Question 1

According to rational expectations theory, forecast errors of expectations

Accepted Answer

A)  are more likely to be negative than positive. 
B)  are more likely to be positive than negative. 
C)  tend to be persistently high or low. 
D)  are unpredictable. 
A)  are more likely to be negative than positive. 
B)  are more likely to be positive than negative. 
C)  tend to be persistently high or low. 
D)  are unpredictable.

Question 2

The advantage of a "buy-and-hold strategy" is that

Accepted Answer

A)  net profits will tend to be higher because there will be fewer brokerage commissions. 
B)  losses will eventually be eliminated. 
C)  the longer a stock is held, the higher will be its price. 
D)  profits are guaranteed. 
A)  net profits will tend to be higher because there will be fewer brokerage commissions. 
B)  losses will eventually be eliminated. 
C)  the longer a stock is held, the higher will be its price. 
D)  profits are guaranteed.

Question 3

A stock's price will fall if there is

Accepted Answer

A)  a decrease in perceived risk. 
B)  an increase in the required rate of return. 
C)  an increase in the future sales price. 
D)  current dividends are high. 
A)  a decrease in perceived risk. 
B)  an increase in the required rate of return. 
C)  an increase in the future sales price. 
D)  current dividends are high.

Question 4

Using the Gordon growth model, a stock's current price decreases when

Accepted Answer

A)  the dividend growth rate increases. 
B)  the required return on equity decreases. 
C)  the expected dividend payment increases. 
D)  the growth rate of dividends decreases. 
A)  the dividend growth rate increases. 
B)  the required return on equity decreases. 
C)  the expected dividend payment increases. 
D)  the growth rate of dividends decreases.

Question 5

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)  $100.11 
A)  $110.11. 
B)  $121.12. 
C)  $100.10. 
D)  $100.11

Question 6

The January effect refers to the fact that

Accepted Answer

A)  most stock market crashes have occurred in January. 
B)  stock prices tend to fall in January. 
C)  stock prices have historically experienced abnormal price increases in January. 
D)  the football team winning the Super Bowl accurately predicts the behavior of the stock market for the next year. 
A)  most stock market crashes have occurred in January. 
B)  stock prices tend to fall in January. 
C)  stock prices have historically experienced abnormal price increases in January. 
D)  the football team winning the Super Bowl accurately predicts the behavior of the stock market for the next year.

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. 
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.

Question 8

If a mutual fund outperforms the market in one period, evidence suggests that this fund is

Accepted Answer

A)  highly likely to consistently outperform the market in subsequent periods due to its superior investment strategy. 
B)  likely to under-perform the market in subsequent periods to average its overall returns. 
C)  not likely to consistently outperform the market in subsequent periods. 
D)  not likely to outperform the market in any subsequent period. 
A)  highly likely to consistently outperform the market in subsequent periods due to its superior investment strategy. 
B)  likely to under-perform the market in subsequent periods to average its overall returns. 
C)  not likely to consistently outperform the market in subsequent periods. 
D)  not likely to outperform the market in any subsequent period.

Question 9

The global financial crisis lead to a decline in stock prices because

Accepted Answer

A)  of a lowered expected dividend growth rate. 
B)  of a lowered required return on investment in equity. 
C)  higher expected future stock prices. 
D)  higher current dividends. 
A)  of a lowered expected dividend growth rate. 
B)  of a lowered required return on investment in equity. 
C)  higher expected future stock prices. 
D)  higher current dividends.

Question 10

Mean reversion refers to the fact that

Accepted Answer

A)  small firms have higher than average returns. 
B)  stocks that have had low returns in the past are more likely to do well in the future. 
C)  stock returns are high during the month of January. 
D)  stock prices fluctuate more than is justified by fundamentals. 
A)  small firms have higher than average returns. 
B)  stocks that have had low returns in the past are more likely to do well in the future. 
C)  stock returns are high during the month of January. 
D)  stock prices fluctuate more than is justified by fundamentals.

Question 11

An expectation may fail to be rational if

Accepted Answer

A)  relevant information was not available at the time the forecast is made. 
B)  relevant information is available but ignored at the time the forecast is made. 
C)  information changes after the forecast is made. 
D)  information was available to insiders only. 
A)  relevant information was not available at the time the forecast is made. 
B)  relevant information is available but ignored at the time the forecast is made. 
C)  information changes after the forecast is made. 
D)  information was available to insiders only.

Question 12

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. 
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.

Question 13

You believe that a corporation's dividends will grow 5% on average into the foreseeable future. If the company's last dividend payment was $5 what should be the current price of the stock assuming a 12% required return?

Accepted Answer

Use the Gordon Growt

Question 14

Using the Gordon growth model, a stock's 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. 
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.

According to rational expectations theory, forecast errors of expectations

The advantage of a "buy-and-hold strategy" is that

A stock's price will fall if there is

Using the Gordon growth model, a stock's current price decreases when

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

The January effect refers to the fact that

According to rational expectations,

If a mutual fund outperforms the market in one period, evidence suggests that this fund is

The global financial crisis lead to a decline in stock prices because

Mean reversion refers to the fact that

An expectation may fail to be rational if

The small-firm effect refers to the

You believe that a corporation's dividends will grow 5% on average into the foreseeable future. If the company's last dividend payment was $5 what should be the current price of the stock assuming a 12% required return?

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

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

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

According to rational expectations theory, forecast errors of expectations

The advantage of a "buy-and-hold strategy" is that

A stock's price will fall if there is

Using the Gordon growth model, a stock's current price decreases when

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

The January effect refers to the fact that

According to rational expectations,

If a mutual fund outperforms the market in one period, evidence suggests that this fund is

The global financial crisis lead to a decline in stock prices because

Mean reversion refers to the fact that

An expectation may fail to be rational if

The small-firm effect refers to the

You believe that a corporation's dividends will grow 5% on average into the foreseeable future. If the company's last dividend payment was $5 what should be the current price of the stock assuming a 12% required return?

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

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