ECON 2035 6.3 TB

If major traders believe the price of a stock should be higher than its current market price A) they have an incentive to sell the stock. B) their actions will result in the information they possess being incorporated into the price of the stock. C) there is little they can do because government regulation precludes their acting on what they know.

B

If market participants have rational expectations, then the best forecast of the price of a stock in the next period is A) equal to an average of the prices of the stock in previous periods. B) equal to the price of the stock in the current period. C) dependent upon all information available in the current period, including, but not limited to, the price of the stock in the current period. D) dependent on information available in the previous period.

B

In comparing actively managed mutual funds with those funds that simply buy and hold a large market portfolio (index funds), we would expect that: A) the actively managed funds provide a higher return than the index funds. B) the index funds provide a higher return after expenses than the actively managed funds. C) actively managed funds and index funds provide the same returns. D) index funds provide a lower return than actively managed funds only if taxes are taken into consideration.

B

One implication of the efficient markets hypothesis is that investors should: A) concentrate their investments in just a few well-chosen assets. B) hold a diversified portfolio of assets. C) buy stocks rather than bonds. D) buy bonds rather than stocks.

B

Suppose Apple announces that its earnings for the fourth quarter of 2016 rose to $2 billion. As a result of this announcement the price of Apple's stock does not change. The best explanation of this is: A) market participants were expecting Apple's earnings to be greater than $2 billion. B) market participants expected Apple's earnings to be $2 billion. C) market participants expected Apple's earnings to be less than $2 billion. D) market participants have adaptive expectations.

B

Technical analysis is a version of A) insider trading. B) adaptive expectations. C) rational expectations. D) efficient markets.

B

The efficient markets hypothesis A) assumes that market participants form their expectations adaptively. B) applies rational expectations to the pricing of assets. C) applies to the stock market, but not to the bond market. D) indicates that the stock market is efficient, but not rational.

B

A chief criticism of adaptive expectations is that: A) it assumes people ignore information that would be useful in making forecasts. B) people have a hard time adapting. C) it doesn't rely on technical analysis. D) it violates the efficient markets hypothesis.

A

Above-normal returns on stock investments can be expected by investors who: A) possess inside information. B) are wealthy enough to hold the stock of many different companies in their portfolios. C) are risk seeking. D) concentrate their investments in one or two stocks.

A

According to the efficient markets hypothesis A) the equilibrium price of an asset equals the optimal forecast of fundamental value based on available information. B) the actual and expected prices of an asset will be equal. C) the actual price of an asset reflects only information on past returns on the asset. D) the expected price of an asset incorporates only information on past returns on the asset.

A

According to the efficient markets hypothesis, who is most likely to benefit from frequently moving funds from one asset to another? A) your broker B) small investors C) big investors

A

George is trying to forecast the future price of IBM's common stock. To do so he makes use only of past prices of IBM stock. George: A) has adaptive expectations. B) has rational expectations. C) is likely to rapidly adjust his forecast to news affecting the future profitability of IBM. D) is likely to make forecasts that reflect closely IBM stock's fundamental value.

A

If market participants have rational expectations: A) they can assume the stock prices they observe represent the fundamental values of those stocks. B) they know to purchase stocks that are priced below their fundamental value. C) they will achieve higher returns than those with adaptive expectations. D) they can earn above-average returns on their investments.

A

If traders in a market have rational expectations, then A) the price of an asset equals its fundamental value. B) prices of riskier assets are higher than prices of less risky assets. C) past prices of assets do not affect market participants' expectations of future asset prices. D) they make use of less information than they would if they had adaptive expectations.

A

Suppose that Google announces that its profits for the third quarter of 2016 were $1.6 billion. As a result of this announcement the price of Google's stock declines. The best explanation of this is: A) market participants expected Google's profits to be greater than $1.6 billion for the third quarter. B) market participants expected Google's profits to be less than $1.6 billion for the third quarter. C) the stock market is not an efficient market. D) market participants have adaptive expectations.

A

The efficient markets hypothesis predicts that an investor: A) will not be able consistently to earn above-normal profits from buying or selling stocks. B) will be able consistently to earn above-normal profits from buying or selling stocks so long as he or she makes use of rational expectations. C) will be able consistently to earn above-normal profits from buying or selling stocks so long as he makes use of adaptive expectations. D) will be able consistently to earn above-normal profits so long as stock prices in general are rising.

A

The long-run average annual return on investments in the stock market is ________ than the annual returns on investments in Treasury bills and ________ than the annual returns on investments in bank CDs. A) higher; higher B) higher; lower C) lower; higher D) lower; lower

A

When market participants have rational expectations A) they use all information available to them. B) they only slowly adjust their expectations to news which could affect prices or returns. C) they are less likely to make accurate forecasts than if they have adaptive expectations. D) they are able to forecast interest rates more accurately than inflation rates.

A

Under the efficient markets hypothesis, for news about a company's prospects to have a large impact on the price of the company's stock, the news must: A) have an impact on the company's profitability in the short term. B) have an impact on the company's profitability in the long term. C) significantly increase the likelihood that the company will go bankrupt. D) significantly reduce the liquidity of the company's stock.

B

When market participants have adaptive expectations A) they use all information available to them. B) they only slowly adjust their expectations to news which could affect prices or returns. C) they are more likely to make accurate forecasts than if they have rational expectations. D) they are able to forecast interest rates more accurately than inflation rates.

