Question 1

Which of the following is true?

Accepted Answer

A) Managed equity funds that have yielded attractive returns during the last 5 or 10 years can generally be counted on to yield similar returns in the future. 
B) Managed funds generally outperform indexed equity mutual funds. 
C) An investment strategy that yielded a high rate of return in the past will often be disastrous in the future. 
D) Indexed equity mutual funds are usually tied directly to either the Consumer Price Index or the GDP deflator. 
A) Managed equity funds that have yielded attractive returns during the last 5 or 10 years can generally be counted on to yield similar returns in the future. 
B) Managed funds generally outperform indexed equity mutual funds. 
C) An investment strategy that yielded a high rate of return in the past will often be disastrous in the future. 
D) Indexed equity mutual funds are usually tied directly to either the Consumer Price Index or the GDP deflator. C

Question 2

Historically,which of the following has had the highest average annual rate of return?

Accepted Answer

A) corporate bonds 
B) money market mutual funds 
C) corporate stocks 
D) U.S.Treasury bonds 
A) corporate bonds 
B) money market mutual funds 
C) corporate stocks 
D) U.S.Treasury bonds C

Question 3

If an investor's primary stock holding is currently Exxon Mobil,the purchase of which of the following stocks would provide the investor with the largest reduction in risk?

Accepted Answer

A) BP / Amoco. 
B) Shell Oil Corporation. 
C) General Motors. 
D) Texaco. 
A) BP / Amoco. 
B) Shell Oil Corporation. 
C) General Motors. 
D) Texaco. C

Question 4

The current market value of a stock option contract to purchase 1,000 shares of IBM stock at a price of $100 that can be exercised five years from now would

Accepted Answer

A) increase if the expected future price of IBM stock rose. 
B) increase if the expected future price of IBM stock fell. 
C) decrease if the expected future price of IBM stock rose. 
D) remain unchanged regardless of the expected future price of IBM stock. 
A) increase if the expected future price of IBM stock rose. 
B) increase if the expected future price of IBM stock fell. 
C) decrease if the expected future price of IBM stock rose. 
D) remain unchanged regardless of the expected future price of IBM stock.

Question 5

Which of the following would be most likely to push stock prices higher?

Accepted Answer

A) higher interest rates and the expectation of larger future corporate profits 
B) higher interest rates and the expectation of smaller future corporate profits 
C) lower interest rates and the expectation of larger future corporate profits 
D) lower interest rates and the expectation of smaller future corporate profits 
A) higher interest rates and the expectation of larger future corporate profits 
B) higher interest rates and the expectation of smaller future corporate profits 
C) lower interest rates and the expectation of larger future corporate profits 
D) lower interest rates and the expectation of smaller future corporate profits

Question 6

Which of the following would reduce the risk of an investment in the stock market?

Accepted Answer

A) investing in a portfolio of diverse firms 
B) holding the investment for a long period of time 
C) both a and b 
D) neither a nor b 
A) investing in a portfolio of diverse firms 
B) holding the investment for a long period of time 
C) both a and b 
D) neither a nor b

Question 7

During the last sixty years,the broad stock market (Standard and Poor's 500 Index)yielded an average annual nominal rate of return of approximately ____ and real rate of return of approximately ____.

Accepted Answer

A) 5 percent;2 percent 
B) 10 percent;7 percent 
C) 17 percent;9 percent 
D) 9 percent;17 percent 
A) 5 percent;2 percent 
B) 10 percent;7 percent 
C) 17 percent;9 percent 
D) 9 percent;17 percent

Question 8

The stock price of a firm is primarily a reflection of the

Accepted Answer

A) firm's current net earnings per share. 
B) firm's expected future net earnings per share. 
C) discounted value of the firm's expected future net earnings per share. 
D) firm's current net earnings per share multiplied by the interest rate. 
E) book value of the firm. 
A) firm's current net earnings per share. 
B) firm's expected future net earnings per share. 
C) discounted value of the firm's expected future net earnings per share. 
D) firm's current net earnings per share multiplied by the interest rate. 
E) book value of the firm.

Question 9

Buying shares of corporate stock tends to be more risky when

Accepted Answer

A) the stock of a single corporation is purchased. 
B) the stock may have to be sold within a few months. 
C) all stocks bought are in the same industry. 
D) all of the above are true. 
A) the stock of a single corporation is purchased. 
B) the stock may have to be sold within a few months. 
C) all stocks bought are in the same industry. 
D) all of the above are true.

Question 10

Which of the following is true?

Accepted Answer

A) Investment in the stock market is a relatively foolproof method for an investor to earn a high rate of return during the next five years. 
B) Current stock prices already reflect information that is known with a high degree of certainty. 
C) Experts are able to predict changes in the direction of the broad stock market indexes with a high degree of accuracy. 
D) While changes in the prices of specific stocks are difficult to predict,it is relatively easy to predict the future direction of the broad stock market. 
E) Both c and d are true. 
A) Investment in the stock market is a relatively foolproof method for an investor to earn a high rate of return during the next five years. 
B) Current stock prices already reflect information that is known with a high degree of certainty. 
C) Experts are able to predict changes in the direction of the broad stock market indexes with a high degree of accuracy. 
D) While changes in the prices of specific stocks are difficult to predict,it is relatively easy to predict the future direction of the broad stock market. 
E) Both c and d are true.

