Question 1

"My broker studies the stock market and the management of specific firms. When he advises me to buy, I listen because he is an expert." Analyze this view.

Accepted Answer

The answer of "My broker studies the stock market and...

Question 2

Which of the following has enhanced the ability of investors, without any special business skills, to benefit from the ownership of corporate America?

Accepted Answer

A) the increased availability of mutual funds that make it possible for even small investors to purchase a diverse stock portfolio at a low cost 
B) an increased tendency of small investors to buy and sell stock frequently, using stock tips from investment experts 
C) the virtual disappearance of business failures among corporations with publicly traded stock shares 
D) all of the above

Question 3

Since 1802, the American stock market has yielded an average annual real return (the return adjusted for inflation) of approximately

Accepted Answer

A) 3 percent. 
B) 5 percent. 
C) 7 percent 
D) 11 percent.

Question 4

The current market value of a stock option contract to purchase 1,000 shares of IBM stock at a price of $100 that can be exercised five years from now would

Accepted Answer

A) increase if the expected future price of IBM stock rose. 
B) increase if the expected future price of IBM stock fell. 
C) decrease if the expected future price of IBM stock rose. 
D) remain unchanged regardless of the expected future price of IBM stock.

Question 5

Historically, which of the following has had the highest average annual rate of return?

Accepted Answer

A) corporate bonds 
B) money market mutual funds 
C) corporate stocks 
D) U.S. Treasury bonds

Question 6

The market for new issues of stock is called the

Accepted Answer

A) primary market. 
B) secondary market. 
C) The New York Stock Exchange (NYS
E) . 
D) The Chicago Board of Trade.

Question 7

Historically, when a diverse set of stocks is held over a lengthy time period, stocks have yielded a ____ rate of return, and the variation in the rate of return has been ____.

Accepted Answer

A) low; low 
B) low; high 
C) high; low 
D) high; high

Question 8

Which of the following is true?

Accepted Answer

A) People who invest in the stock market are virtually certain to make money. 
B) Investors in the stock market can reduce their risk if they hold shares of specific stocks for only short periods of time. 
C) The risk of stock market investments can be reduced through the holding of a diverse portfolio of unrelated stocks over long periods of time. 
D) In the long run, corporate bonds can be expected to yield a higher real rate of return than ownership of stocks.

Question 9

Which of the following is true?

Accepted Answer

A) The buyer of a firm's stock is purchasing a fractional share in the firm's future net revenues. 
B) When investors believe that a business decision by the management of a firm will increase the firm's future earnings, the price of the firm's stock will tend to rise. 
C) Changing stock prices provide the board of directors and managers of a firm with a strong incentive to make good decisions and undertake productive projects. 
D) All of the above are true.

Question 10

Which of the following is a risk that investors undertake when purchasing stocks?

Accepted Answer

A) An individual stock can rise and fall unpredictably. 
B) Nearly all stocks in the stock market may rise or fall together, when expectations about the entire economy change. 
C) Both a and b are true. 
D) Neither a nor b is true.

Question 11

Which of the following indicates why the role of vigilant investors and investment fund managers is important for the efficient operation of an economy?

Accepted Answer

A) These investors generally serve on the boards of directors of corporations. 
B) These investors tend to buy and sell stocks in a way that rewards good management. 
C) These investors help allocate capital efficiently among firms and among investment projects. 
D) Both b and c are true.

Question 12

Which of the following will tend to result in the least variation in the expected real rate of return from the ownership of stocks?

Accepted Answer

A) ownership of a single stock for a short period of time 
B) ownership of a single stock over a lengthy period of time 
C) ownership of stocks from a specific sector (for example, the automobile industry) over a lengthy period of time 
D) ownership of a diverse set of stocks (the Standard & Poor's 500, for example) over a lengthy period of time

Question 13

During the last sixty years, the broad stock market (Standard and Poor's 500 Index) yielded an average annual nominal rate of return of approximately ____ and real rate of return of approximately ____.

Accepted Answer

A) 5 percent; 2 percent 
B) 10 percent; 7 percent 
C) 17 percent; 9 percent 
D) 9 percent; 17 percent

Question 14

A firm's stock price will be higher when the interest rate is ____ and the value of the firm's expected future profits are ____.

