Question 1

Fundamental analysis shows that stock in Johnson's Lumber Company has a price that is less than its present value.

Accepted Answer

A) This stock is overvalued;you should consider adding it to your portfolio. 
B) This stock is overvalued;you shouldn't consider adding it to your portfolio. 
C) This stock is undervalued;you should consider adding it to your portfolio. 
D) This stock is undervalued;you shouldn't consider adding it to your portfolio. 
A) This stock is overvalued;you should consider adding it to your portfolio. 
B) This stock is overvalued;you shouldn't consider adding it to your portfolio. 
C) This stock is undervalued;you should consider adding it to your portfolio. 
D) This stock is undervalued;you shouldn't consider adding it to your portfolio. D

Question 2

Which of the following is correct concerning diversification?

Accepted Answer

A) It only reduces firm-specific risk,but most of the reduction comes from increasing the number of stocks in a portfolio to well above 30. 
B) It only reduces firm-specific risk;much of the reduction comes from increasing the number of stocks in a portfolio from 1 to 30. 
C) It only reduces market risk,but most of the reduction comes from increasing the number of stocks in a portfolio to well above 30. 
D) None of the above is correct. 
A) It only reduces firm-specific risk,but most of the reduction comes from increasing the number of stocks in a portfolio to well above 30. 
B) It only reduces firm-specific risk;much of the reduction comes from increasing the number of stocks in a portfolio from 1 to 30. 
C) It only reduces market risk,but most of the reduction comes from increasing the number of stocks in a portfolio to well above 30. 
D) None of the above is correct. B

Question 3

If the efficient market hypothesis is correct,then

Accepted Answer

A) index funds should typically beat managed funds,and usually do. 
B) index fund should typically beat managed funds,but usually do not. 
C) mutual funds should typically beat index funds,and usually do. 
D) mutual funds should typically beat index funds,but usually do not. 
A) index funds should typically beat managed funds,and usually do. 
B) index fund should typically beat managed funds,but usually do not. 
C) mutual funds should typically beat index funds,and usually do. 
D) mutual funds should typically beat index funds,but usually do not. A

Question 4

Fundamental analysis is

Accepted Answer

A) the study of the relation between risk and return of stock portfolios. 
B) the determination of the allocation of savings between stocks and bonds based on a person's degree of risk aversion. 
C) the study of a company's accounting statements and future prospects to determine its value. 
D) a method used to determine how adding stocks to a portfolio will change the risk of the portfolio. 
A) the study of the relation between risk and return of stock portfolios. 
B) the determination of the allocation of savings between stocks and bonds based on a person's degree of risk aversion. 
C) the study of a company's accounting statements and future prospects to determine its value. 
D) a method used to determine how adding stocks to a portfolio will change the risk of the portfolio.

Question 5

If more people think a corporation's stock is overvalued than think it is undervalued then there is a

Accepted Answer

A) surplus,so its price will rise. 
B) surplus,so its price will fall. 
C) shortage,so its price will rise. 
D) shortage,so its price will fall. 
A) surplus,so its price will rise. 
B) surplus,so its price will fall. 
C) shortage,so its price will rise. 
D) shortage,so its price will fall.

Question 6

According to the efficient market hypothesis

Accepted Answer

A) changes in the prices of stocks are predictable.Evidence shows that managed funds typically do better than indexed funds. 
B) changes in the prices of stocks are predictable.Evidence shows that indexed funds typically do better than managed funds. 
C) changes in the prices of stocks are not predictable.Evidence shows that managed funds typically do better than indexed funds. 
D) changes in the prices of stocks are not predictable.Evidence shows that indexed funds typically do better than managed funds. 
A) changes in the prices of stocks are predictable.Evidence shows that managed funds typically do better than indexed funds. 
B) changes in the prices of stocks are predictable.Evidence shows that indexed funds typically do better than managed funds. 
C) changes in the prices of stocks are not predictable.Evidence shows that managed funds typically do better than indexed funds. 
D) changes in the prices of stocks are not predictable.Evidence shows that indexed funds typically do better than managed funds.

