Question 1

Investment in a broad portfolio of stocks is most attractive for

Accepted Answer

A)  short-term investors. 
B)  long-term investors. 
C)  investors seeking a steady rate of return. 
D)  investors who will need the funds for other purposes in about 10 years. 
A)  short-term investors. 
B)  long-term investors. 
C)  investors seeking a steady rate of return. 
D)  investors who will need the funds for other purposes in about 10 years. B

Question 2

A firm's stock price will be higher when the interest rate is ____ and the value of the firm's expected future profits are ____.

Accepted Answer

A)  lower; larger 
B)  lower; smaller 
C)  higher; larger 
D)  higher; smaller 
A)  lower; larger 
B)  lower; smaller 
C)  higher; larger 
D)  higher; smaller A

Question 3

If the interest rate were 10 percent, how much would people be willing to pay for a stock that was certain to yield a $2 per share stream of net earnings continuously in the future?

Accepted Answer

A)  $2 
B)  $10 
C)  $20 
D)  $100 
A)  $2 
B)  $10 
C)  $20 
D)  $100 C

Question 4

If the interest rate were 12.5 percent, how much would people be willing to pay for a stock that was certain to yield a $20 per share stream of net earnings continuously in the future?

Accepted Answer

A)  $20 
B)  $25 
C)  $160 
D)  $250 
A)  $20 
B)  $25 
C)  $160 
D)  $250

Question 5

The variation in the rate of return one can expect from ownership of stocks will generally be smaller if

Accepted Answer

A)  all of the funds are invested in a specific sector of the economy such as the automobile industry. 
B)  a diverse set of stocks is held over a lengthy period of time such as 30 or 40 years. 
C)  all of the funds are invested in a single stock. 
D)  the funds are invested for a relatively short period of time. 
A)  all of the funds are invested in a specific sector of the economy such as the automobile industry. 
B)  a diverse set of stocks is held over a lengthy period of time such as 30 or 40 years. 
C)  all of the funds are invested in a single stock. 
D)  the funds are invested for a relatively short period of time.

Question 6

Which of the following would reduce the risk of an investment in the stock market?

Accepted Answer

A)  investing in a portfolio of diverse firms 
B)  holding the investment for a long period of time 
C)  both a and b 
D)  neither a nor b 
A)  investing in a portfolio of diverse firms 
B)  holding the investment for a long period of time 
C)  both a and b 
D)  neither a nor b

Question 7

Which of the following would be most likely to cause the price/earnings ratio of stocks to rise?

Accepted Answer

A)  the expectation of a recession in the near future 
B)  the expectation of inflation in the near future 
C)  higher interest rates 
D)  lower interest rates 
A)  the expectation of a recession in the near future 
B)  the expectation of inflation in the near future 
C)  higher interest rates 
D)  lower interest rates

Question 8

The market for new issues of stock is called the

Accepted Answer

A)  primary market. 
B)  secondary market. 
C)  The New York Stock Exchange (NYS
E) . 
D)  The Chicago Board of Trade. 
A)  primary market. 
B)  secondary market. 
C)  The New York Stock Exchange (NYS
E) . 
D)  The Chicago Board of Trade.

Question 9

A lower interest rate will increase the present value of future income and thereby

Accepted Answer

A)  decrease the market value of stocks. 
B)  increase the market value of stocks. 
C)  have no effect on the market value of stocks. 
D)  decrease the discounted market value of stocks. 
A)  decrease the market value of stocks. 
B)  increase the market value of stocks. 
C)  have no effect on the market value of stocks. 
D)  decrease the discounted market value of stocks.

Question 10

Which of the following has enhanced the ability of investors, without any special business skills, to benefit from the ownership of corporate America?

Accepted Answer

A)  the increased availability of mutual funds that make it possible for even small investors to purchase a diverse stock portfolio at a low cost 
B)  an increased tendency of small investors to buy and sell stock frequently, using stock tips from investment experts 
C)  the virtual disappearance of business failures among corporations with publicly traded stock shares 
D)  all of the above 
A)  the increased availability of mutual funds that make it possible for even small investors to purchase a diverse stock portfolio at a low cost 
B)  an increased tendency of small investors to buy and sell stock frequently, using stock tips from investment experts 
C)  the virtual disappearance of business failures among corporations with publicly traded stock shares 
D)  all of the above

Question 11

According to the random walk theory, which of the following is true?

Accepted Answer

A)  Stock prices reflect all available information about factors that affect stock prices. 
B)  Future movements of stock prices are unpredictable. 
C)  Changes in stock prices are driven by surprise occurrences. 
D)  All of the above are true. 
A)  Stock prices reflect all available information about factors that affect stock prices. 
B)  Future movements of stock prices are unpredictable. 
C)  Changes in stock prices are driven by surprise occurrences. 
D)  All of the above are true.

Question 12

Which of the following is true?

