Question 1

Which of the following is not correct?

Accepted Answer

A) There is a greater reduction in risk by increasing the number of stocks in a portfolio from 1 to 10,than by increasing it from 100 to 120 stocks. 
B) The historical rate of return on stocks has been about 5 percentage points higher than the historical rate of return on bonds. 
C) Stock in an industry that is very sensitive to economic conditions is likely to have a higher average return than stock in an industry that is not so sensitive to economic conditions. 
D) If you had information about a corporation that no one else had,you could earn a very high rate of return.This contradicts the efficient market hypothesis. 
A) There is a greater reduction in risk by increasing the number of stocks in a portfolio from 1 to 10,than by increasing it from 100 to 120 stocks. 
B) The historical rate of return on stocks has been about 5 percentage points higher than the historical rate of return on bonds. 
C) Stock in an industry that is very sensitive to economic conditions is likely to have a higher average return than stock in an industry that is not so sensitive to economic conditions. 
D) If you had information about a corporation that no one else had,you could earn a very high rate of return.This contradicts the efficient market hypothesis.

Question 2

A person who believes strongly in the use of fundamental analysis to choose a portfolio of stocks

Accepted Answer

A) has a better chance of outperforming the market if stock prices follow a random walk than if they do not follow a random walk. 
B) almost always chooses to hold index funds in his or her portfolio rather than actively-managed funds. 
C) is spending his or her time wisely if the efficient markets hypothesis is correct. 
D) is interested in the likely ability of a corporation to pay dividends in the future. 
A) has a better chance of outperforming the market if stock prices follow a random walk than if they do not follow a random walk. 
B) almost always chooses to hold index funds in his or her portfolio rather than actively-managed funds. 
C) is spending his or her time wisely if the efficient markets hypothesis is correct. 
D) is interested in the likely ability of a corporation to pay dividends in the future.

Question 3

The efficient markets hypothesis says that beating the market consistently is

Accepted Answer

A) impossible.Many studies find that beating the market is,at best,extremely difficult. 
B) impossible.Many studies find that beating the market is relatively easy. 
C) relatively easy.Many studies find that beating the market is,at best,extremely difficult. 
D) relatively easy.Many studies find that beating the market is relatively easy. 
A) impossible.Many studies find that beating the market is,at best,extremely difficult. 
B) impossible.Many studies find that beating the market is relatively easy. 
C) relatively easy.Many studies find that beating the market is,at best,extremely difficult. 
D) relatively easy.Many studies find that beating the market is relatively easy.

Question 4

Which of the following is correct?

Accepted Answer

A) Managed funds typically have a higher return than indexed funds.This tends to refute the efficient market hypothesis. 
B) Managed funds typically have a higher return than indexed funds.This tends to support the efficient market hypothesis. 
C) Index funds typically have a higher rate of return than managed funds.This tends to refute the efficient market hypothesis. 
D) Index funds typically have a higher rate of return than managed funds.This tends to support the efficient market hypothesis. 
A) Managed funds typically have a higher return than indexed funds.This tends to refute the efficient market hypothesis. 
B) Managed funds typically have a higher return than indexed funds.This tends to support the efficient market hypothesis. 
C) Index funds typically have a higher rate of return than managed funds.This tends to refute the efficient market hypothesis. 
D) Index funds typically have a higher rate of return than managed funds.This tends to support the efficient market hypothesis.

Question 5

After much anticipation a company releases a new smartphone.The smartphone doesn't work as well as expected and lacks many of the features buyers had been expecting.The unexpectedly negative reaction to the smartphone would

Accepted Answer

A) raise the present value and the price of the corporation's stock. 
B) raise the present value and reduce the price of the corporation's stock. 
C) reduce the present value and the price of the corporation's stock. 
D) reduce the present value and raise the price of the corporation's stock. 
A) raise the present value and the price of the corporation's stock. 
B) raise the present value and reduce the price of the corporation's stock. 
C) reduce the present value and the price of the corporation's stock. 
D) reduce the present value and raise the price of the corporation's stock.

Question 6

A high-ranking corporate official of a well-known company is unexpectedly sentenced to prison for criminal activity in trading stocks.This should

Accepted Answer

A) raise the price and raise the present value of the corporation's stock. 
B) raise the price and lower the present value of the corporation's stock. 
C) lower the price and raise the present value of the corporation's stock. 
D) lower the price and lower the present value of the corporation's stock. 
A) raise the price and raise the present value of the corporation's stock. 
B) raise the price and lower the present value of the corporation's stock. 
C) lower the price and raise the present value of the corporation's stock. 
D) lower the price and lower the present value of the corporation's stock.

