Question 1

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 2

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 3

One of the assumptions of the Gordon Growth Model is that dividends will continue growing at ________ rate.

Accepted Answer

A) an increasing 
B) a fast 
C) a constant 
D) an escalating

Question 4

________ 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 5

What rights does ownership interest give stockholders?

Accepted Answer

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

Question 6

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 7

Loss aversion can explain why very little ________ actually takes place in the securities market.

Accepted Answer

A) short selling 
B) bargaining 
C) bartering 
D) negotiating

Question 8

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 9

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 10

If additional information is not used when forming an optimal forecast because it is not available at that time,then expectations are

Accepted Answer

A) obviously formed irrationally. 
B) still considered to be formed rationally. 
C) formed adaptively. 
D) formed equivalently.

Question 11

The number and availability of discount brokers has grown rapidly since the mid-1970s.The efficient markets hypothesis predicts that people who use discount brokers

Accepted Answer

A) will likely earn lower returns than those who use full-service brokers. 
B) will likely earn about the same as those who use full-service brokers,but will net more after brokerage commissions. 
C) are going against evidence suggesting that full-service brokers can help outperform the market. 
D) are likely to outperform the market by a wide margin.

Question 12

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 13

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 14

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 15

In the Gordon Growth Model,the growth rate is assumed to be ________ the required return on equity.

Accepted Answer

A) greater than 
B) equal to 
C) less than 
D) proportional to

Question 16

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 17

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.

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