Question 1

Another way to state the efficient markets condition is: in an efficient market,________.

Accepted Answer

A)  unexploited profit opportunities will be quickly eliminated 
B)  unexploited profit opportunities will never exist 
C)  unexploited profit opportunities never existed 
D)  every financial market participant must be well informed about securities 
A)  unexploited profit opportunities will be quickly eliminated 
B)  unexploited profit opportunities will never exist 
C)  unexploited profit opportunities never existed 
D)  every financial market participant must be well informed about securities A

Question 2

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 A

Question 3

The analysts predict that the price of corporation's XYZ stock one year from now will be $22.XYZ announced that is not going to pay dividends next year.You decide that you would be satisfied to earn a 10 percent on the investment on this stock,thus,this stock is worth ________ for you now.

Accepted Answer

A)  $20 
B)  $22 
C)  $24 
D)  $18 
A)  $20 
B)  $22 
C)  $24 
D)  $18 A

Question 4

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 5

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 6

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 7

The price earnings ratio (PE)is a measure of how much the market is willing to pay for $1 of ________ from a firm.

Accepted Answer

A)  earnings 
B)  dividends 
C)  assets 
D)  stock 
A)  earnings 
B)  dividends 
C)  assets 
D)  stock

Question 8

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 percent,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 9

In the one-period valuation model with no dividend payments the current price of the stock is given by ________.

Accepted Answer

A)  $ \mathrm{P}_{0}=\frac{\mathrm{P}_{1}}{1+\mathrm{k}_{\mathrm{e}}} $ 
B)  $ \mathrm{P}_{0}=\frac{\text { interest }}{1+\mathrm{k}_{\mathrm{e}}}+\frac{\mathrm{P}_{1}}{1+\mathrm{k}_{\mathrm{e}}} $ 
C)  $ \mathrm{P}_{0}=\frac{\mathrm{P}_{1}}{1+\mathrm{k}_{\mathrm{e}}} \times 100 $ 
D)  $ \mathrm{P}_{0}=\frac{\mathrm{P}_{1}}{1+\mathrm{k}_{\mathrm{e}}} \times 365 $ 
A)  $ \mathrm{P}_{0}=\frac{\mathrm{P}_{1}}{1+\mathrm{k}_{\mathrm{e}}} $ 
B)  $ \mathrm{P}_{0}=\frac{\text { interest }}{1+\mathrm{k}_{\mathrm{e}}}+\frac{\mathrm{P}_{1}}{1+\mathrm{k}_{\mathrm{e}}} $ 
C)  $ \mathrm{P}_{0}=\frac{\mathrm{P}_{1}}{1+\mathrm{k}_{\mathrm{e}}} \times 100 $ 
D)  $ \mathrm{P}_{0}=\frac{\mathrm{P}_{1}}{1+\mathrm{k}_{\mathrm{e}}} \times 365 $

Question 10

The efficient markets hypothesis indicates that investors ________.

Accepted Answer

A)  can use the advice of technical analysts to outperform the market 
B)  do better on average if they adopt a "buy and hold" strategy 
C)  let too many unexploited profit opportunities go by if they adopt a "buy and hold" strategy 
D)  do better if they purchase loaded mutual funds 
A)  can use the advice of technical analysts to outperform the market 
B)  do better on average if they adopt a "buy and hold" strategy 
C)  let too many unexploited profit opportunities go by if they adopt a "buy and hold" strategy 
D)  do better if they purchase loaded mutual funds

Question 11

Common stock is the principal way that corporations raise ________.

Accepted Answer

A)  short-term debt 
B)  foreign exchange 
C)  long-term debt 
D)  equity capital 
A)  short-term debt 
B)  foreign exchange 
C)  long-term debt 
D)  equity capital

Question 12

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 13

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 14

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 15

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 16

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 that use 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 that use all available information

Question 17

What is a recommended strategy for a small investor and how it is associated with the efficient market hypothesis?

Accepted Answer

Students should be able to explain that

Question 18

________ 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 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

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

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

Another way to state the efficient markets condition is: in an efficient market,________.

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

The analysts predict that the price of corporation's XYZ stock one year from now will be $22.XYZ announced that is not going to pay dividends next year.You decide that you would be satisfied to earn a 10 percent on the investment on this stock,thus,this stock is worth ________ for you now.

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

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

Mean reversion refers to the fact that ________.

The price earnings ratio (PE)is a measure of how much the market is willing to pay for $1 of ________ from a firm.

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 percent,the current price of the stock would be ________.

In the one-period valuation model with no dividend payments the current price of the stock is given by ________.

The efficient markets hypothesis indicates that investors ________.

Common stock is the principal way that corporations raise ________.

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

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

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

In asset markets,an asset's price is ________.

According to rational expectations,________.

What is a recommended strategy for a small investor and how it is associated with the efficient market hypothesis?

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

An expectation may fail to be rational if ________.

A change in perceived risk of a stock changes ________.

Why Study Money, banking, and Financial Markets

An Overview of the Financial System

What Is Money

Understanding Interest Rates

The Behaviour of Interest Rates

The Risk and Term Structure of Interest Rates

An Economic Analysis of Financial Structure

Financial Crises

Economic Analysis of Financial Regulation

Banking Industry: Structure and Competition

Nonbank Finance

Banking and the Management of Financial Institutions

Risk Management With Financial Derivatives

Central Banks and the Bank of Canada

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