Question 7

The value of a stock is based on the

Accepted Answer

A) present values of the dividend stream and final price.As a result,the value of a stock rises when interest rates rise. 
B) present values of the dividend stream and final price.As a result,the value of a stock falls when interest rates rise. 
C) future values of the dividend stream and final price.As a result,the value of a stock rises when interest rates rises. 
D) future values of the dividend stream and final price.As a result,the value of a stock falls when interest rates rise. 
A) present values of the dividend stream and final price.As a result,the value of a stock rises when interest rates rise. 
B) present values of the dividend stream and final price.As a result,the value of a stock falls when interest rates rise. 
C) future values of the dividend stream and final price.As a result,the value of a stock rises when interest rates rises. 
D) future values of the dividend stream and final price.As a result,the value of a stock falls when interest rates rise.

Question 8

According to the efficient markets hypothesis,which of the following would increase the price of stock in the Simpson Corporation?

Accepted Answer

A) Simpson announces,just as everyone had expected,that it has hired a new highly respected CEO. 
B) Simpson announces that its profits were low,but not as low as the market had expected. 
C) Analysis by a column in a business weekly indicates that Simpson is overvalued. 
D) All of the above would increase the price. 
A) Simpson announces,just as everyone had expected,that it has hired a new highly respected CEO. 
B) Simpson announces that its profits were low,but not as low as the market had expected. 
C) Analysis by a column in a business weekly indicates that Simpson is overvalued. 
D) All of the above would increase the price.

Question 9

No particular stock is a better buy than any other stock if

Accepted Answer

A) stock prices are driven by investors' "animal spirits." 
B) the random-walk theory of stock prices is incorrect. 
C) the efficient markets hypothesis is correct. 
D) actively managed mutual funds always outperform index funds. 
A) stock prices are driven by investors' "animal spirits." 
B) the random-walk theory of stock prices is incorrect. 
C) the efficient markets hypothesis is correct. 
D) actively managed mutual funds always outperform index funds.

Question 10

If you believe that stock prices follow a random walk,then probably you

Accepted Answer

A) do not believe that there is positive relationship between risk and return. 
B) do not believe that stock prices reflect all available information. 
C) believe in the validity of the efficient markets hypothesis. 
D) believe that it is a good idea to engage in fundamental analysis. 
A) do not believe that there is positive relationship between risk and return. 
B) do not believe that stock prices reflect all available information. 
C) believe in the validity of the efficient markets hypothesis. 
D) believe that it is a good idea to engage in fundamental analysis.

Question 11

The efficient markets hypothesis implies

Accepted Answer

A) that all stocks are fairly valued all the time and that no stock is a better buy than any other. 
B) that all stocks are fairly valued all the time,but that some stocks may be better buys than other. 
C) that some stocks may be better buys than others and stock experts can determine which ones. 
D) that no stock is efficiently valued. 
A) that all stocks are fairly valued all the time and that no stock is a better buy than any other. 
B) that all stocks are fairly valued all the time,but that some stocks may be better buys than other. 
C) that some stocks may be better buys than others and stock experts can determine which ones. 
D) that no stock is efficiently valued.

Question 12

If the efficient markets hypothesis is correct,then

Accepted Answer

A) the number of shares of stock offered for sale exceeds the number of shares of stock that people want to buy. 
B) the stock market is informationally efficient. 
C) stock prices never follow a random walk. 
D) All of the above are correct. 
A) the number of shares of stock offered for sale exceeds the number of shares of stock that people want to buy. 
B) the stock market is informationally efficient. 
C) stock prices never follow a random walk. 
D) All of the above are correct.

Question 13

Which of the following is correct concerning stock market irrationality?

Accepted Answer

A) Bubbles could arise,in part,because the price that people pay for stock depends on what they think someone else will pay for it in the future. 
B) Economists almost all agree that the evidence for stock market irrationality is convincing and the departures from rational pricing are important. 
C) Some evidence for the existence of market irrationality is that informed and presumably rational managers of mutual funds generally beat the market. 
D) All of the above are correct. 
A) Bubbles could arise,in part,because the price that people pay for stock depends on what they think someone else will pay for it in the future. 
B) Economists almost all agree that the evidence for stock market irrationality is convincing and the departures from rational pricing are important. 
C) Some evidence for the existence of market irrationality is that informed and presumably rational managers of mutual funds generally beat the market. 
D) All of the above are correct.

