Question 1

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. 
A)  the random walk. 
B)  the small-firm effect. 
C)  the January effect. 
D)  excessive volatility.

Question 2

One of the assumptions of the Gordon Growth Model is that dividends will continue growing at ________ rate.

Accepted Answer

A)  an increasing 
B)  a fast 
C)  a constant 
D)  an escalating 
A)  an increasing 
B)  a fast 
C)  a constant 
D)  an escalating

Question 3

If additional information is not used when forming an optimal forecast because it is not available at that time, then expectations are

Accepted Answer

A)  obviously formed irrationally. 
B)  still considered to be formed rationally. 
C)  formed adaptively. 
D)  formed equivalently. 
A)  obviously formed irrationally. 
B)  still considered to be formed rationally. 
C)  formed adaptively. 
D)  formed equivalently.

Question 4

The theory of rational expectations, when applied to financial markets, is known as

Accepted Answer

A)  monetarism. 
B)  the efficient markets hypothesis. 
C)  the theory of strict liability. 
D)  the theory of impossibility. 
A)  monetarism. 
B)  the efficient markets hypothesis. 
C)  the theory of strict liability. 
D)  the theory of impossibility.

Question 5

Loss aversion can explain why very little ________ actually takes place in the securities market.

Accepted Answer

A)  short selling 
B)  bargaining 
C)  bartering 
D)  negotiating 
A)  short selling 
B)  bargaining 
C)  bartering 
D)  negotiating

Question 6

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 rationa

Question 7

In the one-period valuation model, the value of a share of stock today depends upon

Accepted Answer

A)  the present value of both the dividends and the expected sales price. 
B)  only the present value of the future dividends. 
C)  the actual value of the dividends and expected sales price received in one year. 
D)  the future value of dividends and the actual sales price. 
A)  the present value of both the dividends and the expected sales price. 
B)  only the present value of the future dividends. 
C)  the actual value of the dividends and expected sales price received in one year. 
D)  the future value of dividends and the actual sales price.

Question 8

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. 
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.

Question 9

You read a story in the newspaper announcing the proposed merger of Dell Computer and Gateway. The merger is expected to greatly increase Gateway's profitability. If you decide to invest in Gateway stock, you can expect to earn

Accepted Answer

A)  above average returns since you will share in the higher profits. 
B)  above average returns since your stock price will definitely appreciate as higher profits are earned. 
C)  below average returns since computer makers have low profit rates. 
D)  a normal return since stock prices adjust to reflect expected changes in profitability almost immediately. 
A)  above average returns since you will share in the higher profits. 
B)  above average returns since your stock price will definitely appreciate as higher profits are earned. 
C)  below average returns since computer makers have low profit rates. 
D)  a normal return since stock prices adjust to reflect expected changes in profitability almost immediately.

Question 10

When a corporation announces a major decline in earnings, the stock price may initially decline significantly and then rise back to normal levels over the next few weeks. This impact is called

Accepted Answer

A)  the January effect. 
B)  mean reversion. 
C)  market overreaction. 
D)  the small-firm effect. 
A)  the January effect. 
B)  mean reversion. 
C)  market overreaction. 
D)  the small-firm effect.

Question 11

Which of the following types of information most likely allows the exploitation of a profit opportunity?

Accepted Answer

A)  Financial analysts' published recommendations 
B)  Technical analysis 
C)  Hot tips from a stockbroker 
D)  Insider information 
A)  Financial analysts' published recommendations 
B)  Technical analysis 
C)  Hot tips from a stockbroker 
D)  Insider information

Question 12

People have a strong incentive to form rational expectations because

Accepted Answer

A)  they are guaranteed of success in the stock market. 
B)  it is costly not to do so. 
C)  it is costly to do so. 
D)  everyone wants to be rational. 
A)  they are guaranteed of success in the stock market. 
B)  it is costly not to do so. 
C)  it is costly to do so. 
D)  everyone wants to be rational.

Question 13

Economists have focused more attention on the formation of expectations in recent years. This increase in interest can probably best be explained by the recognition that

Accepted Answer

A)  expectations influence the behavior of participants in the economy and thus have a major impact on economic activity. 
B)  expectations influence only a few individuals, have little impact on the overall economy, but can have important effects on a few markets. 
C)  expectations influence many individuals, have little impact on the overall economy, but can have distributional effects. 
D)  models that ignore expectations have little predictive power, even in the short run. 
A)  expectations influence the behavior of participants in the economy and thus have a major impact on economic activity. 
B)  expectations influence only a few individuals, have little impact on the overall economy, but can have important effects on a few markets. 
C)  expectations influence many individuals, have little impact on the overall economy, but can have distributional effects. 
D)  models that ignore expectations have little predictive power, even in the short run.

