Question 1

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 D

Question 2

What is the current price of a utility company's stock if the current dividend is $0.20, the expected constant growth rate in dividends is 2% and the required return is 8%?

Accepted Answer

A) $2.00 
B) $2.20 
C) $3.20 
D) $3.40 
A) $2.00 
B) $2.20 
C) $3.20 
D) $3.40 D

Question 3

Stockholders' rights include ________.

Accepted Answer

A) the right to manage 
B) the right to change personnel policy 
C) the right to veto management's decisions 
D) residual claim on all of a company's assets 
A) the right to manage 
B) the right to change personnel policy 
C) the right to veto management's decisions 
D) residual claim on all of a company's assets D

Question 4

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 5

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

Accepted Answer

A) this view ignores the fact 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 the fact 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

Using the Gordon growth formula, if D₁ is $1.00, kₑ is 10 percent or 0.10, and g is 5 percent or 0.05, then the current stock price is ________.

Accepted Answer

A) $10 
B) $20 
C) $30 
D) $40 
A) $10 
B) $20 
C) $30 
D) $40

Question 7

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

Question 8

According to the efficient markets hypothesis, purchasing the reports of financial analysts ________.

Accepted Answer

A) is likely to increase one's returns by an average of 10 percent 
B) is likely to increase one's returns by about 3 to 5 percent 
C) is not likely to be an effective strategy for increasing financial returns 
D) is likely to increase one's returns by an average of about 2 to 3 percent 
A) is likely to increase one's returns by an average of 10 percent 
B) is likely to increase one's returns by about 3 to 5 percent 
C) is not likely to be an effective strategy for increasing financial returns 
D) is likely to increase one's returns by an average of about 2 to 3 percent

Question 9

In the Gordon growth model, a decrease in the required rate of return on equity ________.

Accepted Answer

A) increases the current stock price 
B) increases the future stock price 
C) reduces the future stock price 
D) reduces the current stock price 
A) increases the current stock price 
B) increases the future stock price 
C) reduces the future stock price 
D) reduces the current stock price

Question 10

________ occurs when market participants observe returns on a security that are larger than what is justified by the characteristics of that security and take action to quickly eliminate the unexploited profit opportunity.

Accepted Answer

A) Arbitrage 
B) Mediation 
C) Asset capitalization 
D) Market intercession 
A) Arbitrage 
B) Mediation 
C) Asset capitalization 
D) Market intercession

Question 11

What rights does ownership interest give stockholders?

Accepted Answer

Stockholders have the right to vote on i

Question 12

A situation when an asset price differs from its fundamental value is ________.

Accepted Answer

A) a random walk 
B) an inflation 
C) a deflation 
D) a bubble 
A) a random walk 
B) an inflation 
C) a deflation 
D) a bubble

Question 13

Loss aversion can explain why very little ________ actually takes place in the securities market.

Accepted Answer

A) short selling 
B) bargaining 
C) bartering 
D) negotiating 
A) short selling 
B) bargaining 
C) bartering 
D) negotiating

Question 14

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 15

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 16

The efficient markets hypothesis predicts that stock prices follow a "random walk." The implication of this hypothesis for investing in stocks is ________.

Accepted Answer

A) a "churning strategy" of buying and selling often to catch market swings 
B) turning over your stock portfolio each month, selecting stocks by throwing darts at the stock page 
C) a "buy and hold strategy" of holding stocks to avoid brokerage commissions 
D) following the advice of technical analysts 
A) a "churning strategy" of buying and selling often to catch market swings 
B) turning over your stock portfolio each month, selecting stocks by throwing darts at the stock page 
C) a "buy and hold strategy" of holding stocks to avoid brokerage commissions 
D) following the advice of technical analysts

Question 17

When Happy Feet Corporation announces that their fourth quarter earnings are up 10 percent, their stock price falls. This is consistent with the efficient markets hypothesis ________.

Accepted Answer

A) if earnings were not as high as expected 
B) if earnings were not as low as expected 
C) if a merger is anticipated 
D) the company just invented a new bunion product 
A) if earnings were not as high as expected 
B) if earnings were not as low as expected 
C) if a merger is anticipated 
D) the company just invented a new bunion product

Question 18

A monetary expansion ________ stock prices due to a decrease in the ________ and an increase in the ________, everything else held constant.

Accepted Answer

A) reduces; future sales price; expected rate of return 
B) reduces; current dividend; expected rate of return 
C) increases; required rate of return; future sales price 
D) increases; required rate of return; dividend growth rate 
A) reduces; future sales price; expected rate of return 
B) reduces; current dividend; expected rate of return 
C) increases; required rate of return; future sales price 
D) increases; required rate of return; dividend growth rate

Question 19

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

Accepted Answer

A) P₀ =   
B) P₀ =   +   
C) P₀ =   × 100 
D) P₀ =   × 365 
A) P₀ =   
B) P₀ =   +   
C) P₀ =   × 100 
D) P₀ =   × 365

Question 20

Stockholders' rights include ________.

Accepted Answer

A) the right to vote 
B) the right to manage 
C) primary claims on all cash flows 
D) ownership of bonds 
A) the right to vote 
B) the right to manage 
C) primary claims on all cash flows 
D) ownership of bonds

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

According to rational expectations theory, forecast errors of expectations ________.

What is the current price of a utility company's stock if the current dividend is $0.20, the expected constant growth rate in dividends is 2% and the required return is 8%?

Stockholders' rights include ________.

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

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

Using the Gordon growth formula, if D₁ is $1.00, kₑ is 10 percent or 0.10, and g is 5 percent or 0.05, then the current stock price is ________.

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

According to the efficient markets hypothesis, purchasing the reports of financial analysts ________.

In the Gordon growth model, a decrease in the required rate of return on equity ________.

________ occurs when market participants observe returns on a security that are larger than what is justified by the characteristics of that security and take action to quickly eliminate the unexploited profit opportunity.

What rights does ownership interest give stockholders?

A situation when an asset price differs from its fundamental value is ________.

Loss aversion can explain why very little ________ actually takes place in the securities market.

Evidence against market efficiency includes ________.

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

The efficient markets hypothesis predicts that stock prices follow a "random walk." The implication of this hypothesis for investing in stocks is ________.

When Happy Feet Corporation announces that their fourth quarter earnings are up 10 percent, their stock price falls. This is consistent with the efficient markets hypothesis ________.

A monetary expansion ________ stock prices due to a decrease in the ________ and an increase in the ________, everything else held constant.

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

Stockholders' rights include ________.

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

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

Financial Crises in Emerging Markets

The ISLM Model

Non-Bank Finance

Filters

A monetary expansion stock prices due to a decrease in the and an increase in the , everything else held constant.