Question 1

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 2

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 3

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 4

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 5

In the one-period valuation model,the current stock price increases if

Accepted Answer

A) the expected sales price increases. 
B) the expected sales price falls. 
C) the required return increases. 
D) dividends are cut.

Question 6

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 7

You have observed that the forecasts of an investment advisor consistently outperform the other reported forecasts.The efficient markets hypothesis says that future forecasts by this advisor

Accepted Answer

A) may or may not be better than the other forecasts.Past performance is no guarantee of the future. 
B) will always be the best of the group. 
C) will definitely be worse in the future.What goes up must come down. 
D) will be worse in the near future,but improve over time.

Question 8

A stockholder's ownership of a company's stock gives her the right to

Accepted Answer

A) vote and be the primary claimant of all cash flows. 
B) vote and be the residual claimant of all cash flows. 
C) manage and assume responsibility for all liabilities. 
D) vote and assume responsibility for all liabilities.

Question 9

Using the one-period valuation model,assuming a year-end dividend of $0.11,an expected sales price of $110,and a required rate of return of 10%,the current price of the stock would be

Accepted Answer

A) $110.11. 
B) $121.12. 
C) $100.10. 
D) $100.11

Question 10

The elimination of unexploited profit opportunities requires that ________ market participants be well informed.

Accepted Answer

A) all 
B) a few 
C) zero 
D) many

Question 11

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 12

The efficient markets hypothesis implies that future changes in exchange rates should for all practical purposes be

Accepted Answer

A) unpredictable. 
B) set by each country. 
C) increasing. 
D) pegged to a standard such as the U.S.dollar or the Euro.

Question 13

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 14

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 15

________ 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 16

Studies of mutual fund performance indicate that mutual funds that outperformed the market in one time period usually

Accepted Answer

A) beat the market in the next time period. 
B) beat the market in the next two subsequent time periods. 
C) beat the market in the next three subsequent time periods. 
D) do not beat the market in the next time period.

Question 17

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 18

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 19

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 20

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.

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

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

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

Rules used to predict movements in stock prices based on past patterns are,according to the efficient markets hypothesis

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.

In the one-period valuation model,the current stock price increases if

If the optimal forecast of the return on a security exceeds the equilibrium return,then

You have observed that the forecasts of an investment advisor consistently outperform the other reported forecasts.The efficient markets hypothesis says that future forecasts by this advisor

A stockholder's ownership of a company's stock gives her the right to

Using the one-period valuation model,assuming a year-end dividend of $0.11,an expected sales price of $110,and a required rate of return of 10%,the current price of the stock would be

The elimination of unexploited profit opportunities requires that ________ market participants be well informed.

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

The efficient markets hypothesis implies that future changes in exchange rates should for all practical purposes be

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

According to the efficient markets hypothesis,purchasing the reports of financial analysts

and may provide an explanation for stock market bubbles.

Studies of mutual fund performance indicate that mutual funds that outperformed the market in one time period usually

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

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

Excessive volatility refers to the fact that

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

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

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

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

Rules used to predict movements in stock prices based on past patterns are,according to the efficient markets hypothesis

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.

In the one-period valuation model,the current stock price increases if

If the optimal forecast of the return on a security exceeds the equilibrium return,then

You have observed that the forecasts of an investment advisor consistently outperform the other reported forecasts.The efficient markets hypothesis says that future forecasts by this advisor

A stockholder's ownership of a company's stock gives her the right to

Using the one-period valuation model,assuming a year-end dividend of $0.11,an expected sales price of $110,and a required rate of return of 10%,the current price of the stock would be

The elimination of unexploited profit opportunities requires that ________ market participants be well informed.

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

The efficient markets hypothesis implies that future changes in exchange rates should for all practical purposes be

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

According to the efficient markets hypothesis,purchasing the reports of financial analysts

________ and ________ may provide an explanation for stock market bubbles.

Studies of mutual fund performance indicate that mutual funds that outperformed the market in one time period usually

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

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

Excessive volatility refers to the fact that

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

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

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.

and may provide an explanation for stock market bubbles.