Question 1

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 2

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 3

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 4

Studies of mutual fund performance indicate that mutual funds that outperformed the market in one time period usually

Accepted Answer

A) beat the market in the next time period. 
B) beat the market in the next two subsequent time periods. 
C) beat the market in the next three subsequent time periods. 
D) do not beat the market in the next time period. 
A) beat the market in the next time period. 
B) beat the market in the next two subsequent time periods. 
C) beat the market in the next three subsequent time periods. 
D) do not beat the market in the next time period.

Question 5

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 rational

Question 6

To say that stock prices follow a "random walk" is to argue that stock prices

Accepted Answer

A) rise,then fall,then rise again. 
B) rise,then fall in a predictable fashion. 
C) tend to follow trends. 
D) cannot be predicted based on past trends. 
A) rise,then fall,then rise again. 
B) rise,then fall in a predictable fashion. 
C) tend to follow trends. 
D) cannot be predicted based on past trends.

Question 7

The efficient markets hypothesis suggests that if an unexploited profit opportunity arises in an efficient market

Accepted Answer

A) it will tend to go unnoticed for some time. 
B) it will be quickly eliminated. 
C) financial analysts are your best source of this information. 
D) all profits will be eliminated through taxation. 
A) it will tend to go unnoticed for some time. 
B) it will be quickly eliminated. 
C) financial analysts are your best source of this information. 
D) all profits will be eliminated through taxation.

Question 8

Your best friend calls and gives you the latest stock market "hot tip" that he heard at the health club. Should you act on this information? Why or why not?

Accepted Answer

No,if this informati

Question 9

Does the efficient markets hypothesis imply that the average investor will not earn anything by purchasing stock?

Accepted Answer

A) No,the efficient market hypothesis implies that the average investor should not expect to receive abnormally high returns on a consistent basis. 
B) Yes,the efficient markets hypothesis implies that the best that the average investor can do is break even. 
C) No,the efficient market hypothesis implies that the investor will consistently earn abnormally high returns by purchasing stock. 
D) Yes,the efficient markets hypothesis implies that stock purchases are extremely risky and that the average investor has no hope of recovering any loss. 
A) No,the efficient market hypothesis implies that the average investor should not expect to receive abnormally high returns on a consistent basis. 
B) Yes,the efficient markets hypothesis implies that the best that the average investor can do is break even. 
C) No,the efficient market hypothesis implies that the investor will consistently earn abnormally high returns by purchasing stock. 
D) Yes,the efficient markets hypothesis implies that stock purchases are extremely risky and that the average investor has no hope of recovering any loss.

Question 10

In the one-period valuation model,an increase in the required return on investments in equity

Accepted Answer

A) increases the expected sales price of a stock. 
B) increases the current price of a stock. 
C) reduces the expected sales price of a stock. 
D) reduces the current price of a stock. 
A) increases the expected sales price of a stock. 
B) increases the current price of a stock. 
C) reduces the expected sales price of a stock. 
D) reduces the current price of a stock.

Question 11

The major criticism of the view that expectations are formed adaptively is that

Accepted Answer

A) this view ignores that people use more information than just past data to form their expectations. 
B) it is easier to model adaptive expectations than it is to model rational expectations. 
C) adaptive expectations models have no predictive power. 
D) people are irrational and therefore never learn from past mistakes. 
A) this view ignores that people use more information than just past data to form their expectations. 
B) it is easier to model adaptive expectations than it is to model rational expectations. 
C) adaptive expectations models have no predictive power. 
D) people are irrational and therefore never learn from past mistakes.

Question 12

The efficient markets hypothesis predicts that stock prices follow a "random walk." The implication of this hypothesis for investing in stocks is

Accepted Answer

A) a "churning strategy" of buying and selling often to catch market swings. 
B) turning over your stock portfolio each month,selecting stocks by throwing darts at the stock page. 
C) a "buy and hold strategy" of holding stocks to avoid brokerage commissions. 
D) following the advice of technical analysts. 
A) a "churning strategy" of buying and selling often to catch market swings. 
B) turning over your stock portfolio each month,selecting stocks by throwing darts at the stock page. 
C) a "buy and hold strategy" of holding stocks to avoid brokerage commissions. 
D) following the advice of technical analysts.

Question 13

________ is the field of study that applies concepts from social sciences such as psychology and sociology to help understand the behavior of securities prices.

Accepted Answer

A) Behavioral finance 
B) Strategical finance 
C) Methodical finance 
D) Procedural finance 
A) Behavioral finance 
B) Strategical finance 
C) Methodical finance 
D) Procedural finance

Question 14

In the generalized dividend model,if the expected sales price is in the distant future

Accepted Answer

A) it does not affect the current stock price. 
B) it is more important than dividends in determining the current stock price. 
C) it is equally important with dividends in determining the current stock price. 
D) it is less important than dividends but still affects the current stock price. 
A) it does not affect the current stock price. 
B) it is more important than dividends in determining the current stock price. 
C) it is equally important with dividends in determining the current stock price. 
D) it is less important than dividends but still affects the current stock price.

Question 15

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

Question 16

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 17

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 18

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

Question 19

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

Accepted Answer

A) is the discounted net present value of future interest payments. 
B) is determined by the lowest successful bidder. 
C) fully reflects all available relevant information. 
D) is a result of none of the above. 
A) is the discounted net present value of future interest payments. 
B) is determined by the lowest successful bidder. 
C) fully reflects all available relevant information. 
D) is a result of none of the above.

Question 20

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

Accepted Answer

A) change the way they form expectations about future values of the variable. 
B) begin to make systematic mistakes. 
C) no longer pay close attention to movements in this variable. 
D) give up trying to forecast this variable. 
A) change the way they form expectations about future values of the variable. 
B) begin to make systematic mistakes. 
C) no longer pay close attention to movements in this variable. 
D) give up trying to forecast this variable.

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

The small-firm effect refers to the

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

A phenomenon closely related to market overreaction is

Studies of mutual fund performance indicate that mutual funds that outperformed the market in one time period usually

To say that stock prices follow a "random walk" is to argue that stock prices

The efficient markets hypothesis suggests that if an unexploited profit opportunity arises in an efficient market

Your best friend calls and gives you the latest stock market "hot tip" that he heard at the health club. Should you act on this information? Why or why not?

Does the efficient markets hypothesis imply that the average investor will not earn anything by purchasing stock?

In the one-period valuation model,an increase in the required return on investments in equity

The major criticism of the view that expectations are formed adaptively is that

The efficient markets hypothesis predicts that stock prices follow a "random walk." The implication of this hypothesis for investing in stocks is

________ is the field of study that applies concepts from social sciences such as psychology and sociology to help understand the behavior of securities prices.

In the generalized dividend model,if the expected sales price is in the distant future

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

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

According to rational expectations

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

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

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

Why Study Money, banking, and Financial Markets

An Overview of the Financial System

What Is Money

The Meaning of Interest Rates

The Behavior of Interest Rates

The Risk and Term Structure of Interest Rates

An Economic Analysis of Financial Structure

Banking and the Management of Financial Institutions

Economic Analysis of Financial Regulation

Banking Industry: Structure and Competition

Financial Crises

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

The Is Curve

The Monetary Policy and Aggregate Demand Curves

Aggregate Demand and Supply Analysis

Monetary Policy Theory

The Role of Expectations in Monetary Policy

Transmission Mechanisms of Monetary Policy

Financial Crises in Emerging Market Economies

The ISLM Model

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