Question 1

The efficient markets hypothesis suggests that investors

Accepted Answer

A) should purchase no-load mutual funds which have low management fees. 
B) can use the advice of technical analysts to outperform the market. 
C) let too many unexploited profit opportunities go by if they adopt a "buy and hold" strategy. 
D) act on all "hot tips" they hear. 
A) should purchase no-load mutual funds which have low management fees. 
B) can use the advice of technical analysts to outperform the market. 
C) let too many unexploited profit opportunities go by if they adopt a "buy and hold" strategy. 
D) act on all "hot tips" they hear.

Question 2

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 3

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 4

In rational expectations theory,the term "optimal forecast" is essentially synonymous with

Accepted Answer

A) correct forecast. 
B) the correct guess. 
C) the actual outcome. 
D) the best guess. 
A) correct forecast. 
B) the correct guess. 
C) the actual outcome. 
D) the best guess.

Question 5

The major criticism of the view that expectations are formed adaptively is that

Accepted Answer

A) this view ignores that people use more information than just past data to form their expectations. 
B) it is easier to model adaptive expectations than it is to model rational expectations. 
C) adaptive expectations models have no predictive power. 
D) people are irrational and therefore never learn from past mistakes. 
A) this view ignores that people use more information than just past data to form their expectations. 
B) it is easier to model adaptive expectations than it is to model rational expectations. 
C) adaptive expectations models have no predictive power. 
D) people are irrational and therefore never learn from past mistakes.

Question 6

________ means people are more unhappy when they suffer losses than they are happy when they achieve gains.

Accepted Answer

A) Loss fundamentals 
B) Loss aversion 
C) Loss leader 
D) Loss cycle 
A) Loss fundamentals 
B) Loss aversion 
C) Loss leader 
D) Loss cycle

Question 7

Financial markets quickly eliminate unexploited profit opportunities through changes in

Accepted Answer

A) dividend payments. 
B) tax laws. 
C) asset prices. 
D) monetary policy. 
A) dividend payments. 
B) tax laws. 
C) asset prices. 
D) monetary policy.

Question 8

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 9

In the generalized dividend model,a future sales price far in the future does not affect the current stock price because

Accepted Answer

A) the present value cannot be computed. 
B) the present value is almost zero. 
C) the sales price does not affect the current price. 
D) the stock may never be sold. 
A) the present value cannot be computed. 
B) the present value is almost zero. 
C) the sales price does not affect the current price. 
D) the stock may never be sold.

Question 10

Tests used to rate the performance of rules developed in technical analysis conclude that technical analysis

Accepted Answer

A) outperforms the overall market. 
B) far outperforms the overall market,suggesting that stockbrokers provide valuable services. 
C) does not outperform the overall market. 
D) does not outperform the overall market,suggesting that stockbrokers do not provide services of any value. 
A) outperforms the overall market. 
B) far outperforms the overall market,suggesting that stockbrokers provide valuable services. 
C) does not outperform the overall market. 
D) does not outperform the overall market,suggesting that stockbrokers do not provide services of any value.

Question 11

A phenomenon closely related to market overreaction is

Accepted Answer

A) the random walk. 
B) the small-firm effect. 
C) the January effect. 
D) excessive volatility. 
A) the random walk. 
B) the small-firm effect. 
C) the January effect. 
D) excessive volatility.

Question 12

According to rational expectations theory,forecast errors of expectations

Accepted Answer

A) are more likely to be negative than positive. 
B) are more likely to be positive than negative. 
C) tend to be persistently high or low. 
D) are unpredictable. 
A) are more likely to be negative than positive. 
B) are more likely to be positive than negative. 
C) tend to be persistently high or low. 
D) are unpredictable.

Question 13

To say that stock prices follow a "random walk" is to argue that stock prices

Accepted Answer

A) rise,then fall,then rise again. 
B) rise,then fall in a predictable fashion. 
C) tend to follow trends. 
D) cannot be predicted based on past trends. 
A) rise,then fall,then rise again. 
B) rise,then fall in a predictable fashion. 
C) tend to follow trends. 
D) cannot be predicted based on past trends.

Question 14

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 15

The efficient markets hypothesis implies that prices in the stock market

Accepted Answer

A) follow a definite pattern. 
B) are more likely to go up than down. 
C) always undervalue the true assets of a corporation. 
D) are unpredictable. 
A) follow a definite pattern. 
B) are more likely to go up than down. 
C) always undervalue the true assets of a corporation. 
D) are unpredictable.

Question 16

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 17

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 18

If future changes in stock prices are unpredictable,then we say that the stock prices follow a

Accepted Answer

A) random walk. 
B) straight and narrow path. 
C) meandering path. 
D) generalized walk. 
A) random walk. 
B) straight and narrow path. 
C) meandering path. 
D) generalized walk.

Question 19

According to the efficient markets hypothesis,the current price of a financial security

Accepted Answer

A) is the discounted net present value of future interest payments. 
B) is determined by the lowest successful bidder. 
C) fully reflects all available relevant information. 
D) is a result of none of the above. 
A) is the discounted net present value of future interest payments. 
B) is determined by the lowest successful bidder. 
C) fully reflects all available relevant information. 
D) is a result of none of the above.

Question 20

If expectations are formed rationally,then individuals

Accepted Answer

A) will have a forecast that is 100% accurate all of the time. 
B) change their forecast when faced with new information. 
C) use only the information from past data on a single variable to form their forecast. 
D) have forecast errors that are persistently low. 
A) will have a forecast that is 100% accurate all of the time. 
B) change their forecast when faced with new information. 
C) use only the information from past data on a single variable to form their forecast. 
D) have forecast errors that are persistently low.

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

The efficient markets hypothesis suggests that investors

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

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 rational expectations theory,the term "optimal forecast" is essentially synonymous with

The major criticism of the view that expectations are formed adaptively is that

________ means people are more unhappy when they suffer losses than they are happy when they achieve gains.

Financial markets quickly eliminate unexploited profit opportunities through changes in

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

In the generalized dividend model,a future sales price far in the future does not affect the current stock price because

Tests used to rate the performance of rules developed in technical analysis conclude that technical analysis

A phenomenon closely related to market overreaction is

According to rational expectations theory,forecast errors of expectations

To say that stock prices follow a "random walk" is to argue that stock prices

Mean reversion refers to the fact that

The efficient markets hypothesis implies that prices in the stock market

An expectation may fail to be rational if

Evidence against market efficiency includes

If future changes in stock prices are unpredictable,then we say that the stock prices follow a

According to the efficient markets hypothesis,the current price of a financial security

If expectations are formed rationally,then individuals

Why Study Money,banking,and Financial Markets

An Overview of the Financial System

What Is Money

The Meaning of Interest Rates

The Behavior of Interest Rates

The Risk and Term Structure of Interest Rates

An Economic Analysis of Financial Structure

Banking and the Management of Financial Institutions

Economic Analysis of Financial Regulation

Banking Industry: Structure and Competition

Financial Crises

Nonbank Finance

Financial Derivatives

Conflicts of Interest in the Financial Industry

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

Aggregate Demand and Supply Analysis

Monetary Policy Theory

Transmission Mechanisms of Monetary Policy

Financial Crises in Emerging Market Economies

The IS Curve

The Monetary Policy and Aggregate Demand Curves

The Role of Expectations in Monetary Policy

The ISLM Model

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