Question 7

In the 1990s,Fed Chair Alan Greenspan believed that the market was

Accepted Answer

A) undervalued,and evidence later showed that this was clearly correct. 
B) undervalued,but whether it was remains debatable. 
C) overvalued,and evidence later showed that this was clearly correct. 
D) overvalued,but whether it was remains debatable. 
A) undervalued,and evidence later showed that this was clearly correct. 
B) undervalued,but whether it was remains debatable. 
C) overvalued,and evidence later showed that this was clearly correct. 
D) overvalued,but whether it was remains debatable.

Question 8

Which of the following approaches to investing does not rely on fundamental analysis to choose the stocks in your portfolio?​

Accepted Answer

A) ​Choosing stocks based on research and analysis you do yourself 
B) ​Relying on advice from Wall Street analysts 
C) ​Buying shares of an actively managed mutual fund 
D) ​Buying shares of an index fund that purchases all stocks in a particular stock index 
A) ​Choosing stocks based on research and analysis you do yourself 
B) ​Relying on advice from Wall Street analysts 
C) ​Buying shares of an actively managed mutual fund 
D) ​Buying shares of an index fund that purchases all stocks in a particular stock index

Question 9

The efficient markets hypothesis says that

Accepted Answer

A) only individual investors can make money in the stock market. 
B) it should be easy to find stocks whose price differs from their fundamental value. 
C) stock prices follow a random walk. 
D) All of the above are correct. 
A) only individual investors can make money in the stock market. 
B) it should be easy to find stocks whose price differs from their fundamental value. 
C) stock prices follow a random walk. 
D) All of the above are correct.

Question 10

If stock prices follow a random walk,it means

Accepted Answer

A) long periods of declining prices are followed by long periods of rising prices. 
B) the greater the number of consecutive days of price declines,the greater the probability prices will increase the following day. 
C) stock prices are unrelated to random events that shock the economy. 
D) stock prices are just as likely to rise as to fall at any given time. 
A) long periods of declining prices are followed by long periods of rising prices. 
B) the greater the number of consecutive days of price declines,the greater the probability prices will increase the following day. 
C) stock prices are unrelated to random events that shock the economy. 
D) stock prices are just as likely to rise as to fall at any given time.

Question 11

The available evidence indicates that

Accepted Answer

A) about one-half of all managers of active mutual funds consistently outperform index funds. 
B) outperforming the market on a consistent basis is extremely difficult to do. 
C) there is little truth to the notion that there is a trade-off between risk and return. 
D) there is little truth to the efficient markets hypothesis. 
A) about one-half of all managers of active mutual funds consistently outperform index funds. 
B) outperforming the market on a consistent basis is extremely difficult to do. 
C) there is little truth to the notion that there is a trade-off between risk and return. 
D) there is little truth to the efficient markets hypothesis.

Question 12

According to the efficient markets hypothesis,worse-than-expected news about a corporation will

Accepted Answer

A) have no effect on its stock price. 
B) raise the price of the stock. 
C) lower the price of the stock. 
D) change the price of the stock in a random direction. 
A) have no effect on its stock price. 
B) raise the price of the stock. 
C) lower the price of the stock. 
D) change the price of the stock in a random direction.

Question 13

Fundamental analysis shows that Quadrangle Company is fairly valued.Then Quadrangle Company unexpectedly improves its production techniques and unexpectedly hires a new CEO away from another very successful competitor.Suppose this has no effect on the price of the stock of Quadrangle Company.

Accepted Answer

A) Fundamental analysis would now show the corporation is overvalued.The fact that the price was unchanged is consistent with the efficient markets hypothesis. 
B) Fundamental analysis would now show the corporation is overvalued.The fact that the price was unchanged is not consistent with the efficient markets hypothesis. 
C) Fundamental analysis would now show the corporation is undervalued.The fact that the price was unchanged is consistent with the efficient markets hypothesis. 
D) Fundamental analysis would now show the corporation is undervalued.The fact that the price was unchanged is not consistent with the efficient markets hypothesis. 
A) Fundamental analysis would now show the corporation is overvalued.The fact that the price was unchanged is consistent with the efficient markets hypothesis. 
B) Fundamental analysis would now show the corporation is overvalued.The fact that the price was unchanged is not consistent with the efficient markets hypothesis. 
C) Fundamental analysis would now show the corporation is undervalued.The fact that the price was unchanged is consistent with the efficient markets hypothesis. 
D) Fundamental analysis would now show the corporation is undervalued.The fact that the price was unchanged is not consistent with the efficient markets hypothesis.

Question 14

Fundamental analysis determines the value of a stock based on

Accepted Answer

A) dividends. 
B) the expected final sale price. 
C) the ability of the corporation to earn profits. 
D) All of the above are correct. 
A) dividends. 
B) the expected final sale price. 
C) the ability of the corporation to earn profits. 
D) All of the above are correct.

