Question 1

If a mutual fund outperforms the market in one period,evidence suggests that this fund is

Accepted Answer

A) highly likely to consistently outperform the market in subsequent periods due to its superior investment strategy. 
B) likely to under-perform the market in subsequent periods to average its overall returns. 
C) not likely to consistently outperform the market in subsequent periods. 
D) not likely to outperform the market in any subsequent period.

Question 2

The view that expectations change relatively slowly over time in response to new information is known in economics as

Accepted Answer

A) rational expectations. 
B) irrational expectations. 
C) slow-response expectations. 
D) adaptive expectations.

Question 3

Psychologists have found that people tend to be ________ in their own judgments.

Accepted Answer

A) underconfident 
B) overconfident 
C) indecisive 
D) insecure

Question 4

What rights does ownership interest give stockholders?

Accepted Answer

The answer of What rights does ownership interest give stockholders?...

Question 5

Excessive volatility refers to the fact that

Accepted Answer

A) stock returns display mean reversion. 
B) stock prices can be slow to react to new information. 
C) stock price tend to rise in the month of January. 
D) stock prices fluctuate more than is justified by dividend fluctuations.

Question 6

Which of the following accurately summarize the empirical evidence about technical analysis?

Accepted Answer

A) Technical analysts fare no better than other financial analysis-on average they do not outperform the market. 
B) Technical analysts tend to outperform other financial analysis,but on average they nevertheless under-perform the market. 
C) Technical analysts fare no better than other financial analysis,and like other financial analysts they outperform the market. 
D) Technical analysts fare no better than other financial analysis,and like other financial analysts they under-perform the market.

Question 7

If expectations are formed rationally,then individuals

Accepted Answer

A) will have a forecast that is 100% accurate all of the time. 
B) change their forecast when faced with new information. 
C) use only the information from past data on a single variable to form their forecast. 
D) have forecast errors that are persistently low.

Question 8

The value of any investment is found by computing the

Accepted Answer

A) present value of all future sales. 
B) present value of all future liabilities. 
C) future value of all future expenses. 
D) present value of all future cash flows.

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

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

Accepted Answer

A) unexploited profit opportunities will be quickly eliminated. 
B) unexploited profit opportunities will never exist. 
C) all prices can be accurately predicted. 
D) every financial market participant must be well informed about securities.

Question 11

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 12

If a corporation announces that it expects quarterly earnings to increase by 25% and it actually sees an increase of 22%,what should happen to the price of the corporation's stock if the efficient markets hypothesis holds,everything else held constant?

Accepted Answer

The answer of If a corporation announces that it expects...

Question 13

Increased uncertainty resulting from the global financial crisis ________ the required return on investment in equity.

Accepted Answer

A) raised 
B) lowered 
C) had no impact on 
D) decreased

Question 14

The efficient markets hypothesis implies that prices in the stock market

Accepted Answer

A) follow a definite pattern. 
B) are more likely to go up than down. 
C) always undervalue the true assets of a corporation. 
D) are unpredictable.

Question 15

________ occurs when market participants observe returns on a security that are larger than what is justified by the characteristics of that security and take action to quickly eliminate the unexploited profit opportunity.

Accepted Answer

A) Arbitrage 
B) Mediation 
C) Asset capitalization 
D) Market intercession

Question 16

In the generalized dividend model,the current stock price is the sum of

Accepted Answer

A) the actual value of the future dividend stream. 
B) the present value of the future dividend stream. 
C) the present value of the future dividend stream plus the actual future sales price. 
D) the present value of the future sales price.

Question 17

________ 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 18

According to rational expectations theory,forecast errors of expectations

Accepted Answer

A) are more likely to be negative than positive. 
B) are more likely to be positive than negative. 
C) tend to be persistently high or low. 
D) are unpredictable.

Question 19

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 20

When a corporation announces a major decline in earnings,the stock price may initially decline significantly and then rise back to normal levels over the next few weeks. This impact is called

Accepted Answer

A) the January effect. 
B) mean reversion. 
C) market overreaction. 
D) the small-firm effect.

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