Question 1

People have a strong incentive to form rational expectations because ________.

Accepted Answer

A)  they are guaranteed of success in the stock market 
B)  it is costly not to do so 
C)  it is costly to do so 
D)  everyone wants to be rational

Question 2

If during the past decade the average rate of monetary growth has been 5 percent and the average inflation rate has been 5 percent,everything else held constant,when the Bank of Canada announces that the new rate of monetary growth will be 10 percent,the adaptive expectation forecast of the inflation rate is ________.

Accepted Answer

A)  5 percent 
B)  between 5 and 10 percent 
C)  10 percent 
D)  more than 10 percent

Question 3

An increase in uncertainty for the economy will ________.

Accepted Answer

A)  increase stock prices due to a higher required return 
B)  not affect stock prices 
C)  increase stock prices due to a lower required return 
D)  depress stock prices due to a higher required return

Question 4

What rights does ownership interest give stockholders?

Accepted Answer

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

Question 5

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 6

A phenomenon closely related to market overreaction is ________.

Accepted Answer

A)  the random walk 
B)  the small-firm effect 
C)  the January effect 
D)  excessive volatility

Question 7

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 8

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)  prices will reflect the unexploited profit opportunity

Question 9

If a corporation announces that it expects quarterly earnings to increase by 25 percent and it actually sees an increase of 22 percent,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 10

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

Accepted Answer

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

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 percent 
B)  is likely to increase one's returns by about 3 to 5 percent 
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 percent

Question 12

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 13

For small investors,the best way to pursue a "buy and hold" strategy is to ________.

Accepted Answer

A)  buy and sell individual stocks frequently 
B)  buy no-load mutual funds with high management fees 
C)  buy no-load mutual funds with low management fees 
D)  buy load mutual funds

Question 14

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 15

If expectations are formed adaptively,then people ________.

Accepted Answer

A)  use more information than just past data on a single variable to form their expectations of that variable 
B)  often change their expectations quickly when faced with new information 
C)  use only the information from past data on a single variable to form their expectations of that variable 
D)  never change their expectations once they have been made

Question 16

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 17

What is the current price of a telecommunication company's stock if earnings per share are projected to be $1.50 per share and the industry's average PE ratio is $30?

Accepted Answer

A)  $45 
B)  $20 
C)  $31.50 
D)  $28.50

Question 18

If expectations of the future inflation rate are formed solely on the basis of a weighted average of past inflation rates,then economics would say that expectation formation is ________.

Accepted Answer

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

Question 19

Sometimes one observes that the price of a company's stock falls after the announcement of favorable earnings.This phenomenon is ________.

Accepted Answer

A)  clearly inconsistent with the efficient markets hypothesis 
B)  consistent with the efficient markets hypothesis if the earnings were not as high as anticipated 
C)  consistent with the efficient markets hypothesis if the earnings were not as low as anticipated 
D)  consistent with the efficient markets hypothesis if the favorable earnings were expected

Question 20

________ 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

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