Question 14

If a forecast is made using all available information, then economists say that the expectation formation is

Accepted Answer

A)  rational. 
B)  irrational. 
C)  adaptive. 
D)  reasonable. 
A)  rational. 
B)  irrational. 
C)  adaptive. 
D)  reasonable.

Question 15

If during the past decade the average rate of monetary growth has been 5% and the average inflation rate has been 5%, everything else held constant, when the Federal Reserve announces that the new rate of monetary growth will be 10%, the adaptive expectation forecast of the inflation rate is

Accepted Answer

A)  5%. 
B)  between 5 and 10%. 
C)  10%. 
D)  more than 10%. 
A)  5%. 
B)  between 5 and 10%. 
C)  10%. 
D)  more than 10%.

Question 16

For small investors, the best way to pursue a "buy and hold" strategy is to

Accepted Answer

A)  buy and sell individual stocks frequently. 
B)  buy no-load mutual funds with high management fees. 
C)  buy no-load mutual funds with low management fees. 
D)  buy load mutual funds. 
A)  buy and sell individual stocks frequently. 
B)  buy no-load mutual funds with high management fees. 
C)  buy no-load mutual funds with low management fees. 
D)  buy load mutual funds.

Question 17

Periodic payments of net earnings to shareholders are known as

Accepted Answer

A)  capital gains. 
B)  dividends. 
C)  profits. 
D)  interest. 
A)  capital gains. 
B)  dividends. 
C)  profits. 
D)  interest.

Question 18

Using the Gordon growth formula, if D1 is $2.00, ke is 12% or 0.12, and g is 10% or 0.10, then the current stock price is

Accepted Answer

A)  $20. 
B)  $50. 
C)  $100. 
D)  $150. 
A)  $20. 
B)  $50. 
C)  $100. 
D)  $150.

Question 19

The efficient markets hypothesis implies that prices in the stock market

Accepted Answer

A)  follow a definite pattern. 
B)  are more likely to go up than down. 
C)  always undervalue the true assets of a corporation. 
D)  are unpredictable. 
A)  follow a definite pattern. 
B)  are more likely to go up than down. 
C)  always undervalue the true assets of a corporation. 
D)  are unpredictable.

Question 20

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

Accepted Answer

A)  all 
B)  a few 
C)  zero 
D)  many 
A)  all 
B)  a few 
C)  zero 
D)  many

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

A phenomenon closely related to market overreaction is

One of the assumptions of the Gordon Growth Model is that dividends will continue growing at ________ rate.

If additional information is not used when forming an optimal forecast because it is not available at that time, then expectations are

The theory of rational expectations, when applied to financial markets, is known as

Loss aversion can explain why very little ________ actually takes place in the securities market.

In the one-period valuation model, the value of a share of stock today depends upon

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

You read a story in the newspaper announcing the proposed merger of Dell Computer and Gateway. The merger is expected to greatly increase Gateway's profitability. If you decide to invest in Gateway stock, you can expect to earn

When a corporation announces a major decline in earnings, the stock price may initially decline significantly and then rise back to normal levels over the next few weeks. This impact is called

Which of the following types of information most likely allows the exploitation of a profit opportunity?

People have a strong incentive to form rational expectations because

Economists have focused more attention on the formation of expectations in recent years. This increase in interest can probably best be explained by the recognition that

If a forecast is made using all available information, then economists say that the expectation formation is

If during the past decade the average rate of monetary growth has been 5% and the average inflation rate has been 5%, everything else held constant, when the Federal Reserve announces that the new rate of monetary growth will be 10%, the adaptive expectation forecast of the inflation rate is

For small investors, the best way to pursue a "buy and hold" strategy is to

Periodic payments of net earnings to shareholders are known as

Using the Gordon growth formula, if D1 is $2.00, ke is 12% or 0.12, and g is 10% or 0.10, then the current stock price is

The efficient markets hypothesis implies that prices in the stock market

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

Why Study Money, Banking, and Financial Markets

An Overview of the Financial System

What Is Money

Understanding Interest Rates

The Behavior of Interest Rates

The Risk and Term Structure of Interest Rates

An Economic Analysis of Financial Structure

Financial Crises

Banking and the Management of Financial Institutions

Economic Analysis of Financial Regulation

Banking Industry: Structure and Competition

Nonbank Finance

Financial Derivatives

Conflicts of Interest in the Financial Industry

Central Banks and the Federal Reserve System

The Money Supply Process

Tools of Monetary Policy

The Conduct of Monetary Policy: Strategy and Tactics

The Foreign Exchange Market

The International Financial System

Quantity Theory, Inflation, and the Demand for Money

Aggregate Demand and Supply Analysis

Monetary Policy Theory

Transmission Mechanisms of Monetary Policy

Filters

Using the Gordon growth formula, if D₁ is $2.00, k_e is 12% or 0.12, and g is 10% or 0.10, then the current stock price is