Question 14

Some people argue that there are two advantages to holding mutual funds.The first is that mutual funds provide an inexpensive way to hold a diversified portfolio.The second is that because of their expertise mutual fund managers should be able to consistently beat the market.Which of the following does the evidence show?

Accepted Answer

A) Diversification does reduce risk and mutual funds typically outperform the market. 
B) Diversification does reduce risk,but mutual funds do not typically outperform the market. 
C) Diversification does not reduce risk but mutual funds typically outperform the market. 
D) Diversification does not reduce risk and mutual funds do not typically outperform the market. 
A) Diversification does reduce risk and mutual funds typically outperform the market. 
B) Diversification does reduce risk,but mutual funds do not typically outperform the market. 
C) Diversification does not reduce risk but mutual funds typically outperform the market. 
D) Diversification does not reduce risk and mutual funds do not typically outperform the market.

Question 15

Which of the following is not consistent with the efficient market hypothesis?

Accepted Answer

A) Stock prices should follow a random walk. 
B) Index funds should typically outperform highly managed funds. 
C) News has no effect on stock prices. 
D) There is little point in spending many hours studying the business pages looking for undervalued stocks. 
A) Stock prices should follow a random walk. 
B) Index funds should typically outperform highly managed funds. 
C) News has no effect on stock prices. 
D) There is little point in spending many hours studying the business pages looking for undervalued stocks.

Question 16

According to the efficient market hypothesis,which of the following statements is not correct?

Accepted Answer

A) Stock market prices tend to rise today if they rose yesterday. 
B) As judged by the typical person in the market,all stocks are fairly valued all the time. 
C) At the market price,the number of shares being offered for sale matches the number of shares people want to buy. 
D) All of the above statements are incorrect. 
A) Stock market prices tend to rise today if they rose yesterday. 
B) As judged by the typical person in the market,all stocks are fairly valued all the time. 
C) At the market price,the number of shares being offered for sale matches the number of shares people want to buy. 
D) All of the above statements are incorrect.

Question 17

Fundamental analysis shows that stock in Garske Software Corporation has a present value that is higher than its price.

Accepted Answer

A) This stock is overvalued;you should consider adding it to your portfolio. 
B) This stock is overvalued;you shouldn't consider adding it to your portfolio. 
C) This stock is undervalued;you should consider adding it to your portfolio. 
D) This stock is undervalued;you shouldn't consider adding it to your portfolio. 
A) This stock is overvalued;you should consider adding it to your portfolio. 
B) This stock is overvalued;you shouldn't consider adding it to your portfolio. 
C) This stock is undervalued;you should consider adding it to your portfolio. 
D) This stock is undervalued;you shouldn't consider adding it to your portfolio.

Question 18

An asset market is said to experience a speculative bubble when

Accepted Answer

A) the price of the asset rises above what appears to be its fundamental value. 
B) the price of the asset appears to follow a random walk. 
C) the market cannot establish an equilibrium price for the asset. 
D) the asset is a natural resource and its supply is manipulated by foreign nations and foreign firms. 
A) the price of the asset rises above what appears to be its fundamental value. 
B) the price of the asset appears to follow a random walk. 
C) the market cannot establish an equilibrium price for the asset. 
D) the asset is a natural resource and its supply is manipulated by foreign nations and foreign firms.

Question 19

If stock prices follow a random walk,then stock investors can make large profits by

Accepted Answer

A) buying stocks whose prices have been falling for several days. 
B) buying stocks whose prices have been rising for several days. 
C) performing fundamental analysis of stocks using data contained in annual reports. 
D) using inside information. 
A) buying stocks whose prices have been falling for several days. 
B) buying stocks whose prices have been rising for several days. 
C) performing fundamental analysis of stocks using data contained in annual reports. 
D) using inside information.

Question 20

An automobile manufacturer unexpectedly announces that it has hired a new chief executive officer.It is widely believed that the presence of this individual will raise the profitability of the corporation.At the same time interest rates unexpectedly rise.Which of the above would tend to make the price of the stock rise?

Accepted Answer

A) the announcement and the rise in interest rates 
B) the announcement but not the rise in interest rates 
C) the rise in interest rates,but not the announcement 
D) neither the announcement nor the rise in interest rates 
A) the announcement and the rise in interest rates 
B) the announcement but not the rise in interest rates 
C) the rise in interest rates,but not the announcement 
D) neither the announcement nor the rise in interest rates

Exam 14: The Basic Tools of Finance: Asset Valuation

Fundamental analysis shows that stock in Johnson's Lumber Company has a price that is less than its present value.

