Question 1

The January effect refers to the fact that

Accepted Answer

A) most stock market crashes have occurred in January. 
B) stock prices tend to fall in January. 
C) stock prices have historically experienced abnormal price increases in January. 
D) the football team winning the Super Bowl accurately predicts the behavior of the stock market for the next year. 
A) most stock market crashes have occurred in January. 
B) stock prices tend to fall in January. 
C) stock prices have historically experienced abnormal price increases in January. 
D) the football team winning the Super Bowl accurately predicts the behavior of the stock market for the next year.

Question 2

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

Accepted Answer

A) above average returns since you will share in the higher profits. 
B) above average returns since your stock price will definitely appreciate as higher profits are earned. 
C) below average returns since computer makers have low profit rates. 
D) a normal return since stock prices adjust to reflect expected changes in profitability almost immediately. 
A) above average returns since you will share in the higher profits. 
B) above average returns since your stock price will definitely appreciate as higher profits are earned. 
C) below average returns since computer makers have low profit rates. 
D) a normal return since stock prices adjust to reflect expected changes in profitability almost immediately.

Question 3

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

Accepted Answer

A) Overconfidence;social contagion 
B) Underconfidence;social contagion 
C) Overconfidence;social isolationism 
D) Underconfidence;social isolationism 
A) Overconfidence;social contagion 
B) Underconfidence;social contagion 
C) Overconfidence;social isolationism 
D) Underconfidence;social isolationism

Question 4

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

Accepted Answer

A) increases the current stock price. 
B) increases the future stock price. 
C) reduces the future stock price. 
D) reduces the current stock price. 
A) increases the current stock price. 
B) increases the future stock price. 
C) reduces the future stock price. 
D) reduces the current stock price.

Question 5

Tests used to rate the performance of rules developed in technical analysis conclude that technical analysis

Accepted Answer

A) outperforms the overall market. 
B) far outperforms the overall market,suggesting that stockbrokers provide valuable services. 
C) does not outperform the overall market. 
D) does not outperform the overall market,suggesting that stockbrokers do not provide services of any value. 
A) outperforms the overall market. 
B) far outperforms the overall market,suggesting that stockbrokers provide valuable services. 
C) does not outperform the overall market. 
D) does not outperform the overall market,suggesting that stockbrokers do not provide services of any value.

Question 6

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 7

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 8

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

Accepted Answer

A) the market is inefficient. 
B) no unexploited profit opportunities exist. 
C) the market is in equilibrium. 
D) the market is myopic. 
A) the market is inefficient. 
B) no unexploited profit opportunities exist. 
C) the market is in equilibrium. 
D) the market is myopic.

Question 9

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 10

For small investors,the best way to pursue a "buy and hold" strategy is to

Accepted Answer

A) buy and sell individual stocks frequently. 
B) buy no-load mutual funds with high management fees. 
C) buy no-load mutual funds with low management fees. 
D) buy load mutual funds. 
A) buy and sell individual stocks frequently. 
B) buy no-load mutual funds with high management fees. 
C) buy no-load mutual funds with low management fees. 
D) buy load mutual funds.

Question 11

Financial markets quickly eliminate unexploited profit opportunities through changes in

Accepted Answer

A) dividend payments. 
B) tax laws. 
C) asset prices. 
D) monetary policy. 
A) dividend payments. 
B) tax laws. 
C) asset prices. 
D) monetary policy.

Question 12

________ 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 13

Evidence in support of the efficient markets hypothesis includes

Accepted Answer

A) the failure of technical analysis to outperform the market. 
B) the small-firm effect. 
C) the January effect. 
D) excessive volatility. 
A) the failure of technical analysis to outperform the market. 
B) the small-firm effect. 
C) the January effect. 
D) excessive volatility.

Question 14

If a mutual fund outperforms the market in one period,evidence suggests that this fund is

Accepted Answer

A) highly likely to consistently outperform the market in subsequent periods due to its superior investment strategy. 
B) likely to under-perform the market in subsequent periods to average its overall returns. 
C) not likely to consistently outperform the market in subsequent periods. 
D) not likely to outperform the market in any subsequent period. 
A) highly likely to consistently outperform the market in subsequent periods due to its superior investment strategy. 
B) likely to under-perform the market in subsequent periods to average its overall returns. 
C) not likely to consistently outperform the market in subsequent periods. 
D) not likely to outperform the market in any subsequent period.

Question 15

Excessive volatility refers to the fact that

Accepted Answer

A) stock returns display mean reversion. 
B) stock prices can be slow to react to new information. 
C) stock price tend to rise in the month of January. 
D) stock prices fluctuate more than is justified by dividend fluctuations. 
A) stock returns display mean reversion. 
B) stock prices can be slow to react to new information. 
C) stock price tend to rise in the month of January. 
D) stock prices fluctuate more than is justified by dividend fluctuations.

Question 16

New information that might lead to a decrease in a stock's price might be

Accepted Answer

A) an expected decrease in the level of future dividends. 
B) a decrease in the required rate of return. 
C) an expected increase in the dividend growth rate. 
D) an expected increase in the future sales price. 
A) an expected decrease in the level of future dividends. 
B) a decrease in the required rate of return. 
C) an expected increase in the dividend growth rate. 
D) an expected increase in the future sales price.

Question 17

In a one-period valuation model,a decrease in the required return on investments in equity causes a(n)________ in the ________ price of a stock.

Accepted Answer

A) increase;current 
B) increase;expected sales 
C) decrease;current 
D) decrease;expected sales 
A) increase;current 
B) increase;expected sales 
C) decrease;current 
D) decrease;expected sales

Question 18

The efficient markets hypothesis implies that prices in the stock market

Accepted Answer

A) follow a definite pattern. 
B) are more likely to go up than down. 
C) always undervalue the true assets of a corporation. 
D) are unpredictable. 
A) follow a definite pattern. 
B) are more likely to go up than down. 
C) always undervalue the true assets of a corporation. 
D) are unpredictable.

Question 19

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

Accepted Answer

A) the expected sales price increases. 
B) the expected sales price falls. 
C) the required return increases. 
D) dividends are cut. 
A) the expected sales price increases. 
B) the expected sales price falls. 
C) the required return increases. 
D) dividends are cut.

Question 20

People have a strong incentive to form rational expectations because

Accepted Answer

A) they are guaranteed of success in the stock market. 
B) it is costly not to do so. 
C) it is costly to do so. 
D) everyone wants to be rational. 
A) they are guaranteed of success in the stock market. 
B) it is costly not to do so. 
C) it is costly to do so. 
D) everyone wants to be rational.

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

The January effect refers to the fact that

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

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

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

Tests used to rate the performance of rules developed in technical analysis conclude that technical analysis

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

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

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

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

For small investors,the best way to pursue a "buy and hold" strategy is to

Financial markets quickly eliminate unexploited profit opportunities through changes in

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

Evidence in support of the efficient markets hypothesis includes

If a mutual fund outperforms the market in one period,evidence suggests that this fund is

Excessive volatility refers to the fact that

New information that might lead to a decrease in a stock's price might be

In a one-period valuation model,a decrease in the required return on investments in equity causes a(n)________ in the ________ price of a stock.

The efficient markets hypothesis implies that prices in the stock market

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

People have a strong incentive to form rational expectations because

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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and may provide an explanation for stock market bubbles.

In a one-period valuation model,a decrease in the required return on investments in equity causes a(n) in the price of a stock.