Question 1

What rights does ownership interest give stockholders?

Accepted Answer

Stockholders have the right to vote on i

Question 2

Using the Gordon growth formula,if D1 is $1.00,ke is 10% or 0.10,and g is 5% or 0.05,then the current stock price is

Accepted Answer

A) $10. 
B) $20. 
C) $30. 
D) $40. 
A) $10. 
B) $20. 
C) $30. 
D) $40.

Question 3

If expectations are formed rationally,then individuals

Accepted Answer

A) will have a forecast that is 100% accurate all of the time. 
B) change their forecast when faced with new information. 
C) use only the information from past data on a single variable to form their forecast. 
D) have forecast errors that are persistently low. 
A) will have a forecast that is 100% accurate all of the time. 
B) change their forecast when faced with new information. 
C) use only the information from past data on a single variable to form their forecast. 
D) have forecast errors that are persistently low.

Question 4

When a corporation announces a major decline in earnings,the stock price may initially decline significantly and then rise back to normal levels over the next few weeks.This impact is called

Accepted Answer

A) the January effect. 
B) mean reversion. 
C) market overreaction. 
D) the small-firm effect. 
A) the January effect. 
B) mean reversion. 
C) market overreaction. 
D) the small-firm effect.

Question 5

A change in perceived risk of a stock changes

Accepted Answer

A) the expected dividend growth rate. 
B) the expected sales price. 
C) the required rate of return. 
D) the current dividend. 
A) the expected dividend growth rate. 
B) the expected sales price. 
C) the required rate of return. 
D) the current dividend.

Question 6

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 7

Stock market crashes lead us to believe that

Accepted Answer

A) factors other than market fundamentals have an effect on asset prices. 
B) unexploited profit opportunities never exist. 
C) crashes are always predictable when market participants behave rationally. 
D) bubbles are a natural outcome of an efficient market. 
A) factors other than market fundamentals have an effect on asset prices. 
B) unexploited profit opportunities never exist. 
C) crashes are always predictable when market participants behave rationally. 
D) bubbles are a natural outcome of an efficient market.

Question 8

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 9

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

Accepted Answer

A) raised 
B) lowered 
C) had no impact on 
D) decreased 
A) raised 
B) lowered 
C) had no impact on 
D) decreased

Question 10

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

Accepted Answer

A) the present value of both the dividends and the expected sales price. 
B) only the present value of the future dividends. 
C) the actual value of the dividends and expected sales price received in one year. 
D) the future value of dividends and the actual sales price. 
A) the present value of both the dividends and the expected sales price. 
B) only the present value of the future dividends. 
C) the actual value of the dividends and expected sales price received in one year. 
D) the future value of dividends and the actual sales price.

Question 11

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 12

If future changes in stock prices are unpredictable,then we say that the stock prices follow a

Accepted Answer

A) random walk. 
B) straight and narrow path. 
C) meandering path. 
D) generalized walk. 
A) random walk. 
B) straight and narrow path. 
C) meandering path. 
D) generalized walk.

Question 13

A monetary expansion ________ stock prices due to a decrease in the ________ and an increase in the ________,everything else held constant.

Accepted Answer

A) reduces;future sales price;expected rate of return 
B) reduces;current dividend;expected rate of return 
C) increases;required rate of return;future sales price 
D) increases;required rate of return;dividend growth rate 
A) reduces;future sales price;expected rate of return 
B) reduces;current dividend;expected rate of return 
C) increases;required rate of return;future sales price 
D) increases;required rate of return;dividend growth rate

Question 14

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 15

________ 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.

Accepted Answer

A) Arbitrage 
B) Mediation 
C) Asset capitalization 
D) Market intercession 
A) Arbitrage 
B) Mediation 
C) Asset capitalization 
D) Market intercession

Question 16

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

Accepted Answer

A) monetarism. 
B) the efficient markets hypothesis. 
C) the theory of strict liability. 
D) the theory of impossibility. 
A) monetarism. 
B) the efficient markets hypothesis. 
C) the theory of strict liability. 
D) the theory of impossibility.

Question 17

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%,the current price of the stock would be

Accepted Answer

A) $110.00. 
B) $101.00. 
C) $100.00. 
D) $96.19. 
A) $110.00. 
B) $101.00. 
C) $100.00. 
D) $96.19.

Question 18

Stockholders are residual claimants,meaning that they

Accepted Answer

A) have the first priority claim on all of a company's assets. 
B) are liable for all of a company's debts. 
C) will never share in a company's profits. 
D) receive the remaining cash flow after all other claims are paid. 
A) have the first priority claim on all of a company's assets. 
B) are liable for all of a company's debts. 
C) will never share in a company's profits. 
D) receive the remaining cash flow after all other claims are paid.

Question 19

When using rational expectations,forecast errors will,on average,be ________ and ________ be predicted ahead of time.

Accepted Answer

A) positive;can 
B) positive;cannot 
C) negative;can 
D) zero;cannot 
A) positive;can 
B) positive;cannot 
C) negative;can 
D) zero;cannot

Question 20

Loss aversion can explain why very little ________ actually takes place in the securities market.

Accepted Answer

A) short selling 
B) bargaining 
C) bartering 
D) negotiating 
A) short selling 
B) bargaining 
C) bartering 
D) negotiating

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

What rights does ownership interest give stockholders?

Using the Gordon growth formula,if D1 is $1.00,ke is 10% or 0.10,and g is 5% or 0.05,then the current stock price is

If expectations are formed rationally,then individuals

When a corporation announces a major decline in earnings,the stock price may initially decline significantly and then rise back to normal levels over the next few weeks.This impact is called

A change in perceived risk of a stock changes

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

Stock market crashes lead us to believe that

Mean reversion refers to the fact that

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

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

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

If future changes in stock prices are unpredictable,then we say that the stock prices follow a

A monetary expansion ________ stock prices due to a decrease in the ________ and an increase in the ________,everything else held constant.

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?

________ 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.

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

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%,the current price of the stock would be

Stockholders are residual claimants,meaning that they

When using rational expectations,forecast errors will,on average,be ________ and ________ be predicted ahead of time.

Loss aversion can explain why very little ________ actually takes place in the securities market.

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

Web 1:financial Crises in Emerging Market Economies

Web 2:the Islm Model

Web 3:nonbank Finance

Web 4:financial Derivatives

Web 5:conflicts of Interest in the Financial Services Industry

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A monetary expansion stock prices due to a decrease in the and an increase in the ,everything else held constant.

When using rational expectations,forecast errors will,on average,be and be predicted ahead of time.