Question 1

How expectations are formed is important because expectations influence

Accepted Answer

A) the demand for assets. 
B) bond prices. 
C) the risk structure of interest rates. 
D) the term structure of interest rates. 
E) all of the above. 
A) the demand for assets. 
B) bond prices. 
C) the risk structure of interest rates. 
D) the term structure of interest rates. 
E) all of the above. E

Question 2

Mean reversion refers to the observation that

Accepted Answer

A) stock prices overact to news announcements. 
B) stocks prices are more volatile than fluctuations in their fundamental value would predict. 
C) stocks with low returns are likely to have high returns in the future. 
D) stocks with low returns are likely to have even lower returns in the future. 
A) stock prices overact to news announcements. 
B) stocks prices are more volatile than fluctuations in their fundamental value would predict. 
C) stocks with low returns are likely to have high returns in the future. 
D) stocks with low returns are likely to have even lower returns in the future. C

Question 3

Loss aversion means the unhappiness a person feels when he or she suffers a monetary loss exceeds the happiness the same person experiences from receiving a monetary gain of the same amount.

Accepted Answer

A) True 
 B)False  True

Question 4

According to the efficient market 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 highest 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 highest successful bidder. 
C) fully reflects all available relevant information. 
D) is a result of none of the above.

Question 5

What is the optimal investment strategy according to the efficient market hypothesis? Why?

Accepted Answer

The answer of What is the optimal investment strategy according...

Question 6

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

Accepted Answer

A) the market is inefficient. 
B) an unexploited profit opportunity exists. 
C) the market is in equilibrium. 
D) only A and B of the above are true. 
E) only B and C of the above are true. 
A) the market is inefficient. 
B) an unexploited profit opportunity exists. 
C) the market is in equilibrium. 
D) only A and B of the above are true. 
E) only B and C of the above are true.

Question 7

The small-firm effect refers to the observation that small firms' stocks

Accepted Answer

A) follow a random walk but large firms' stocks do not. 
B) have earned abnormally low returns given their greater risk. 
C) have earned abnormally high returns even taking into account their greater risk. 
D) sell for lower prices than do large firms' stocks. 
A) follow a random walk but large firms' stocks do not. 
B) have earned abnormally low returns given their greater risk. 
C) have earned abnormally high returns even taking into account their greater risk. 
D) sell for lower prices than do large firms' stocks.

Question 8

The efficient markets hypothesis is weakened by evidence that

Accepted Answer

A) stock prices tend to follow a random walk. 
B) stock prices are more volatile than fluctuations in their fundamental values can explain. 
C) technical analysis does not outperform the overall market. 
D) an investment adviser's past success or failure at picking stocks does not predict his or her future performance. 
A) stock prices tend to follow a random walk. 
B) stock prices are more volatile than fluctuations in their fundamental values can explain. 
C) technical analysis does not outperform the overall market. 
D) an investment adviser's past success or failure at picking stocks does not predict his or her future performance.

Question 9

The efficient market hypothesis suggests that

Accepted Answer

A) investors should not try to outguess the market by constantly buying and selling securities. 
B) investors do better on average if they adopt a "buy and hold" strategy. 
C) buying into a mutual fund is a sensible strategy for a small investor. 
D) all of the above are sensible strategies. 
E) only A and B of the above are sensible strategies. 
A) investors should not try to outguess the market by constantly buying and selling securities. 
B) investors do better on average if they adopt a "buy and hold" strategy. 
C) buying into a mutual fund is a sensible strategy for a small investor. 
D) all of the above are sensible strategies. 
E) only A and B of the above are sensible strategies.

Question 10

Evidence in favor of market efficiency includes

Accepted Answer

A) performance of investment analysts and mutual funds. 
B) whether stock prices reflect publicly available information. 
C) the random-walk behavior of stock prices. 
D) all of the above. 
A) performance of investment analysts and mutual funds. 
B) whether stock prices reflect publicly available information. 
C) the random-walk behavior of stock prices. 
D) all of the above.

Question 11

It is probably a good use of an investor's time to watch as many shows featuring technical analysts as possible.

Accepted Answer

A) True 
 B)False

Question 12

"Short selling" refers to the practice of buying a stock and holding it for only a short time before selling it.

Accepted Answer

A) True 
 B)False

Question 13

Evidence that stock prices sometimes fall when a firm announces good news contradicts the efficient market hypothesis.

Accepted Answer

A) True 
 B)False

Question 14

Evidence that a mutual fund has performed extraordinarily well in the past contradicts the efficient market hypothesis.

Accepted Answer

A) True 
 B)False

Question 15

How is it possible that a firm can announce a record-breaking loss, yet its stock price rises when the announcement is made?

Accepted Answer

The answer of How is it possible that a firm...

