Question 1

Which of the following is true?

Accepted Answer

A)  An increase in the interest rate will tend to increase stock prices. 
B)  A reduction in the interest rate will tend to increase stock prices. 
C)  An increase in the inflation rate will tend to increase stock prices. 
D)  There is no reason to believe that changes in interest rates will influence stock prices. 
A)  An increase in the interest rate will tend to increase stock prices. 
B)  A reduction in the interest rate will tend to increase stock prices. 
C)  An increase in the inflation rate will tend to increase stock prices. 
D)  There is no reason to believe that changes in interest rates will influence stock prices.

Question 2

Which of the following is true?

Accepted Answer

A)  Investment in the stock market is a relatively foolproof method for an investor to earn a high rate of return during the next five years. 
B)  Current stock prices already reflect information that is known with a high degree of certainty. 
C)  Experts are able to predict changes in the direction of the broad stock market indexes with a high degree of accuracy. 
D)  While changes in the prices of specific stocks are difficult to predict, it is relatively easy to predict the future direction of the broad stock market. 
E)  Both c and d are true. 
A)  Investment in the stock market is a relatively foolproof method for an investor to earn a high rate of return during the next five years. 
B)  Current stock prices already reflect information that is known with a high degree of certainty. 
C)  Experts are able to predict changes in the direction of the broad stock market indexes with a high degree of accuracy. 
D)  While changes in the prices of specific stocks are difficult to predict, it is relatively easy to predict the future direction of the broad stock market. 
E)  Both c and d are true.

Question 3

Which of the following represents a method for a firm to obtain funds for growth and product development?

Accepted Answer

A)  use of retained earnings 
B)  borrowing money 
C)  selling stock 
D)  all of the above 
A)  use of retained earnings 
B)  borrowing money 
C)  selling stock 
D)  all of the above

Question 4

Historically, which of the following has had the highest average annual rate of return?

Accepted Answer

A)  corporate bonds 
B)  money market mutual funds 
C)  corporate stocks 
D)  U.S. Treasury bonds 
A)  corporate bonds 
B)  money market mutual funds 
C)  corporate stocks 
D)  U.S. Treasury bonds

Question 5

Stock analysts often argue that lower interest rates are good for the stock market. Does this argument make sense?

Accepted Answer

A)  No; lower interest rates will tend to slow down the economy and this will be bad for the stock market. 
B)  Yes; the lower rates of interest will increase the value of future income (and capital gains) and stock prices will rise to reflect this factor. 
C)  No; the lower rates of interest will reduce the value of future income (and capital gains) and this will cause stock prices to fall. 
D)  Yes; the lower interest rates will cause inflation and inflation is generally good for the stock market. 
A)  No; lower interest rates will tend to slow down the economy and this will be bad for the stock market. 
B)  Yes; the lower rates of interest will increase the value of future income (and capital gains) and stock prices will rise to reflect this factor. 
C)  No; the lower rates of interest will reduce the value of future income (and capital gains) and this will cause stock prices to fall. 
D)  Yes; the lower interest rates will cause inflation and inflation is generally good for the stock market.

Question 6

During the last sixty years, the broad stock market (Standard and Poor's 500 Index) yielded an average annual nominal rate of return of approximately ____ and real rate of return of approximately ____.

Accepted Answer

A)  5 percent; 2 percent 
B)  10 percent; 7 percent 
C)  17 percent; 9 percent 
D)  9 percent; 17 percent 
A)  5 percent; 2 percent 
B)  10 percent; 7 percent 
C)  17 percent; 9 percent 
D)  9 percent; 17 percent

Question 7

The current market value of a stock option contract to purchase 1,000 shares of IBM stock at a price of $100 that can be exercised five years from now would

Accepted Answer

A)  increase if the expected future price of IBM stock rose. 
B)  increase if the expected future price of IBM stock fell. 
C)  decrease if the expected future price of IBM stock rose. 
D)  remain unchanged regardless of the expected future price of IBM stock. 
A)  increase if the expected future price of IBM stock rose. 
B)  increase if the expected future price of IBM stock fell. 
C)  decrease if the expected future price of IBM stock rose. 
D)  remain unchanged regardless of the expected future price of IBM stock.

Question 8

Which of the following types of mutual funds best describes one in which an "expert" seeks to pick the stock holdings in a way that maximizes the rate of return?

