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

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

The view that expectations change relatively slowly over time in response to new information is known in economics as ________.

If you your stock broker tells you that you should buy stock in Ford as it has devised a new hybrid engine system that will reduce consumption of fuel by 90 percent, would you follow this advice and buy Ford's stock?

________ occurs when market participants observe returns on a security that are larger than what is justified by the characteristics of that security and take action to quickly eliminate the unexploited profit opportunity.

Assume that your economics professor announces to your class that after thirty years of giving exams only on scheduled dates, this semester she will give only surprise quizzes. What is the rational expectation response to this new policy? Why does your self-interest require that you change your behavior? What would the consequences be for students who changed their expectations about exams adaptively?

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

If during the past decade the average rate of monetary growth has been 5 percent and the average inflation rate has been 5 percent, everything else held constant, when the Bank of Canada announces that the new rate of monetary growth will be 10 percent, the adaptive expectation forecast of the inflation rate is ________.

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

A company's dividend in one year is $1.00 and this is expected to increase at a constant rate of 2%. If the required return on this stock increases from 10% to 12$ by how much will the stock price change?

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

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

In the Gordon Growth Model, the growth rate is assumed to be ________ the required return on equity.

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 ________.

If the optimal forecast of the return on a security exceeds the equilibrium return, then ________.

Psychologists have found that people tend to be ________ in their own judgments.

General Electric announces that it is going to cut its dividends by $0.02 per share in the future. This, everything else remaining the same, will cause its current stock price to ________.

New information that might lead to a decrease in an asset's price might be ________.

A change in perceived risk of a stock changes ________.

Financial markets quickly eliminate unexploited profit opportunities through changes in ________.

A situation when an asset price differs from its fundamental value is ________.