Question 1

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 2

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 3

In the Gordon growth model,a decrease in the required rate of return on equity

Accepted Answer

A) increases the current stock price. 
B) increases the future stock price. 
C) reduces the future stock price. 
D) reduces the current stock price.

Question 4

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 5

The efficient markets hypothesis indicates that investors

Accepted Answer

A) can use the advice of technical analysts to outperform the market. 
B) do better on average if they adopt a "buy and hold" strategy. 
C) let too many unexploited profit opportunities go by if they adopt a "buy and hold" strategy. 
D) do better if they purchase loaded mutual funds.

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

________ is the field of study that applies concepts from social sciences such as psychology and sociology to help understand the behavior of securities prices.

Accepted Answer

A) Behavioral finance 
B) Strategical finance 
C) Methodical finance 
D) Procedural finance

Question 8

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 9

Using the one-period valuation model,assuming a year-end dividend of $1.00,an expected sales price of $100,and a required rate of return of 5%,the current price of the stock would be

Accepted Answer

A) $110.00. 
B) $101.00. 
C) $100.00. 
D) $96.19.

Question 10

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 11

Periodic payments of net earnings to shareholders are known as

Accepted Answer

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

Question 12

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 13

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 14

In the one-period valuation model,an increase in the required return on investments in equity

Accepted Answer

A) increases the expected sales price of a stock. 
B) increases the current price of a stock. 
C) reduces the expected sales price of a stock. 
D) reduces the current price of a stock.

Question 15

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 16

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 17

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 18

If market participants notice that a variable behaves differently now than in the past,then,according to rational expectations theory,we can expect market participants to

Accepted Answer

A) change the way they form expectations about future values of the variable. 
B) begin to make systematic mistakes. 
C) no longer pay close attention to movements in this variable. 
D) give up trying to forecast this variable.

Question 19

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 20

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.

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