B

When market participants have rational expectations: A) the information they use contains only past experiences. B) the information they use contains not only past experiences, but also their expectations for the future. C) the information they use contains only their expectations for the future. D) their forecasts are always correct.

B

Which of the following statements is TRUE of rational expectations? A) Rational expectations forecasts are always correct. B) For a trader with rational expectations, the expectation of an asset's price equals the optimal price forecast. C) If traders have rational expectations, any announcement by a company will have an effect on its stock price, even if the market was already aware of the facts being announced. D) If a trader really has rational expectations, he or she will always earn a greater than normal return on his or her financial portfolio.

B

"Tips" published in leading commercial or financial publications are unlikely to lead to profitable trades because: C) the news will already be reflected in the market prices of the assets. D) the news contained in the tips is usually inaccurate.

C

According to the efficient markets hypothesis, prices of securities A) change infrequently. B) change frequently to reflect news about changes in the fundamental values of the securities. C) change frequently as evaluations of existing information about the securities change. D) are not allowed, under federal securities laws, to change more frequently than once a month.

C

According to the efficient markets hypothesis, the difference between today's price for a share of stock and tomorrow's price is: A) predictable given currently available information. B) equal to today's price minus yesterday's price. C) unforecastable. D) zero.

C

According to the efficient markets hypothesis: A) common stock prices should be constant. B) the price of a corporation's stock is likely to fluctuate substantially in response to news about changes in the company's short-term prospects. C) the price of a corporation's stock will fluctuate significantly only in response to news about changes in the company's long-term prospects. D) price fluctuations in common stock are a response to fads and are only infrequently the result of changes in the expected profitability of the companies involved.

C

An asset's fundamental value equals A) its face value. B) its maturity value. C) the market's best guess of the present value of the asset's expected future returns. D) the weighted sum of its market price over the recent past.

C

An implication of the efficient markets hypothesis is that: A) only sophisticated investors will be able to earn above-normal profits from financial investments. B) above-normal profits are available only to major traders. C) above-normal profits will be eliminated in the trading process. D) unless he or she acts recklessly, the average investor should be able to make above-normal profits.

C

Based on data from past returns, a person age 22 who invests $100 per month in stocks will, by the age of 67, have: A) less than if the person had invested in CDs. B) twice as much than if the person had invested in CDs. C) thirteen times as much than if the person had invested in CDs. D) one-hundred times as much than if the person had invested in CDs.

C

If market participants rely only on past stock prices to forecast future stock prices A) they will be better able to forecast future price increases than future price decreases. B) they will be better able to forecast future price decreases than future price increases. C) they have adaptive expectations. D) they have rational expectations.

C

If the prices of financial assets follow a random walk, then A) they should be easy to forecast, provided market participants have rational expectations. B) they should be easy to forecast, provided market participants have adaptive expectations. C) the change in price from one trading period to the next is not predictable. D) major traders in the market must not be making use of all available information about the assets.

C

Studies indicate that many mutual fund managers and other professional investors: A) always earn better than the long-run average return on stocks. B) never earn better than the long-run average return on stocks. C) are unable to consistently earn better than the long-run average return on stocks. D) are able to consistently earn better than the long-run average return on stocks.

C

When market participants have rational expectations, the deviation of the expected price from the actual future price is A) zero. B) predictable, provided all relevant information is made use of. C) not predictable. D) predictable under certain circumstances, but not under others.

C

An investor will generally find that hiring an investment firm to actively manage his or her portfolio will: A) result in a higher return than would be received from an index mutual fund. B) be less expensive than simply placing money in an index mutual fund. C) result in a higher return, but will be more expensive than placing money in an index mutual fund. D) result in about the same return, but will be more expensive than placing money in an index mutual fund.

D

Employees of brokerage firms that rely on forecasting future profits of firms in order to forecast future stock prices are called: A) rational analysts. B) adaptive analysts. C) technical analysts. D) fundamental analysts.

D

Expectations of asset values by participants in financial markets A) are not possible to model, given the current state of economic knowledge. B) determine market prices, but are not related to changes in market prices. C) generally do not change. D) determine current market prices and changes in market prices.

D

In an efficient market with rational expectations, the actual price of an asset A) will equal its expected price. B) will often be below its expected price. C) will often be above its expected price. D) equals its expected price plus a random error term.

D

Rational expectations involve the assumption that A) market participants make use only of information on the past performance of an asset in determining what they believe its price should be. B) market participants rarely change their minds about the correct price of an asset. C) financial markets are good at increasing liquidity, but poor at transmitting information. D) market participants make use of all available information.

D

Suppose Exxon-Mobil announces that its profits in the third quarter of 2016 were $40 billion. This will cause the price of Exxon-Mobil stock to: A) rise. B) fall. C) remain unchanged. D) rise, fall, or remain unchanged depending on the expectations of market participants before the announcement.

D

Under the efficient markets hypothesis, what would be the price per share of a company whose current dividend is $10.00 and whose dividends are expected to grow by 3% per year (assume the risk-adjusted interest rate is 10%)? A) $74.62 B) $79.23 C) $142.86 D) $147.14

D

Which type of analyst should generally outperform the market index according to the efficient markets hypothesis? A) technical analysts B) fundamental analysts C) those that follow the random walk D) none of the above

D