Question 11

Since 1802,the American stock market has yielded an average annual real return (the return adjusted for inflation)of approximately

Accepted Answer

A) 3 percent. 
B) 5 percent. 
C) 7 percent 
D) 11 percent. 
A) 3 percent. 
B) 5 percent. 
C) 7 percent 
D) 11 percent.

Question 12

Which of the following is true of stocks?

Accepted Answer

A) Stock ownership is risky because the investor can never be sure what return they will earn or what the value of their stock holdings will be in the future. 
B) The riskiness of stocks is one reason why their average rate of return has been higher than investments like bonds that guarantee a specified nominal amount in the future. 
C) Both a and b are true. 
D) Neither a nor b is true. 
A) Stock ownership is risky because the investor can never be sure what return they will earn or what the value of their stock holdings will be in the future. 
B) The riskiness of stocks is one reason why their average rate of return has been higher than investments like bonds that guarantee a specified nominal amount in the future. 
C) Both a and b are true. 
D) Neither a nor b is true.

Question 13

Suppose that monetary policy becomes more expansionary,and as a result,the future rate of inflation is higher.Will this be good for the stock market?

Accepted Answer

A) Yes;the inflation will lead to higher wages,and this will be good for both the economy and the stock market. 
B) No;the inflation will lead to higher nominal interest rates,and this will reduce the present value of the future net earnings derived from stocks. 
C) Yes;the inflation rate will reduce the long-run rate of unemployment,and this will be good for the stock market. 
D) No;the expansionary monetary policy will lead to lower real interest rates,and this is generally bad for both the economy and the stock market. 
A) Yes;the inflation will lead to higher wages,and this will be good for both the economy and the stock market. 
B) No;the inflation will lead to higher nominal interest rates,and this will reduce the present value of the future net earnings derived from stocks. 
C) Yes;the inflation rate will reduce the long-run rate of unemployment,and this will be good for the stock market. 
D) No;the expansionary monetary policy will lead to lower real interest rates,and this is generally bad for both the economy and the stock market.

Question 14

If the interest rate were 10 percent,how much would people be willing to pay for a stock that was certain to yield a $2 per share stream of net earnings continuously in the future?

Accepted Answer

A) $2 
B) $10 
C) $20 
D) $100 
A) $2 
B) $10 
C) $20 
D) $100

Question 15

Which of the following has enhanced the ability of investors,without any special business skills,to benefit from the ownership of corporate America?

Accepted Answer

A) the increased availability of mutual funds that make it possible for even small investors to purchase a diverse stock portfolio at a low cost 
B) an increased tendency of small investors to buy and sell stock frequently,using stock tips from investment experts 
C) the virtual disappearance of business failures among corporations with publicly traded stock shares 
D) all of the above 
A) the increased availability of mutual funds that make it possible for even small investors to purchase a diverse stock portfolio at a low cost 
B) an increased tendency of small investors to buy and sell stock frequently,using stock tips from investment experts 
C) the virtual disappearance of business failures among corporations with publicly traded stock shares 
D) all of the above

Question 16

A lower interest rate will increase the present value of future income and thereby

Accepted Answer

A) decrease the market value of stocks. 
B) increase the market value of stocks. 
C) have no effect on the market value of stocks. 
D) decrease the discounted market value of stocks. 
A) decrease the market value of stocks. 
B) increase the market value of stocks. 
C) have no effect on the market value of stocks. 
D) decrease the discounted market value of stocks.

Question 17

An indexed equity mutual fund

Accepted Answer

A) is directly tied to either the consumer price index or the GDP deflator. 
B) is a fund that hires a manager who will try to pick the stocks that will increase most in value in the future. 
C) merely holds stocks in the same proportion as they exist in a broad stock market index like the Standard & Poor's 500. 
D) will have high operating costs because these funds engage in a substantial amount of stock trading. 
A) is directly tied to either the consumer price index or the GDP deflator. 
B) is a fund that hires a manager who will try to pick the stocks that will increase most in value in the future. 
C) merely holds stocks in the same proportion as they exist in a broad stock market index like the Standard & Poor's 500. 
D) will have high operating costs because these funds engage in a substantial amount of stock trading.

Question 18

Which of the following is an advantage of an indexed equity mutual fund relative to a managed equity fund?

Accepted Answer

A) Indexed funds generally have better stock pickers. 
B) Indexed funds engage in more detailed research. 
C) Indexed funds have lower operating costs because they engage in less stock trading. 
D) Indexed funds earn a significantly higher rate of return than a broad portfolio that represents the entire stock market. 
A) Indexed funds generally have better stock pickers. 
B) Indexed funds engage in more detailed research. 
C) Indexed funds have lower operating costs because they engage in less stock trading. 
D) Indexed funds earn a significantly higher rate of return than a broad portfolio that represents the entire stock market.

