahead of time.

If a corporation announces that it expects quarterly earnings to increase by 25% and it actually sees an increase of 22%, what should happen to the price of the corporation's stock if the efficient markets hypothesis holds, everything else held constant?

The number and availability of discount brokers has grown rapidly since the mid-1970s. The efficient markets hypothesis predicts that people who use discount brokers

Tests used to rate the performance of rules developed in technical analysis conclude that technical analysis

If a market participant believes that a stock price is irrationally high, they may try to borrow stock from brokers to sell in the market and then make a profit by buying the stock back again after the stock falls in price. This practice is called

Which of the following accurately summarize the empirical evidence about technical analysis?

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

In a one-period valuation model, a decrease in the required return on investments in equity causes a(n) ________ in the ________ price of a stock.

If expectations are formed rationally, then individuals

What rights does ownership interest give stockholders?

________ means people are more unhappy when they suffer losses than they are happy when they achieve gains.

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

________ and ________ may provide an explanation for stock market bubbles.

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

Evidence against market efficiency includes