Accepted Answer

A) lower; larger 
B) lower; smaller 
C) higher; larger 
D) higher; smaller

Question 15

Which of the following provides the strongest argument for young people making regular payments into a retirement program that invests these funds in a diverse set of stocks?

Accepted Answer

A) The prices of stocks tend to fluctuate more than the prices of bonds. 
B) Over short periods of time, variation in the real rate of return of stocks is greater than bonds. 
C) When held over lengthy periods like 30 or 40 years, historically, the rate of return on stocks has been both higher and less variable than that of bonds. 
D) Lower interest rates will lead to higher bond prices.

Question 16

During the last two centuries, after adjustment for inflation,

Accepted Answer

A) corporate bonds have yielded a real return of approximately 7 percent annually, compared to a real return of about 3 percent for corporate stocks. 
B) corporate stocks have yielded a real return of approximately 7 percent annually, compared to a real return of about 3 percent for bonds. 
C) both corporate stocks and bonds have yielded a real rate of return of about 3 percent. 
D) both corporate stocks and bonds have yielded a real rate of return of about 7 percent.

Question 17

Buying shares of corporate stock tends to be more risky when

Accepted Answer

A) the stock of a single corporation is purchased. 
B) the stock may have to be sold within a few months. 
C) all stocks bought are in the same industry. 
D) all of the above are true.

Question 18

If the interest rate were 5 percent, how much would people be willing to pay for a stock that was certain to yield a $10 per share stream of net earnings continuously in the future?

Accepted Answer

A) $10 
B) $20 
C) $200 
D) $400 
E) $2,000

Question 19

Compared to other investments such as bonds, historically a diverse set of stocks held over a lengthy time period (for example, 30 or 40 years) has yielded a

Accepted Answer

A) low average real rate of return, and the variation in that return has been extremely high. 
B) high average real rate of return, and the variation in that return has been relatively small. 
C) low average real rate of return, and the variation in that return has been relatively small. 
D) high average real rate of return, and the variation in that return has been extremely high.

Question 20

Investors are often willing to pay positive prices for shares of firms that have never earned a profit because the investors

Accepted Answer

A) do not know the firms have never earned a profit. 
B) expect the firms to have positive net earnings in the future. 
C) expect that interest rates will rise in the future. 
D) expect that higher rates of inflation will push stock prices higher in the future.

Exam 18: Appendix: the Stock Market: Its Function, Performance, and Potential As an Investment Opportunity

"My broker studies the stock market and the management of specific firms. When he advises me to buy, I listen because he is an expert." Analyze this view.

Which of the following has enhanced the ability of investors, without any special business skills, to benefit from the ownership of corporate America?

Since 1802, the American stock market has yielded an average annual real return (the return adjusted for inflation) of approximately

The current market value of a stock option contract to purchase 1,000 shares of IBM stock at a price of $100 that can be exercised five years from now would

Historically, which of the following has had the highest average annual rate of return?

The market for new issues of stock is called the

Historically, when a diverse set of stocks is held over a lengthy time period, stocks have yielded a rate of return, and the variation in the rate of return has been .

Which of the following is true?

Which of the following is true?

Which of the following is a risk that investors undertake when purchasing stocks?

Which of the following indicates why the role of vigilant investors and investment fund managers is important for the efficient operation of an economy?

Which of the following will tend to result in the least variation in the expected real rate of return from the ownership of stocks?

During the last sixty years, the broad stock market (Standard and Poor's 500 Index) yielded an average annual nominal rate of return of approximately and real rate of return of approximately .

A firm's stock price will be higher when the interest rate is and the value of the firm's expected future profits are .

Which of the following provides the strongest argument for young people making regular payments into a retirement program that invests these funds in a diverse set of stocks?

During the last two centuries, after adjustment for inflation,

Buying shares of corporate stock tends to be more risky when

If the interest rate were 5 percent, how much would people be willing to pay for a stock that was certain to yield a $10 per share stream of net earnings continuously in the future?

Compared to other investments such as bonds, historically a diverse set of stocks held over a lengthy time period (for example, 30 or 40 years) has yielded a

Investors are often willing to pay positive prices for shares of firms that have never earned a profit because the investors