Accepted Answer

A)  indexed equity mutual fund 
B)  managed equity mutual fund 
C)  supervised equity mutual fund 
D)  marked equity mutual fund 
A)  indexed equity mutual fund 
B)  managed equity mutual fund 
C)  supervised equity mutual fund 
D)  marked equity mutual fund

Question 9

During the 1970s, the price/earnings ratio of stocks in the S&P 500 was relatively low. This low P/E ratio was

Accepted Answer

A)  surprising because the inflation rate was high during the 1970s. 
B)  not surprising because interest rates were low during the inflationary 1970s. 
C)  not surprising because interest rates were high during the inflationary 1970s. 
D)  surprising because the inflation rate was low during the 1970s. 
A)  surprising because the inflation rate was high during the 1970s. 
B)  not surprising because interest rates were low during the inflationary 1970s. 
C)  not surprising because interest rates were high during the inflationary 1970s. 
D)  surprising because the inflation rate was low during the 1970s.

Question 10

Which of the following is a risk that investors undertake when purchasing stocks?

Accepted Answer

A)  An individual stock can rise and fall unpredictably. 
B)  Nearly all stocks in the stock market may rise or fall together, when expectations about the entire economy change. 
C)  Both a and b are true. 
D)  Neither a nor b is true. 
A)  An individual stock can rise and fall unpredictably. 
B)  Nearly all stocks in the stock market may rise or fall together, when expectations about the entire economy change. 
C)  Both a and b are true. 
D)  Neither a nor b is true.

Question 11

Which of the following would be most likely to push stock prices higher?

Accepted Answer

A)  higher interest rates and the expectation of larger future corporate profits 
B)  higher interest rates and the expectation of smaller future corporate profits 
C)  lower interest rates and the expectation of larger future corporate profits 
D)  lower interest rates and the expectation of smaller future corporate profits 
A)  higher interest rates and the expectation of larger future corporate profits 
B)  higher interest rates and the expectation of smaller future corporate profits 
C)  lower interest rates and the expectation of larger future corporate profits 
D)  lower interest rates and the expectation of smaller future corporate profits

Question 12

Which of the following is true?

Accepted Answer

A)  The stock market helps channel the savings of individuals into business activities that create wealth. 
B)  Individual investors can reduce their risk by holding a large share of their wealth in the form of the stock ownership of a single company. 
C)  Historically, the long-term real rate of return of stocks has generally been less than that of bonds. 
D)  Mutual funds that have done well in the past are more likely to outperform the market average in the future. 
A)  The stock market helps channel the savings of individuals into business activities that create wealth. 
B)  Individual investors can reduce their risk by holding a large share of their wealth in the form of the stock ownership of a single company. 
C)  Historically, the long-term real rate of return of stocks has generally been less than that of bonds. 
D)  Mutual funds that have done well in the past are more likely to outperform the market average in the future.

Question 13

During the last two centuries, after adjustment for inflation,

Accepted Answer

A)  corporate bonds have yielded a real return of approximately 7 percent annually, compared to a real return of about 3 percent for corporate stocks. 
B)  corporate stocks have yielded a real return of approximately 7 percent annually, compared to a real return of about 3 percent for bonds. 
C)  both corporate stocks and bonds have yielded a real rate of return of about 3 percent. 
D)  both corporate stocks and bonds have yielded a real rate of return of about 7 percent. 
A)  corporate bonds have yielded a real return of approximately 7 percent annually, compared to a real return of about 3 percent for corporate stocks. 
B)  corporate stocks have yielded a real return of approximately 7 percent annually, compared to a real return of about 3 percent for bonds. 
C)  both corporate stocks and bonds have yielded a real rate of return of about 3 percent. 
D)  both corporate stocks and bonds have yielded a real rate of return of about 7 percent.

Question 14

Which of the following is an advantage of an indexed equity mutual fund relative to a managed equity fund?

Accepted Answer

A)  Indexed funds generally have better stock pickers. 
B)  Indexed funds engage in more detailed research. 
C)  Indexed funds have lower operating costs because they engage in less stock trading. 
D)  Indexed funds earn a significantly higher rate of return than a broad portfolio that represents the entire stock market. 
A)  Indexed funds generally have better stock pickers. 
B)  Indexed funds engage in more detailed research. 
C)  Indexed funds have lower operating costs because they engage in less stock trading. 
D)  Indexed funds earn a significantly higher rate of return than a broad portfolio that represents the entire stock market.

Question 15

Which of the following is true of stocks?

Accepted Answer

A)  Stock ownership is risky because the investor can never be sure what return they will earn or what the value of their stock holdings will be in the future. 
B)  The riskiness of stocks is one reason why their average rate of return has been higher than investments like bonds that guarantee a specified nominal amount in the future. 
C)  Both a and b are true. 
D)  Neither a nor b is true. 
A)  Stock ownership is risky because the investor can never be sure what return they will earn or what the value of their stock holdings will be in the future. 
B)  The riskiness of stocks is one reason why their average rate of return has been higher than investments like bonds that guarantee a specified nominal amount in the future. 
C)  Both a and b are true. 
D)  Neither a nor b is true.

