Question 1

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 2

Evidence against market efficiency includes

Accepted Answer

A)  failure of technical analysis to outperform the market. 
B)  the random walk behavior of stock prices. 
C)  the inability of mutual fund managers to consistently beat the market. 
D)  the January effect. 
A)  failure of technical analysis to outperform the market. 
B)  the random walk behavior of stock prices. 
C)  the inability of mutual fund managers to consistently beat the market. 
D)  the January effect.

Question 3

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.

Question 4

If a forecast made using all available information is not perfectly accurate,then it is

Accepted Answer

A)  still a rational expectation. 
B)  not a rational expectation. 
C)  an adaptive expectation. 
D)  a second-best expectation. 
A)  still a rational expectation. 
B)  not a rational expectation. 
C)  an adaptive expectation. 
D)  a second-best expectation.

Question 5

Psychologists have found that people tend to be ________ in their own judgments.

Accepted Answer

A)  underconfident 
B)  overconfident 
C)  indecisive 
D)  insecure 
A)  underconfident 
B)  overconfident 
C)  indecisive 
D)  insecure

Question 6

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 7

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 8

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 9

In the generalized dividend model,the current stock price is the sum of

Accepted Answer

A)  the actual value of the future dividend stream. 
B)  the present value of the future dividend stream. 
C)  the present value of the future dividend stream plus the actual future sales price. 
D)  the present value of the future sales price. 
A)  the actual value of the future dividend stream. 
B)  the present value of the future dividend stream. 
C)  the present value of the future dividend stream plus the actual future sales price. 
D)  the present value of the future sales price.

Question 10

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.

Question 11

If additional information is not used when forming an optimal forecast because it is not available at that time,then expectations are

Accepted Answer

A)  obviously formed irrationally. 
B)  still considered to be formed rationally. 
C)  formed adaptively. 
D)  formed equivalently. 
A)  obviously formed irrationally. 
B)  still considered to be formed rationally. 
C)  formed adaptively. 
D)  formed equivalently.

Question 12

The value of any investment is found by computing the

Accepted Answer

A)  present value of all future sales. 
B)  present value of all future liabilities. 
C)  future value of all future expenses. 
D)  present value of all future cash flows. 
A)  present value of all future sales. 
B)  present value of all future liabilities. 
C)  future value of all future expenses. 
D)  present value of all future cash flows.

Question 13

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 14

If in an efficient market all prices are correct and reflect market fundamentals,which of the following is a false statement?

Accepted Answer

A)  A stock that has done poorly in the past is more likely to do well in the future. 
B)  One investment is as good as any other because the securities' prices are correct. 
C)  A security's price reflects all available information about the intrinsic value of the security. 
D)  Security prices can be used by managers to assess their cost of capital accurately. 
A)  A stock that has done poorly in the past is more likely to do well in the future. 
B)  One investment is as good as any other because the securities' prices are correct. 
C)  A security's price reflects all available information about the intrinsic value of the security. 
D)  Security prices can be used by managers to assess their cost of capital accurately.

Question 15

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 16

If in an efficient market all prices are correct and reflect market fundamentals,which of the following is a false statement?

Accepted Answer

A)  A stock that has done poorly in the past is more likely to do well in the future. 
B)  One investment is as good as any other because the securities' prices are correct. 
C)  A security's price reflects all available information about the intrinsic value of the security. 
D)  Security prices can be used by managers to assess their cost of capital accurately. 
A)  A stock that has done poorly in the past is more likely to do well in the future. 
B)  One investment is as good as any other because the securities' prices are correct. 
C)  A security's price reflects all available information about the intrinsic value of the security. 
D)  Security prices can be used by managers to assess their cost of capital accurately.

Question 17

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 18

You have observed that the forecasts of an investment advisor consistently outperform the other reported forecasts. The efficient markets hypothesis says that future forecasts by this advisor

Accepted Answer

A)  may or may not be better than the other forecasts. Past performance is no guarantee of the future. 
B)  will always be the best of the group. 
C)  will definitely be worse in the future. What goes up must come down. 
D)  will be worse in the near future, but improve over time. 
A)  may or may not be better than the other forecasts. Past performance is no guarantee of the future. 
B)  will always be the best of the group. 
C)  will definitely be worse in the future. What goes up must come down. 
D)  will be worse in the near future, but improve over time.

Question 19

An expectation may fail to be rational if

Accepted Answer

A)  relevant information was not available at the time the forecast is made. 
B)  relevant information is available but ignored at the time the forecast is made. 
C)  information changes after the forecast is made. 
D)  information was available to insiders only. 
A)  relevant information was not available at the time the forecast is made. 
B)  relevant information is available but ignored at the time the forecast is made. 
C)  information changes after the forecast is made. 
D)  information was available to insiders only.

Question 20

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.

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

According to rational expectations,

Evidence against market efficiency includes

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

If a forecast made using all available information is not perfectly accurate,then it is

Psychologists have found that people tend to be ________ in their own judgments.

The January effect refers to the fact that

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

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

In the generalized dividend model,the current stock price is the sum of

People have a strong incentive to form rational expectations because

If additional information is not used when forming an optimal forecast because it is not available at that time,then expectations are

The value of any investment is found by computing the

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

If in an efficient market all prices are correct and reflect market fundamentals,which of the following is a false statement?

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

If in an efficient market all prices are correct and reflect market fundamentals,which of the following is a false statement?

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

You have observed that the forecasts of an investment advisor consistently outperform the other reported forecasts. The efficient markets hypothesis says that future forecasts by this advisor

An expectation may fail to be rational if

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

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

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