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

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

Stockholders are residual claimants,meaning that they

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

If a forecast is made using all available information,then economists say that the expectation formation is

You believe that a corporation's dividends will grow 5% 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% required return?

Evidence against market efficiency includes

If additional information is not used when forming an optimal forecast because it is not available at that time,then expectations are

If a corporation announces that it expects quarterly earnings to increase by 25% and it actually sees an increase of 22%,what should happen to the price of the corporation's stock if the efficient markets hypothesis holds,everything else held constant?

If the optimal forecast of the return on a security exceeds the equilibrium return,then

Using the Gordon growth model,a stock's price will increase if

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 ________.

Financial markets quickly eliminate unexploited profit opportunities through changes in

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

Information plays an important role in asset pricing because it allows the buyer to more accurately judge ________.

You have observed that the forecasts of an investment advisor consistently outperform the other reported forecasts.The efficient markets hypothesis says that future forecasts by this advisor

You read a story in the newspaper announcing the proposed merger of Dell Computer and Gateway.The merger is expected to greatly increase Gateway's profitability.If you decide to invest in Gateway stock,you can expect to earn

Rules used to predict movements in stock prices based on past patterns are,according to the efficient markets hypothesis,

If expectations of the future inflation rate are formed solely on the basis of a weighted average of past inflation rates,then economics would say that expectation formation is

Using the one-period valuation model,assuming a year-end dividend of $0.11,an expected sales price of $110,and a required rate of return of 10%,the current price of the stock would be

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