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

You believe that a corporation's dividends will grow 5 percent on average into the foreseeable future. If the company's last dividend payment was $5 what should be the current price of the stock assuming a 12 percent required return?

Explain why the Gordon growth model does not need to incorporate the end period price.

A phenomenon closely related to market overreaction is ________.

Common stock is the principal way that corporations raise ________.

The advantage of a "buy-and-hold strategy" is that ________.

In a rational bubble, investors can have ________ expectations that a bubble is occurring but continue to hold the asset anyway.

The efficient markets hypothesis suggests that if an unexploited profit opportunity arises in an efficient market, ________.

Assume that your economics professor announces to your class that after thirty years of giving exams only on scheduled dates, this semester she will give only surprise quizzes. What is the rational expectation response to this new policy? Why does your self-interest require that you change your behavior? What would the consequences be for students who changed their expectations about exams adaptively?

A change in perceived risk of a stock changes ________.

________ is the field of study that applies concepts from social sciences such as psychology and sociology to help understand the behavior of securities prices.

If a market participant believes that a stock price is irrationally high, they may try to borrow stock from brokers to sell in the market and then make a profit by buying the stock back again after the stock falls in price. This practice is called ________.

The view that expectations change relatively slowly over time in response to new information is known in economics as ________.

In asset markets, an asset's price is ________.

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 the one-period valuation model, the value of a share of stock today depends upon ________.

If a mutual fund outperforms the market in one period, evidence suggests that this fund is ________.

According to rational expectations, ________.

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

Periodic payments of net earnings to shareholders are known as ________.

Mean reversion refers to the fact that ________.