Which of the following is correct concerning diversification?

If the efficient market hypothesis is correct,then

Fundamental analysis is

If more people think a corporation's stock is overvalued than think it is undervalued then there is a

According to the efficient market hypothesis

The value of a stock is based on the

According to the efficient markets hypothesis,which of the following would increase the price of stock in the Simpson Corporation?

No particular stock is a better buy than any other stock if

If you believe that stock prices follow a random walk,then probably you

The efficient markets hypothesis implies

If the efficient markets hypothesis is correct,then

Which of the following is correct concerning stock market irrationality?

Which of the following is not consistent with the efficient market hypothesis?

According to the efficient market hypothesis,which of the following statements is not correct?

Fundamental analysis shows that stock in Garske Software Corporation has a present value that is higher than its price.

An asset market is said to experience a speculative bubble when

If stock prices follow a random walk,then stock investors can make large profits by

Ten Principles of Economics

Ten Principles of Economics: How People Make Decisions

Ten Principles of Economics: How People Interact

Ten Principles of Economics: How the Economy As a Whole Works

Ten Principles of Economics: Part A

Ten Principles of Economics: Part B

Thinking Like an Economist

Thinking Like an Economist: The Economist As Scientist

Thinking Like an Economist: The Economist As Policy Adviser

Thinking Like an Economist: Why Economists Disagree

Thinking Like an Economist: Lets Get Going

Thinking Like an Economist: Graphing a Brief Review

Thinking Like an Economist: Part A

Thinking Like an Economist: Part B

Interdependence and the Gains From Trade

Interdependence and the Gains From Trade: A Parable for the Modern Economy

Interdependence and the Gains From Trade: Comparative Advantage the Driving Force of Specialization

Interdependence and the Gains From Trade: Applications of Comparative Advantage

Interdependence and the Gains From Trade: Conclusion

Interdependence and the Gains From Trade: Part A

Interdependence and the Gains From Trade: Part B

The Market Forces of Supply and Demand

The Market Forces of Supply and Demand:Markets and Competition

The Market Forces of Supply and Demand: Demand

The Market Forces of Supply and Demand: Supply

The Market Forces of Supply and Demand: Supply and Demand Together

The Market Forces of Supply and DemandConclusion How Prices Allocate Resources

The Market Forces of Supply and Demand: Part A

The Market Forces of Supply and Demand: Part B

Elasticity and Its Applications

Elasticity and Its Applications: The Elasticity of Demand

Elasticity and Its Applications: The Elasticity of Supply

Elasticity and Its Applications: Three Applications of Supply,demand,and Elasticity

Elasticity and Its Applications: Part A

Elasticity and Its Applications: Part B

Supply Demand and Government Policies

Supply Demand and Government Policies: Controls on Prices

Supply Demand and Government Policies: Taxes

Supply Demand and Government Policies: Part A

Supply Demand and Government Policies: Part B

Consumers Producers and the Efficiency of Markets

Consumers Producers and the Efficiency of Markets: Consumer Surplus

Consumers Producers and the Efficiency of Markets: Producer Surplus

Consumers Producers and the Efficiency of Markets: Market Efficiency

Consumers Producers and the Efficiency of Markets: Conclusion Market Efficiency and Market Failure

Consumers Producers and the Efficiency of Markets: Part A

Consumers Producers and the Efficiency of Markets: Part B

Application the Cost of Taxation

Application the Cost of Taxation: The Deadweight Loss of Taxation

Application the Cost of Taxation: The Determinants of the Deadweight Loss

Application the Cost of Taxation: Deadweight Loss and Tax Revenue As Taxes Vary

Application the Cost of Taxation: Conclusion

Application the Cost of Taxation: Part A

Application the Cost of Taxation: Part B

Application International Trade

Application International Trade: The Determinants of Trade

Application International Trade: The Winners and Losers From Trade

Application International Trade: The Arguments for Restricting Trade

Application International Trade: Conclusion

Application International Trade: Part A

Application International Trade: Part B