Question 16

Currently, about ____ of U.S. households own stock, either directly or through an equity mutual fund.

Accepted Answer

A)  10 percent 
B)  20 percent 
C)  50 percent 
D)  80 percent 
A)  10 percent 
B)  20 percent 
C)  50 percent 
D)  80 percent

Question 17

The random walk theory implies that stock prices

Accepted Answer

A)  go down, then up, and then down again. 
B)  follow systematic trends. 
C)  can be forecast accurately by experts who are knowledgeable about how the stock market works. 
D)  will change as the result of unexpected factors that are virtually impossible to forecast accurately. 
A)  go down, then up, and then down again. 
B)  follow systematic trends. 
C)  can be forecast accurately by experts who are knowledgeable about how the stock market works. 
D)  will change as the result of unexpected factors that are virtually impossible to forecast accurately.

Question 18

Which of the following provides the strongest argument for young people making regular payments into a retirement program that invests these funds in a diverse set of stocks?

Accepted Answer

A)  The prices of stocks tend to fluctuate more than the prices of bonds. 
B)  Over short periods of time, variation in the real rate of return of stocks is greater than bonds. 
C)  When held over lengthy periods like 30 or 40 years, historically, the rate of return on stocks has been both higher and less variable than that of bonds. 
D)  Lower interest rates will lead to higher bond prices. 
A)  The prices of stocks tend to fluctuate more than the prices of bonds. 
B)  Over short periods of time, variation in the real rate of return of stocks is greater than bonds. 
C)  When held over lengthy periods like 30 or 40 years, historically, the rate of return on stocks has been both higher and less variable than that of bonds. 
D)  Lower interest rates will lead to higher bond prices.

Question 19

If the interest rate were 5 percent, how much would people be willing to pay for a stock that was certain to yield a $10 per share stream of net earnings continuously in the future?

Accepted Answer

A)  $10 
B)  $20 
C)  $200 
D)  $400 
E)  $2,000 
A)  $10 
B)  $20 
C)  $200 
D)  $400 
E)  $2,000

Question 20

Which of the following is true?

Accepted Answer

A)  Managed equity funds generally outperform indexed equity mutual funds. 
B)  Managed equity funds merely hold stocks in the same proportion they are represented in a broad stock market index such as the Standard & Poor's 500. 
C)  Indexed equity funds generally have lower management and operating costs than managed funds. 
D)  Indexed equity funds generally engage in more stock trading than managed funds. 
A)  Managed equity funds generally outperform indexed equity mutual funds. 
B)  Managed equity funds merely hold stocks in the same proportion they are represented in a broad stock market index such as the Standard & Poor's 500. 
C)  Indexed equity funds generally have lower management and operating costs than managed funds. 
D)  Indexed equity funds generally engage in more stock trading than managed funds.

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

Which of the following is true?

Which of the following is true?

Which of the following represents a method for a firm to obtain funds for growth and product development?

Historically, which of the following has had the highest average annual rate of return?

Stock analysts often argue that lower interest rates are good for the stock market. Does this argument make sense?

During the last sixty years, the broad stock market (Standard and Poor's 500 Index) yielded an average annual nominal rate of return of approximately ____ and real rate of return of approximately ____.

The current market value of a stock option contract to purchase 1,000 shares of IBM stock at a price of $100 that can be exercised five years from now would

Which of the following types of mutual funds best describes one in which an "expert" seeks to pick the stock holdings in a way that maximizes the rate of return?

During the 1970s, the price/earnings ratio of stocks in the S&P 500 was relatively low. This low P/E ratio was

Which of the following is a risk that investors undertake when purchasing stocks?

Which of the following would be most likely to push stock prices higher?

Which of the following is true?

During the last two centuries, after adjustment for inflation,

Which of the following is an advantage of an indexed equity mutual fund relative to a managed equity fund?

Which of the following is true of stocks?

Currently, about ____ of U.S. households own stock, either directly or through an equity mutual fund.

The random walk theory implies that stock prices

Which of the following provides the strongest argument for young people making regular payments into a retirement program that invests these funds in a diverse set of stocks?

If the interest rate were 5 percent, how much would people be willing to pay for a stock that was certain to yield a $10 per share stream of net earnings continuously in the future?

Which of the following is true?

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

During the last sixty years, the broad stock market (Standard and Poor's 500 Index) yielded an average annual nominal rate of return of approximately and real rate of return of approximately .