Question 16

According to the efficient market hypothesis

Accepted Answer

A) one cannot expect to earn an abnormally high return by purchasing a security. 
B) information in newspapers and in the published reports of financial analysts is already reflected in market prices. 
C) unexploited profit opportunities abound, thereby explaining why so many people get rich by trading securities. 
D) all of the above are true. 
E) only A and B of the above are true. 
A) one cannot expect to earn an abnormally high return by purchasing a security. 
B) information in newspapers and in the published reports of financial analysts is already reflected in market prices. 
C) unexploited profit opportunities abound, thereby explaining why so many people get rich by trading securities. 
D) all of the above are true. 
E) only A and B of the above are true.

Question 17

Which of the following does not weaken the efficient markets hypothesis?

Accepted Answer

A) Mean reversion 
B) Success of buy-and-hold strategy 
C) January effect 
D) Excessive volatility 
A) Mean reversion 
B) Success of buy-and-hold strategy 
C) January effect 
D) Excessive volatility

Question 18

The advantage of a "buy and hold strategy" is that

Accepted Answer

A) net profits will tend to be higher because there will be fewer brokerage commissions. 
B) losses will eventually be eliminated. 
C) the longer a stock is held, the higher its price will be. 
D) only B and C of the above are true. 
A) net profits will tend to be higher because there will be fewer brokerage commissions. 
B) losses will eventually be eliminated. 
C) the longer a stock is held, the higher its price will be. 
D) only B and C of the above are true.

Question 19

Although the verdict is not yet in, the available evidence indicates that, for many purposes, the efficient market hypothesis is

Accepted Answer

A) a good starting point for analyzing expectations. 
B) not a good starting point for analyzing expectations. 
C) too general to be a useful tool for analyzing expectations. 
D) none of the above. 
A) a good starting point for analyzing expectations. 
B) not a good starting point for analyzing expectations. 
C) too general to be a useful tool for analyzing expectations. 
D) none of the above.

Question 20

Another way to state the efficient market condition is that in an efficient market,

Accepted Answer

A) unexploited profit opportunities will be quickly eliminated. 
B) unexploited profit opportunities will never exist. 
C) arbitrageurs guarantee that unexploited profit opportunities never exist. 
D) both A and C of the above occur. 
A) unexploited profit opportunities will be quickly eliminated. 
B) unexploited profit opportunities will never exist. 
C) arbitrageurs guarantee that unexploited profit opportunities never exist. 
D) both A and C of the above occur.

Exam 6: Are Financial Markets Efficient

How expectations are formed is important because expectations influence

Mean reversion refers to the observation that

Loss aversion means the unhappiness a person feels when he or she suffers a monetary loss exceeds the happiness the same person experiences from receiving a monetary gain of the same amount.

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

What is the optimal investment strategy according to the efficient market hypothesis? Why?

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

The small-firm effect refers to the observation that small firms' stocks

The efficient markets hypothesis is weakened by evidence that

The efficient market hypothesis suggests that

Evidence in favor of market efficiency includes

It is probably a good use of an investor's time to watch as many shows featuring technical analysts as possible.

"Short selling" refers to the practice of buying a stock and holding it for only a short time before selling it.

Evidence that stock prices sometimes fall when a firm announces good news contradicts the efficient market hypothesis.

Evidence that a mutual fund has performed extraordinarily well in the past contradicts the efficient market hypothesis.

How is it possible that a firm can announce a record-breaking loss, yet its stock price rises when the announcement is made?

According to the efficient market hypothesis

Which of the following does not weaken the efficient markets hypothesis?

The advantage of a "buy and hold strategy" is that

Although the verdict is not yet in, the available evidence indicates that, for many purposes, the efficient market hypothesis is

Another way to state the efficient market condition is that in an efficient market,

Why Study Financial Markets and Institutions

Overview of the Financial System

What Do Interest Rates Mean and What Is Their Role in Valuation

Why Do Interest Rates Change

How Do Risk and Term Structure Affect Interest Rates

Why Do Financial Institutions Exist

Why Do Financial Crises Occur and Why Are They so Damaging to the Economy

Central Banks and the Federal Reserve System

Conduct of Monetary Policy: Tools, Goals, Strategy, and Tactics

The Money Markets

The Bond Market

The Stock Market

The Mortgage Markets

The Foreign Exchange Market

The International Financial System

Banking and the Management of Financial Institutions

Financial Regulation

Banking Industry: Structure and Competition

The Mutual Fund Industry

Insurance Companies and Pension Funds

Investment Banks, Security Brokers and Dealers, and Venture Capital Firms

Risk Management in Financial Institutions

Hedging With Financial Derivatives

Savings Associations and Credit Unions

Finance Companies

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