Accepted Answer

A)  The buyer of a firm's stock is purchasing a fractional share in the firm's future net revenues. 
B)  When investors believe that a business decision by the management of a firm will increase the firm's future earnings, the price of the firm's stock will tend to rise. 
C)  Changing stock prices provide the board of directors and managers of a firm with a strong incentive to make good decisions and undertake productive projects. 
D)  All of the above are true. 
A)  The buyer of a firm's stock is purchasing a fractional share in the firm's future net revenues. 
B)  When investors believe that a business decision by the management of a firm will increase the firm's future earnings, the price of the firm's stock will tend to rise. 
C)  Changing stock prices provide the board of directors and managers of a firm with a strong incentive to make good decisions and undertake productive projects. 
D)  All of the above are true.

Question 13

An indexed equity mutual fund

Accepted Answer

A)  is directly tied to either the consumer price index or the GDP deflator. 
B)  is a fund that hires a manager who will try to pick the stocks that will increase most in value in the future. 
C)  merely holds stocks in the same proportion as they exist in a broad stock market index like the Standard & Poor's 500. 
D)  will have high operating costs because these funds engage in a substantial amount of stock trading. 
A)  is directly tied to either the consumer price index or the GDP deflator. 
B)  is a fund that hires a manager who will try to pick the stocks that will increase most in value in the future. 
C)  merely holds stocks in the same proportion as they exist in a broad stock market index like the Standard & Poor's 500. 
D)  will have high operating costs because these funds engage in a substantial amount of stock trading.

Question 14

Which of the following is true?

Accepted Answer

A)  The P/E ratio provides information on the price of a stock relative to its current earnings. 
B)  The P/E ratio provides information on the price of a stock relative to its future earnings. 
C)  The P/E ratio provides information on the price of a stock relative to its past earnings. 
D)  The P/E ratio average from 1950-2008 was 26. 
A)  The P/E ratio provides information on the price of a stock relative to its current earnings. 
B)  The P/E ratio provides information on the price of a stock relative to its future earnings. 
C)  The P/E ratio provides information on the price of a stock relative to its past earnings. 
D)  The P/E ratio average from 1950-2008 was 26.

Question 15

The stock price of a firm is primarily a reflection of the

Accepted Answer

A)  firm's current net earnings per share. 
B)  firm's expected future net earnings per share. 
C)  discounted value of the firm's expected future net earnings per share. 
D)  firm's current net earnings per share multiplied by the interest rate. 
E)  book value of the firm. 
A)  firm's current net earnings per share. 
B)  firm's expected future net earnings per share. 
C)  discounted value of the firm's expected future net earnings per share. 
D)  firm's current net earnings per share multiplied by the interest rate. 
E)  book value of the firm.

Question 16

Which of the following will reduce the risk accompanying equity (stock) investments?

Accepted Answer

A)  the purchase of shares of a mutual fund that holds the stocks of many diverse corporations 
B)  the purchasing and holding of equities over a lengthy period of time 
C)  the purchase of shares in firms doing business in a wider variety of industries and markets 
D)  all of the above 
A)  the purchase of shares of a mutual fund that holds the stocks of many diverse corporations 
B)  the purchasing and holding of equities over a lengthy period of time 
C)  the purchase of shares in firms doing business in a wider variety of industries and markets 
D)  all of the above

Question 17

Historically, when a diverse set of stocks is held over a lengthy time period, stocks have yielded a ____ rate of return, and the variation in the rate of return has been ____.

Accepted Answer

A)  low; low 
B)  low; high 
C)  high; low 
D)  high; high 
A)  low; low 
B)  low; high 
C)  high; low 
D)  high; high

Question 18

The present value of $1 million to be received in the future will

Accepted Answer

A)  increase if the interest rate rises. 
B)  increase if the payment is received at a more distant time in the future. 
C)  be greater than $1 million. 
D)  increase if the interest rate were to fall from 8 percent to 4 percent. 
A)  increase if the interest rate rises. 
B)  increase if the payment is received at a more distant time in the future. 
C)  be greater than $1 million. 
D)  increase if the interest rate were to fall from 8 percent to 4 percent.

Question 19

The random walk theory implies that stock prices

Accepted Answer

A)  go down, then up, and then down again. 
B)  go up and then down in a predictable pattern. 
C)  follow systematic trends. 
D)  are unpredictable based on past trends. 
A)  go down, then up, and then down again. 
B)  go up and then down in a predictable pattern. 
C)  follow systematic trends. 
D)  are unpredictable based on past trends.

Question 20

Suppose that monetary policy becomes more expansionary, and as a result, the future rate of inflation is higher. Will this be good for the stock market?