Question 15

Suppose that an increased risk of mortgage defaults lowers the expected profitability of banks.Then we would expect to see

Accepted Answer

A) the demand for bank stocks rise which would raise the prices of bank stocks. 
B) the demand for bank stocks rise which would reduce the prices of bank stocks. 
C) the demand for bank stocks fall which would raise the prices of bank stocks. 
D) the demand for bank stocks fall which would reduce the prices of bank stocks. 
A) the demand for bank stocks rise which would raise the prices of bank stocks. 
B) the demand for bank stocks rise which would reduce the prices of bank stocks. 
C) the demand for bank stocks fall which would raise the prices of bank stocks. 
D) the demand for bank stocks fall which would reduce the prices of bank stocks.

Question 16

In the 1990s,Fed Chairperson Alan Greenspan questioned whether the stock market

Accepted Answer

A) boom at that time reflected "irrational exuberance." 
B) decline at that time reflected "irrational funk." 
C) boom at that time reflected "rational exuberance." 
D) decline at that time reflected "rational funk." 
A) boom at that time reflected "irrational exuberance." 
B) decline at that time reflected "irrational funk." 
C) boom at that time reflected "rational exuberance." 
D) decline at that time reflected "rational funk."

Question 17

Ron decides which stocks to purchase by throwing darts at the stock pages of The Wall Street Journal.Ron probably believes that

Accepted Answer

A) stock prices follow a random walk. 
B) the stock market is informationally efficient. 
C) it is better to own stock in 20 companies than it is to own stock in 2 companies. 
D) All of the above are correct. 
A) stock prices follow a random walk. 
B) the stock market is informationally efficient. 
C) it is better to own stock in 20 companies than it is to own stock in 2 companies. 
D) All of the above are correct.

Question 18

After the 1982 recession,the U.S.and world economies entered into a long period

Accepted Answer

A) of high unemployment rates. 
B) high inflation rates. 
C) that has become known as the "Great Moderation." 
D) that has become known as the "Great Recession." 
A) of high unemployment rates. 
B) high inflation rates. 
C) that has become known as the "Great Moderation." 
D) that has become known as the "Great Recession."

Question 19

An index fund

Accepted Answer

A) holds only stocks and bonds that are indexed to inflation. 
B) holds all the stocks in a given stock index. 
C) guarantees a return that follows the index of leading economic indicators. 
D) typically has a lower return than a managed fund. 
A) holds only stocks and bonds that are indexed to inflation. 
B) holds all the stocks in a given stock index. 
C) guarantees a return that follows the index of leading economic indicators. 
D) typically has a lower return than a managed fund.

Question 20

Which of the following methods of picking stocks is not consistent with fundamental analysis?

Accepted Answer

A) doing research such as thoroughly reading and analyzing companies' annual reports 
B) choosing mutual funds that are managed by individuals with good reputations 
C) viewing individual stock prices as unpredictable 
D) relying upon the advice of Wall Street analysts 
A) doing research such as thoroughly reading and analyzing companies' annual reports 
B) choosing mutual funds that are managed by individuals with good reputations 
C) viewing individual stock prices as unpredictable 
D) relying upon the advice of Wall Street analysts

Exam 14: The Basic Tools of Finance: Asset Valuation

Which of the following is not correct?

A person who believes strongly in the use of fundamental analysis to choose a portfolio of stocks

The efficient markets hypothesis says that beating the market consistently is

Which of the following is correct?

After much anticipation a company releases a new smartphone.The smartphone doesn't work as well as expected and lacks many of the features buyers had been expecting.The unexpectedly negative reaction to the smartphone would

A high-ranking corporate official of a well-known company is unexpectedly sentenced to prison for criminal activity in trading stocks.This should

In the 1990s,Fed Chair Alan Greenspan believed that the market was

Which of the following approaches to investing does not rely on fundamental analysis to choose the stocks in your portfolio?​

The efficient markets hypothesis says that

If stock prices follow a random walk,it means

The available evidence indicates that

According to the efficient markets hypothesis,worse-than-expected news about a corporation will

Fundamental analysis shows that Quadrangle Company is fairly valued.Then Quadrangle Company unexpectedly improves its production techniques and unexpectedly hires a new CEO away from another very successful competitor.Suppose this has no effect on the price of the stock of Quadrangle Company.

Fundamental analysis determines the value of a stock based on

Suppose that an increased risk of mortgage defaults lowers the expected profitability of banks.Then we would expect to see

In the 1990s,Fed Chairperson Alan Greenspan questioned whether the stock market

Ron decides which stocks to purchase by throwing darts at the stock pages of The Wall Street Journal.Ron probably believes that

After the 1982 recession,the U.S.and world economies entered into a long period

An index fund

Which of the following methods of picking stocks is not consistent with fundamental analysis?

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

Which of the following approaches to investing does not rely on fundamental analysis to choose the stocks in your portfolio?