Question 1

Using the Gordon growth formula,if D1 is $2.00,ke is 12% or 0.12,and g is 10% or 0.10,then the current stock price is

Accepted Answer

A) $20. 
B) $50. 
C) $100. 
D) $150.

Question 2

Stockholders are residual claimants,meaning that they

Accepted Answer

A) have the first priority claim on all of a company's assets. 
B) are liable for all of a company's debts. 
C) will never share in a company's profits. 
D) receive the remaining cash flow after all other claims are paid.

Question 3

In the one-period valuation model,an increase in the required return on investments in equity

Accepted Answer

A) increases the expected sales price of a stock. 
B) increases the current price of a stock. 
C) reduces the expected sales price of a stock. 
D) reduces the current price of a stock.

Question 4

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

Accepted Answer

A) may or may not be better than the other forecasts.Past performance is no guarantee of the future. 
B) will always be the best of the group. 
C) will definitely be worse in the future.What goes up must come down. 
D) will be worse in the near future,but improve over time.

Question 5

The number and availability of discount brokers has grown rapidly since the mid-1970s.The efficient markets hypothesis predicts that people who use discount brokers

Accepted Answer

A) will likely earn lower returns than those who use full-service brokers. 
B) will likely earn about the same as those who use full-service brokers,but will net more after brokerage commissions. 
C) are going against evidence suggesting that full-service brokers can help outperform the market. 
D) are likely to outperform the market by a wide margin.

Question 6

If a forecast made using all available information is not perfectly accurate,then it is

Accepted Answer

A) still a rational expectation. 
B) not a rational expectation. 
C) an adaptive expectation. 
D) a second-best expectation.

Question 7

Periodic payments of net earnings to shareholders are known as

Accepted Answer

A) capital gains. 
B) dividends. 
C) profits. 
D) interest.

Question 8

In the Gordon growth model,a decrease in the required rate of return on equity

Accepted Answer

A) increases the current stock price. 
B) increases the future stock price. 
C) reduces the future stock price. 
D) reduces the current stock price.

Question 9

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

Accepted Answer

A) the market is inefficient. 
B) no unexploited profit opportunities exist. 
C) the market is in equilibrium. 
D) the market is myopic.

Question 10

According to the efficient markets hypothesis,purchasing the reports of financial analysts

Accepted Answer

A) is likely to increase one's returns by an average of 10%. 
B) is likely to increase one's returns by about 3 to 5%. 
C) is not likely to be an effective strategy for increasing financial returns. 
D) is likely to increase one's returns by an average of about 2 to 3%.

Question 11

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?

Accepted Answer

The answer of You believe that a corporation's dividends will...

Question 12

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

Accepted Answer

A) a waste of time. 
B) profitably employed by all financial analysts. 
C) the most efficient rules to employ. 
D) consistent with the random walk hypothesis.

Question 13

________ and ________ may provide an explanation for stock market bubbles.

Accepted Answer

A) Overconfidence; social contagion 
B) Underconfidence; social contagion 
C) Overconfidence; social isolationism 
D) Underconfidence; social isolationism

Question 14

Tests used to rate the performance of rules developed in technical analysis conclude that technical analysis

Accepted Answer

A) outperforms the overall market. 
B) far outperforms the overall market,suggesting that stockbrokers provide valuable services. 
C) does not outperform the overall market. 
D) does not outperform the overall market,suggesting that stockbrokers do not provide services of any value.

Question 15

Rational expectations forecast errors will on average be ________ and therefore ________ be predicted ahead of time.

Accepted Answer

A) positive; can 
B) positive; cannot 
C) negative; can 
D) zero; cannot

Question 16

The efficient markets hypothesis indicates that investors

Accepted Answer

A) can use the advice of technical analysts to outperform the market. 
B) do better on average if they adopt a "buy and hold" strategy. 
C) let too many unexploited profit opportunities go by if they adopt a "buy and hold" strategy. 
D) do better if they purchase loaded mutual funds.

Question 17

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

Accepted Answer

A) unexploited profit opportunities will be quickly eliminated. 
B) unexploited profit opportunities will never exist. 
C) arbitragers guarantee that unexploited profit opportunities never exist. 
D) every financial market participant must be well informed about securities.

Question 18

Using the one-period valuation model,assuming a year-end dividend of $1.00,an expected sales price of $100,and a required rate of return of 5%,the current price of the stock would be

Accepted Answer

A) $110.00. 
B) $101.00. 
C) $100.00. 
D) $96.19.

Question 19

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

Accepted Answer

A) rational. 
B) irrational. 
C) adaptive. 
D) reasonable.

Question 20

In a one-period valuation model,a decrease in the required return on investments in equity causes a(n)________ in the ________ price of a stock.

Accepted Answer

A) increase; current 
B) increase; expected sales 
C) decrease; current 
D) decrease; expected sales

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

Using the Gordon growth formula,if D₁ is $2.00,k_e is 12% or 0.12,and g is 10% or 0.10,then the current stock price is

Stockholders are residual claimants,meaning that they

In the one-period valuation model,an increase in the required return on investments in equity

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

The number and availability of discount brokers has grown rapidly since the mid-1970s.The efficient markets hypothesis predicts that people who use discount brokers

If a forecast made using all available information is not perfectly accurate,then it is

Periodic payments of net earnings to shareholders are known as

In the Gordon growth model,a decrease in the required rate of return on equity

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

According to the efficient markets hypothesis,purchasing the reports of financial analysts

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?

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

and may provide an explanation for stock market bubbles.

Tests used to rate the performance of rules developed in technical analysis conclude that technical analysis

Rational expectations forecast errors will on average be and therefore be predicted ahead of time.

The efficient markets hypothesis indicates that investors

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

Using the one-period valuation model,assuming a year-end dividend of $1.00,an expected sales price of $100,and a required rate of return of 5%,the current price of the stock would be

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

In a one-period valuation model,a decrease in the required return on investments in equity causes a(n) in the price of a stock.

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

Using the Gordon growth formula,if D1 is $2.00,ke is 12% or 0.12,and g is 10% or 0.10,then the current stock price is

Stockholders are residual claimants,meaning that they

In the one-period valuation model,an increase in the required return on investments in equity

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

The number and availability of discount brokers has grown rapidly since the mid-1970s.The efficient markets hypothesis predicts that people who use discount brokers

If a forecast made using all available information is not perfectly accurate,then it is

Periodic payments of net earnings to shareholders are known as

In the Gordon growth model,a decrease in the required rate of return on equity

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

According to the efficient markets hypothesis,purchasing the reports of financial analysts

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?

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

________ and ________ may provide an explanation for stock market bubbles.

Tests used to rate the performance of rules developed in technical analysis conclude that technical analysis

Rational expectations forecast errors will on average be ________ and therefore ________ be predicted ahead of time.

The efficient markets hypothesis indicates that investors

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

Using the one-period valuation model,assuming a year-end dividend of $1.00,an expected sales price of $100,and a required rate of return of 5%,the current price of the stock would be

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

In a one-period valuation model,a decrease in the required return on investments in equity causes a(n) ________ in the ________ price of a stock.

Using the Gordon growth formula,if D₁ is $2.00,k_e is 12% or 0.12,and g is 10% or 0.10,then the current stock price is

and may provide an explanation for stock market bubbles.

Rational expectations forecast errors will on average be and therefore be predicted ahead of time.

In a one-period valuation model,a decrease in the required return on investments in equity causes a(n) in the price of a stock.