Accepted Answer

A)  Yes; the inflation will lead to higher wages, and this will be good for both the economy and the stock market. 
B)  No; the inflation will lead to higher nominal interest rates, and this will reduce the present value of the future net earnings derived from stocks. 
C)  Yes; the inflation rate will reduce the long-run rate of unemployment, and this will be good for the stock market. 
D)  No; the expansionary monetary policy will lead to lower real interest rates, and this is generally bad for both the economy and the stock market. 
A)  Yes; the inflation will lead to higher wages, and this will be good for both the economy and the stock market. 
B)  No; the inflation will lead to higher nominal interest rates, and this will reduce the present value of the future net earnings derived from stocks. 
C)  Yes; the inflation rate will reduce the long-run rate of unemployment, and this will be good for the stock market. 
D)  No; the expansionary monetary policy will lead to lower real interest rates, and this is generally bad for both the economy and the stock market.

Special Topic 3 : The Stock Market: Its Function, Performance, and Potential as an Investment Opportunity

Investment in a broad portfolio of stocks is most attractive for

A firm's stock price will be higher when the interest rate is ____ and the value of the firm's expected future profits are ____.

If the interest rate were 10 percent, how much would people be willing to pay for a stock that was certain to yield a $2 per share stream of net earnings continuously in the future?

If the interest rate were 12.5 percent, how much would people be willing to pay for a stock that was certain to yield a $20 per share stream of net earnings continuously in the future?

The variation in the rate of return one can expect from ownership of stocks will generally be smaller if

Which of the following would reduce the risk of an investment in the stock market?

Which of the following would be most likely to cause the price/earnings ratio of stocks to rise?

The market for new issues of stock is called the

A lower interest rate will increase the present value of future income and thereby

Which of the following has enhanced the ability of investors, without any special business skills, to benefit from the ownership of corporate America?

According to the random walk theory, which of the following is true?

Which of the following is true?

An indexed equity mutual fund

Which of the following is true?

The stock price of a firm is primarily a reflection of the

Which of the following will reduce the risk accompanying equity (stock) investments?

Historically, when a diverse set of stocks is held over a lengthy time period, stocks have yielded a ____ rate of return, and the variation in the rate of return has been ____.

The present value of $1 million to be received in the future will

The random walk theory implies that stock prices

Suppose that monetary policy becomes more expansionary, and as a result, the future rate of inflation is higher. Will this be good for the stock market?

The Economic Approach

A : Some Tools of the Economist

B : Some Tools of the Economist

A : Supply, Demand, and the Market Process

B : Supply, Demand, and the Market Process

A : Supply and Demand: Applications and Extensions

B : Supply and Demand: Applications and Extensions

Difficult Cases for the Market and the Role of Government

The Economics of Collective Decision-Making

A : Taking the Nations Economic Pulse

B : Taking the Nations Economic Pulse

Economic Fluctuations, Unemployment, and Inflation

A : an Introduction to Basic Macroeconomic Markets

B : an Introduction to Basic Macroeconomic Markets

Dynamic Change, Economic Fluctuations, and the Ad-As Model

Fiscal Policy: the Keynesian View and Historical Perspective

Fiscal Policy, Incentives, and Secondary Effects

A : Money and the Banking System

B : Money and the Banking System

Modern Macroeconomics and Monetary Policy

Stabilization Policy, Output, and Employment

Creating an Environment for Growth and Prosperity

Institutions, Policies, and Cross-Country Differences in Income and Growth

Gaining From International Trade

International Finance and the Foreign Exchange Market

Consumer Choice and Elasticity

A : Costs and the Supply of Goods

B : Costs and the Supply of Goods

A : Price Takers and the Competitive Process

B : Price Takers and the Competitive Process

Price-Searcher Markets With Low Entry Barriers

A : Price-Searcher Markets With High Entry Barriers

B : Price-Searcher Markets With High Entry Barriers

The Supply of and Demand for Productive Resources

Earnings, Productivity, and the Job Market

Investment, the Capital Market, and the Wealth of Nations

Income Inequality and Poverty

Special Topic 1 : Government Spending and Taxation

Special Topic 2 : The Economics of Social Security

Special Topic 4 : Great Debates in Economics: Keynes Versus Hayek

Special Topic 5 : The Crisis of 2008: Causes and Lessons for the Future

Special Topic 6 : Lessons from the Great Depression

Special Topic 7 : Lessons from Japan and Canada

Special Topic 8 : The Federal Budget and the National Debt

Special Topic 9 : The Economics of Healthcare

Special Topic 10 : Education: Problems and Performance

Special Topic 11 : Earnings Differences Between Men and Women

Special Topic 12 : Do Labor Unions Increase the Wages of Workers?

Special Topic 13 : The Question of Resource Exhaustion

Special Topic 14 : Difficult Environmental Cases and the Role of Government

Filters

A firm's stock price will be higher when the interest rate is and the value of the firm's expected future profits are .

Historically, when a diverse set of stocks is held over a lengthy time period, stocks have yielded a rate of return, and the variation in the rate of return has been .