Question 1

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 2

In the one-period valuation model,the value of a share of stock today depends upon

Accepted Answer

A) the present value of both the dividends and the expected sales price. 
B) only the present value of the future dividends. 
C) the actual value of the dividends and expected sales price received in one year. 
D) the future value of dividends and the actual sales price.

Question 3

You read a story in the newspaper announcing the proposed merger of Dell Computer and Gateway. The merger is expected to greatly increase Gateway's profitability. If you decide to invest in Gateway stock,you can expect to earn

Accepted Answer

A) above average returns since you will share in the higher profits. 
B) above average returns since your stock price will definitely appreciate as higher profits are earned. 
C) below average returns since computer makers have low profit rates. 
D) a normal return since stock prices adjust to reflect expected changes in profitability almost immediately.

Question 4

If a market participant believes that a stock price is irrationally high,they may try to borrow stock from brokers to sell in the market and then make a profit by buying the stock back again after the stock falls in price. This practice is called

Accepted Answer

A) short selling. 
B) double dealing. 
C) undermining. 
D) long marketing.

Question 5

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 6

When Happy Feet Corporation announces that their fourth quarter earnings are up 10%,their stock price falls. This is consistent with the efficient markets hypothesis

Accepted Answer

A) if earnings were not as high as expected. 
B) if earnings were not as low as expected. 
C) if a merger is anticipated. 
D) the company just invented a new bunion product.

Question 7

Using the Gordon growth model,a stock's current price decreases when

Accepted Answer

A) the dividend growth rate increases. 
B) the required return on equity decreases. 
C) the expected dividend payment increases. 
D) the growth rate of dividends decreases.

Question 8

Evidence against market efficiency includes

Accepted Answer

A) failure of technical analysis to outperform the market. 
B) the random walk behavior of stock prices. 
C) the inability of mutual fund managers to consistently beat the market. 
D) the January effect.

Question 9

In rational expectations theory,the term "optimal forecast" is essentially synonymous with

Accepted Answer

A) correct forecast. 
B) the correct guess. 
C) the actual outcome. 
D) the best guess.

Question 10

Using the Gordon growth formula,if D1 is $1.00,ke is 10% or 0.10,and g is 5% or 0.05,then the current stock price is

Accepted Answer

A) $10. 
B) $20. 
C) $30. 
D) $40.

Question 11

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

Question 12

When we describe stock prices as following a random walk,we mean that future changes in stock prices are

Accepted Answer

A) unpredictable. 
B) increasing. 
C) decreasing. 
D) constant.

Question 13

When using rational expectations,forecast errors will,on average,be ________ and ________ be predicted ahead of time.

Accepted Answer

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

Question 14

New information that might lead to a decrease in a stock's price might be

Accepted Answer

A) an expected decrease in the level of future dividends. 
B) a decrease in the required rate of return. 
C) an expected increase in the dividend growth rate. 
D) an expected increase in the future sales price.

Question 15

A monetary expansion ________ stock prices due to a decrease in the ________ and an increase in the ________,everything else held constant.

Accepted Answer

A) reduces;future sales price;expected rate of return 
B) reduces;current dividend;expected rate of return 
C) increases;required rate of return;future sales price 
D) increases;required rate of return;dividend growth rate

Question 16

Periodic payments of net earnings to shareholders are known as

Accepted Answer

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

Question 17

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 18

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 19

The global financial crisis lead to a decline in stock prices because

Accepted Answer

A) of a lowered expected dividend growth rate. 
B) of a lowered required return on investment in equity. 
C) higher expected future stock prices. 
D) higher current dividends.

Question 20

If in an efficient market all prices are correct and reflect market fundamentals,which of the following is a FALSE statement?

Accepted Answer

A) A stock that has done poorly in the past is more likely to do well in the future. 
B) One investment is as good as any other because the securities' prices are correct. 
C) A security's price reflects all available information about the intrinsic value of the security. 
D) Security prices can be used by managers to assess their cost of capital accurately.

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

The efficient markets hypothesis indicates that investors

In the one-period valuation model,the value of a share of stock today depends upon

You read a story in the newspaper announcing the proposed merger of Dell Computer and Gateway. The merger is expected to greatly increase Gateway's profitability. If you decide to invest in Gateway stock,you can expect to earn

If a market participant believes that a stock price is irrationally high,they may try to borrow stock from brokers to sell in the market and then make a profit by buying the stock back again after the stock falls in price. This practice is called

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

When Happy Feet Corporation announces that their fourth quarter earnings are up 10%,their stock price falls. This is consistent with the efficient markets hypothesis

Using the Gordon growth model,a stock's current price decreases when

Evidence against market efficiency includes

In rational expectations theory,the term "optimal forecast" is essentially synonymous with

Using the Gordon growth formula,if D1 is $1.00,ke is 10% or 0.10,and g is 5% or 0.05,then the current stock price 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.

When we describe stock prices as following a random walk,we mean that future changes in stock prices are

When using rational expectations,forecast errors will,on average,be and be predicted ahead of time.

New information that might lead to a decrease in a stock's price might be

A monetary expansion stock prices due to a decrease in the and an increase in the ,everything else held constant.

Periodic payments of net earnings to shareholders are known as

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?

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

The global financial crisis lead to a decline in stock prices because

If in an efficient market all prices are correct and reflect market fundamentals,which of the following is a FALSE statement?

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

The efficient markets hypothesis indicates that investors

In the one-period valuation model,the value of a share of stock today depends upon

You read a story in the newspaper announcing the proposed merger of Dell Computer and Gateway. The merger is expected to greatly increase Gateway's profitability. If you decide to invest in Gateway stock,you can expect to earn

If a market participant believes that a stock price is irrationally high,they may try to borrow stock from brokers to sell in the market and then make a profit by buying the stock back again after the stock falls in price. This practice is called

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

When Happy Feet Corporation announces that their fourth quarter earnings are up 10%,their stock price falls. This is consistent with the efficient markets hypothesis

Using the Gordon growth model,a stock's current price decreases when

Evidence against market efficiency includes

In rational expectations theory,the term "optimal forecast" is essentially synonymous with

Using the Gordon growth formula,if D1 is $1.00,ke is 10% or 0.10,and g is 5% or 0.05,then the current stock price 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.

When we describe stock prices as following a random walk,we mean that future changes in stock prices are

When using rational expectations,forecast errors will,on average,be ________ and ________ be predicted ahead of time.

New information that might lead to a decrease in a stock's price might be

A monetary expansion ________ stock prices due to a decrease in the ________ and an increase in the ________,everything else held constant.

Periodic payments of net earnings to shareholders are known as

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?

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

The global financial crisis lead to a decline in stock prices because

If in an efficient market all prices are correct and reflect market fundamentals,which of the following is a FALSE statement?

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.

When using rational expectations,forecast errors will,on average,be and be predicted ahead of time.

A monetary expansion stock prices due to a decrease in the and an increase in the ,everything else held constant.