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

In the one-period valuation model with no dividend payments the current price of the stock is given by ________.

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

What rights does ownership interest give stockholders?

Increased uncertainty resulting from the subprime crisis ________ the required return on investment in equity.

In the Gordon growth model, a decrease in the required rate of return on equity ________.

In rational expectations theory, the term "optimal forecast" is essentially synonymous with ________.

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

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

What is the current price of a utility company's stock if the current dividend is $0.20, the expected constant growth rate in dividends is 2% and the required return is 8%?

In a rational bubble, investors can have ________ expectations that a bubble is occurring but continue to hold the asset anyway.

The efficient markets hypothesis suggests that investors ________.

People have a strong incentive to form rational expectations because ________.

You have observed that the forecasts of an investment advisor consistently outperform the other reported forecasts. The efficient markets hypothesis says that future forecasts by this advisor ________.

In the one-period valuation model, the current stock price increases if ________.

In the generalized dividend model, the current stock price is the sum of ________.

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 ________.

Using the one-period valuation model, assuming a year-end dividend of $1.00, an expected sales price of $100, and a required rate of return of 5 percent, the current price of the stock would be ________.

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

If in an efficient market all prices are correct and reflect market fundamentals, which of the following is a false statement?

Periodic payments of net earnings to shareholders are known as ________.