Question 1

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 2

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 3

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 4

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 5

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 6

If expectations are formed rationally,then individuals

Accepted Answer

A)   will have a forecast that is 100% accurate all of the time.
B)   change their forecast when faced with new information.
C)   use only the information from past data on a single variable to form their forecast.
D)   have forecast errors that are persistently low.

Question 7

Which of the following types of information most likely allows the exploitation of a profit opportunity?

Accepted Answer

A)   Financial analysts' published recommendations
B)   Technical analysis
C)   Hot tips from a stockbroker
D)   Insider information

Question 8

Financial markets quickly eliminate unexploited profit opportunities through changes in

Accepted Answer

A)   dividend payments.
B)   tax laws.
C)   asset prices.
D)   monetary policy.

Question 9

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 10

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 11

The theory of rational expectations,when applied to financial markets,is known as

Accepted Answer

A)   monetarism.
B)   the efficient markets hypothesis.
C)   the theory of strict liability.
D)   the theory of impossibility.

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

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 14

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 15

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 16

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 17

________ 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 18

Stockholders are residual claimants,meaning that they

Accepted Answer

A)   have the first priority claim on all of a company's assets.
B)   are liable for all of a company's debts.
C)   will never share in a company's profits.
D)   receive the remaining cash flow after all other claims are paid.

Question 19

What rights does ownership interest give stockholders?

Accepted Answer

Stockholders have the right to vote on i...

Question 20

________ 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

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

________ 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.

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

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

Correct AnswerverifiedShow Answer

The theory of rational expectations,when applied to financial markets,is known as

Correct AnswerverifiedShow Answer

If expectations are formed rationally,then individuals

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

In rational expectations theory,the term "optimal forecast" is essentially synonymous with

Correct AnswerverifiedShow Answer

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

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Which of the following types of information most likely allows the exploitation of a profit opportunity?

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Financial markets quickly eliminate unexploited profit opportunities through changes in

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Stockholders are residual claimants,meaning that they

Correct AnswerverifiedShow Answer

What rights does ownership interest give stockholders?

Correct AnswerverifiedStockholders have the right to vote on i...View AnswerShow Answer

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

Correct AnswerverifiedShow Answer

A phenomenon closely related to market overreaction is

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

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Stockholders have the right to vote on i...
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