Question 1

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 A

Question 2

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. C

Question 3

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 information is readily available,it will already be reflected in the stock price.

Question 4

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 5

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)  prices will reflect the unexploited profit opportunity. 
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)  prices will reflect the unexploited profit opportunity.

Question 6

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 7

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 8

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 highest 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 highest successful bidder. 
C)  fully reflects all available relevant information. 
D)  is a result of none of the above.

Question 9

Economists have focused more attention on the formation of expectations in recent years.This increase in interest can probably best be explained by the recognition that

Accepted Answer

A)  expectations influence the behavior of participants in the economy and thus have a major impact on economic activity. 
B)  expectations influence only a few individuals, have little impact on the overall economy, but can have important effects on a few markets. 
C)  expectations influence many individuals, have little impact on the overall economy, but can have distributional effects. 
D)  models that ignore expectations have little predictive power, even in the short run. 
A)  expectations influence the behavior of participants in the economy and thus have a major impact on economic activity. 
B)  expectations influence only a few individuals, have little impact on the overall economy, but can have important effects on a few markets. 
C)  expectations influence many individuals, have little impact on the overall economy, but can have distributional effects. 
D)  models that ignore expectations have little predictive power, even in the short run.

Question 10

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 11

If a corporation announces that it expects quarterly earnings to increase by 25% and it actually sees an increase of 22%,what should happen to the price of the corporation's stock if the efficient markets hypothesis holds,everything else held constant?

Accepted Answer

The stock's price should fall. The price

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

If during the past decade the average rate of monetary growth has been 5% and the average inflation rate has been 5%,everything else held constant,when the Federal Reserve announces that the new rate of monetary growth will be 10%,the adaptive expectation forecast of the inflation rate is

Accepted Answer

A)  5%. 
B)  between 5 and 10%. 
C)  10%. 
D)  more than 10%. 
A)  5%. 
B)  between 5 and 10%. 
C)  10%. 
D)  more than 10%.

Question 14

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 15

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 16

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 17

________ 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 18

In asset markets,an asset's price is

Accepted Answer

A)  set equal to the highest price a seller will accept. 
B)  set equal to the highest price a buyer is willing to pay. 
C)  set equal to the lowest price a seller is willing to accept. 
D)  set by the buyer willing to pay the highest price. 
A)  set equal to the highest price a seller will accept. 
B)  set equal to the highest price a buyer is willing to pay. 
C)  set equal to the lowest price a seller is willing to accept. 
D)  set by the buyer willing to pay the highest price.

Question 19

Rules used to predict movements in stock prices based on past patterns are,according to the efficient markets hypothesis,

Accepted Answer

A)  a waste of time. 
B)  profitably employed by all financial analysts. 
C)  the most efficient rules to employ. 
D)  consistent with the random walk hypothesis. 
A)  a waste of time. 
B)  profitably employed by all financial analysts. 
C)  the most efficient rules to employ. 
D)  consistent with the random walk hypothesis.

Question 20

One of the assumptions of the Gordon Growth Model is that dividends will continue growing at ________ rate.

Accepted Answer

A)  an increasing 
B)  a fast 
C)  a constant 
D)  an escalating 
A)  an increasing 
B)  a fast 
C)  a constant 
D)  an escalating

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

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

The small-firm effect refers to the

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?

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,

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

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

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

Economists have focused more attention on the formation of expectations in recent years.This increase in interest can probably best be explained by the recognition that

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

If a corporation announces that it expects quarterly earnings to increase by 25% and it actually sees an increase of 22%,what should happen to the price of the corporation's stock if the efficient markets hypothesis holds,everything else held constant?

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

If during the past decade the average rate of monetary growth has been 5% and the average inflation rate has been 5%,everything else held constant,when the Federal Reserve announces that the new rate of monetary growth will be 10%,the adaptive expectation forecast of the inflation rate is

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

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

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

In asset markets,an asset's price is

Rules used to predict movements in stock prices based on past patterns are,according to the efficient markets hypothesis,

One of the assumptions of the Gordon Growth Model is that dividends will continue growing at ________ rate.

Why Study Money, banking, and Financial Markets

An Overview of the Financial System

What Is Money

Understanding Interest Rates

The Behavior of Interest Rates

The Risk and Term Structure of Interest Rates

An Economic Analysis of Financial Structure

Financial Crises

Banking and the Management of Financial Institutions

Economic Analysis of Financial Regulation

Banking Industry: Structure and Competition

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

The ISLM Model

Filters

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

and may provide an explanation for stock market bubbles.