Question 19

Stock market analysts often argue that lower interest rates are good for the stock market.Does this argument make sense?

Accepted Answer

A) No;lower interest rates will tend to slow down the economy,and this will be bad for the stock market. 
B) Yes;the lower rates of interest will increase the value of future income (and capital gains),and stock prices will rise to reflect this factor. 
C) No;the lower rates of interest will reduce the value of future income (and capital gains),and this will cause stock prices to fall. 
D) Yes;the lower interest rates will cause inflation,and inflation is generally good for the stock market. 
A) No;lower interest rates will tend to slow down the economy,and this will be bad for the stock market. 
B) Yes;the lower rates of interest will increase the value of future income (and capital gains),and stock prices will rise to reflect this factor. 
C) No;the lower rates of interest will reduce the value of future income (and capital gains),and this will cause stock prices to fall. 
D) Yes;the lower interest rates will cause inflation,and inflation is generally good for the stock market.

Question 20

Consider a stock with a 50 percent probability of zero net earnings and a 50 percent probability of net earnings equal to $20 per share each year continuously in the future.Furthermore,assume that people are risk averse: That is,they will have to be compensated for uncertainty accompanying variation in their future wealth.If the interest rate were 5 percent,how much would people be willing to pay for a share of this stock?

Accepted Answer

A) $10 
B) $200 
C) less than $200 
D) more than $200 
E) $400 
A) $10 
B) $200 
C) less than $200 
D) more than $200 
E) $400

Exam 31: The Stock Market: Its Function, Performance, and Potential As an Investment Opportunity

Which of the following is true?

Historically,which of the following has had the highest average annual rate of return?

If an investor's primary stock holding is currently Exxon Mobil,the purchase of which of the following stocks would provide the investor with the largest reduction in risk?

The current market value of a stock option contract to purchase 1,000 shares of IBM stock at a price of $100 that can be exercised five years from now would

Which of the following would be most likely to push stock prices higher?

Which of the following would reduce the risk of an investment in the stock market?

During the last sixty years,the broad stock market (Standard and Poor's 500 Index)yielded an average annual nominal rate of return of approximately ____ and real rate of return of approximately ____.

The stock price of a firm is primarily a reflection of the

Buying shares of corporate stock tends to be more risky when

Which of the following is true?

Since 1802,the American stock market has yielded an average annual real return (the return adjusted for inflation)of approximately

Which of the following is true of stocks?

Suppose that monetary policy becomes more expansionary,and as a result,the future rate of inflation is higher.Will this be good for the stock market?

If the interest rate were 10 percent,how much would people be willing to pay for a stock that was certain to yield a $2 per share stream of net earnings continuously in the future?

Which of the following has enhanced the ability of investors,without any special business skills,to benefit from the ownership of corporate America?

A lower interest rate will increase the present value of future income and thereby

An indexed equity mutual fund

Which of the following is an advantage of an indexed equity mutual fund relative to a managed equity fund?

Stock market analysts often argue that lower interest rates are good for the stock market.Does this argument make sense?

The Economic Approach

Asome Tools of the Economist

Asupply,demand,and the Market Process

Asupply and Demand: Applications and Extensions

Difficult Cases for the Market and the Role of Government

The Economics of Collective Decision-Making

Ataking the Nations Economic Pulse

Economic Fluctuations, unemployment, and Inflation

Aan Introduction to Basic Macroeconomic Markets

Dynamic Change, economic Fluctuations, and the Ad-As Model

Fiscal Policy: the Keynesian View and Historical Perspective

Fiscal Policy, incentives, and Secondary Effects

Amoney and the Banking System

Modern Macroeconomics and Monetary Policy

Stabilization Policy, output, and Employment

Creating an Environment for Growth and Prosperity

Institutions,policies,and Cross-Country Differences in Income and Growth

Gaining From International Trade

International Finance and the Foreign Exchange Market

Consumer Choice and Elasticity

Acosts and the Supply of Goods

Aprice Takers and the Competitive Process

Price-Searcher Markets With Low Entry Barriers

Aprice-Searcher Markets With High Entry Barriers

The Supply of and Demand for Productive Resources

Earnings, productivity, and the Job Market

Investment, the Capital Market, and the Wealth of Nations

Income Inequality and Poverty

Government Spending and Taxation

The Economics of Social Security

Great Debates in Economics: Keynes Versus Hayek

The Crisis of 2008: Causes and Lessons for the Future

Lessons From the Great Depression

Lessons From Japan and Canada

The Federal Budget and the National Debt

The Economics of Healthcare

Education: Problems and Performance

Earnings Differences Between Men and Women

Do Labor Unions Increase the Wages of Workers

The Question of Resource Exhaustion

Difficult Environmental Cases and the Role of Government

Filters

During the last sixty years,the broad stock market (Standard and Poor's 500 Index)yielded an average annual nominal rate of return of approximately and real rate of return of approximately .