Question 1

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 2

Periodic payments of net earnings to shareholders are known as

Accepted Answer

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

Question 3

________ means people are more unhappy when they suffer losses than they are happy when they achieve gains.

Accepted Answer

A) Loss fundamentals 
B) Loss aversion 
C) Loss leader 
D) Loss cycle

Question 4

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 5

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 6

The advantage of a "buy-and-hold strategy" is that

Accepted Answer

A) net profits will tend to be higher because there will be fewer brokerage commissions. 
B) losses will eventually be eliminated. 
C) the longer a stock is held,the higher will be its price. 
D) profits are guaranteed.

Question 7

If during the past decade the average rate of monetary growth has been 5% and the average inflation rate has been 5%,everything else held constant,when the Federal Reserve announces that the new rate of monetary growth will be 10%,the adaptive expectation forecast of the inflation rate is

Accepted Answer

A) 5%. 
B) between 5 and 10%. 
C) 10%. 
D) more than 10%.

Question 8

An expectation may fail to be rational if

Accepted Answer

A) relevant information was not available at the time the forecast is made. 
B) relevant information is available but ignored at the time the forecast is made. 
C) information changes after the forecast is made. 
D) information was available to insiders only.

Question 9

In the generalized dividend model,a future sales price far in the future does not affect the current stock price because

Accepted Answer

A) the present value cannot be computed. 
B) the present value is almost zero. 
C) the sales price does not affect the current price. 
D) the stock may never be sold.

Question 10

To say that stock prices follow a "random walk" is to argue that stock prices

Accepted Answer

A) rise,then fall,then rise again. 
B) rise,then fall in a predictable fashion. 
C) tend to follow trends. 
D) cannot be predicted based on past trends.

Question 11

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 12

Using the Gordon growth model,if D1 is $.50,ke is 7%,and g is 5%,then the present value of the stock is

Accepted Answer

A) $2.50. 
B) $25. 
C) $50. 
D) $46.73.

Question 13

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 14

The efficient markets hypothesis suggests that if an unexploited profit opportunity arises in an efficient market

Accepted Answer

A) it will tend to go unnoticed for some time. 
B) it will be quickly eliminated. 
C) financial analysts are your best source of this information. 
D) all profits will be eliminated through taxation.

Question 15

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 16

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 17

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.

Question 18

In asset markets,an asset's price is

Accepted Answer

A) set equal to the highest price a seller will accept. 
B) set equal to the highest price a buyer is willing to pay. 
C) set equal to the lowest price a seller is willing to accept. 
D) set by the buyer willing to pay the highest price.

Question 19

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

Accepted Answer

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

Question 20

The efficient markets hypothesis suggests that investors

Accepted Answer

A) should purchase no-load mutual funds which have low management fees. 
B) can use the advice of technical analysts to outperform the market. 
C) let too many unexploited profit opportunities go by if they adopt a "buy and hold" strategy. 
D) act on all "hot tips" they hear.

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