Question 1

Which of the following is an implication of the random walk theory?

Accepted Answer

A)  Experts will be able to make money by picking and choosing the best stocks. 
B)  There is a systematic pattern to the movement of prices in the stock market. 
C)  Stock market investors can expect to earn a fairly steady real rate of return of about 7 percent annually. 
D)  Even experts will be unable to predict the future movement of stock prices with any degree of accuracy. 
A)  Experts will be able to make money by picking and choosing the best stocks. 
B)  There is a systematic pattern to the movement of prices in the stock market. 
C)  Stock market investors can expect to earn a fairly steady real rate of return of about 7 percent annually. 
D)  Even experts will be unable to predict the future movement of stock prices with any degree of accuracy.

Question 2

Buying shares of corporate stock tends to be more risky when

Accepted Answer

A)  the stock of a single corporation is purchased. 
B)  the stock may have to be sold within a few months. 
C)  all stocks bought are in the same industry. 
D)  all of the above are true. 
A)  the stock of a single corporation is purchased. 
B)  the stock may have to be sold within a few months. 
C)  all stocks bought are in the same industry. 
D)  all of the above are true.

Question 3

Since 1802, the average annual compound return for stock holdings, adjusted for inflation, has been approximately

Accepted Answer

A)  2 percent. 
B)  7 percent. 
C)  15 percent. 
D)  30 percent. 
A)  2 percent. 
B)  7 percent. 
C)  15 percent. 
D)  30 percent.

Question 4

The random walk theory indicates that

Accepted Answer

A)  investors can make money by purchasing stocks that are widely expected to earn substantial profits in the future. 
B)  while changes in the prices of specific stocks are difficult to predict, experts are able to forecast the future direction of broad stock market indexes with a high degree of accuracy. 
C)  changes in stock prices are driven by surprise occurrences that are difficult for anyone to predict accurately. 
D)  managed mutual funds will persistently outperform indexed funds. 
A)  investors can make money by purchasing stocks that are widely expected to earn substantial profits in the future. 
B)  while changes in the prices of specific stocks are difficult to predict, experts are able to forecast the future direction of broad stock market indexes with a high degree of accuracy. 
C)  changes in stock prices are driven by surprise occurrences that are difficult for anyone to predict accurately. 
D)  managed mutual funds will persistently outperform indexed funds.

Question 5

Which of the following is true?

Accepted Answer

A)  Most stockholders own stock because they want to participate in the daily decision making of the firms that they own. 
B)  The shareholders of a large well-established firm can be reasonably sure that they will earn a real rate of return of about 7 percent in the future. 
C)  The potential losses of shareholders are limited to the amount of their investment. 
D)  Ownership of a corporate bond provides the bondholder with an ownership right to a fraction of the firm's future profits. 
A)  Most stockholders own stock because they want to participate in the daily decision making of the firms that they own. 
B)  The shareholders of a large well-established firm can be reasonably sure that they will earn a real rate of return of about 7 percent in the future. 
C)  The potential losses of shareholders are limited to the amount of their investment. 
D)  Ownership of a corporate bond provides the bondholder with an ownership right to a fraction of the firm's future profits.

Question 6

The random walk theory of stock prices indicates that

Accepted Answer

A)  if they are willing to do a little research, even beginning investors will be able to pick the stocks that will increase most in price in the future. 
B)  managed mutual funds will persistently earn a higher rate of return than indexed funds. 
C)  current stock prices already reflect information about factors influencing future stock prices that can be forecast with any degree of accuracy. 
D)  stock market investors can expect to earn a steady real rate of return of about 7 percent annually. 
A)  if they are willing to do a little research, even beginning investors will be able to pick the stocks that will increase most in price in the future. 
B)  managed mutual funds will persistently earn a higher rate of return than indexed funds. 
C)  current stock prices already reflect information about factors influencing future stock prices that can be forecast with any degree of accuracy. 
D)  stock market investors can expect to earn a steady real rate of return of about 7 percent annually.

Question 7

Investors are often willing to pay positive prices for shares of firms that have never earned a profit because the investors

Accepted Answer

A)  do not know the firms have never earned a profit. 
B)  expect the firms to have positive net earnings in the future. 
C)  expect that interest rates will rise in the future. 
D)  expect that higher rates of inflation will push stock prices higher in the future. 
A)  do not know the firms have never earned a profit. 
B)  expect the firms to have positive net earnings in the future. 
C)  expect that interest rates will rise in the future. 
D)  expect that higher rates of inflation will push stock prices higher in the future.

Question 8

To the extent that current profits are directly related to future profits, a high price/earnings ratio would indicate that stocks are

Accepted Answer

A)  inexpensive. 
B)  expensive. 
C)  going to increase in value in the future. 
D)  most likely to fall in value if interest rates decline. 
A)  inexpensive. 
B)  expensive. 
C)  going to increase in value in the future. 
D)  most likely to fall in value if interest rates decline.

Question 9

Consider a stock with a 50 percent probability of zero net earnings and a 50 percent probability of net earnings equal to $20 per share each year continuously in the future. Furthermore, assume that people are risk averse: That is, they will have to be compensated for uncertainty accompanying variation in their future wealth. If the interest rate were 5 percent, how much would people be willing to pay for a share of this stock?

Accepted Answer

A)  $10 
B)  $200 
C)  less than $200 
D)  more than $200 
E)  $400 
A)  $10 
B)  $200 
C)  less than $200 
D)  more than $200 
E)  $400

Question 10

Many personal finance magazines such as Money and Smart Money routinely give advice as to which stocks to buy. Should you take their advice?

Accepted Answer

Current stock prices will reflect all of

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

Which of the following is an implication of the random walk theory?

Buying shares of corporate stock tends to be more risky when

Since 1802, the average annual compound return for stock holdings, adjusted for inflation, has been approximately

The random walk theory indicates that

Which of the following is true?

The random walk theory of stock prices indicates that

Investors are often willing to pay positive prices for shares of firms that have never earned a profit because the investors

To the extent that current profits are directly related to future profits, a high price/earnings ratio would indicate that stocks are

Many personal finance magazines such as Money and Smart Money routinely give advice as to which stocks to buy. Should you take their advice?

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

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