ECON CH. 6

According to the Gordon growth model, if the stock price is $21, required return on equity is 10% and the current dividend is $1, what is the expected growth rate of dividends? A) 2% B) 5% C) 10% D) 15%

B) 5%

Which group of investors vote for a corporation's board of directors? A) bond holders B) holders of preferred stock C) holders of common stock D) both holders of common and preferred stock

C) holders of common stock

If a corporation pays a dividend, which group receives priority in receiving the dividend? A) bond holders B) holders of common stock C) holders of preferred stock D) Dividends are evenly divided by holders of common and preferred stock.

C) holders of preferred stock

The required return on equity for an individual stock includes which of the following? A) systemic risk B) idiosyncratic risk C) risk-free interest rate D) all of the above

D) all of the above

As of 2015, which of the following was the largest stock exchange in terms of total value traded? A) New York Stock Exchange B) London Stock Exchange C) Shanghai Stock Exchange D) Tokyo Stock Exchange

A) New York Stock Exchange

How can the Gordon growth model help explain the major decline in stock indexes during 2007-2009? A) There was an increase in the required return on equities and a decrease in the expected growth rate of dividends. B) There was a decrease in the required return on equities and an increase in the expected growth rate of dividends. C) There was an increase in the required return on equities and an increase in the expected growth rate of dividends. D) There was a decrease in the required return on equities and a decrease in the expected growth rate of dividends.

A) There was an increase in the required return on equities and a decrease in the expected growth rate of dividends.

The double taxation of dividends typically refers to A) dividends being taxed first as corporate profits and then as income after being paid to stock holders. B) stockholders paying both income and social security taxes on dividends. C) stockholders paying an income tax and dividend surtax on dividends. D) dividends being taxed at both the state and local level.

A) dividends being taxed first as corporate profits and then as income after being paid to stock holders.

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) has adaptive expectations.

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) higher; higher

Rising stock prices ________ household wealth, which ________ consumption spending. A) increases; increases B) increases; decreases C) decreases; increases D) decreases; decreases

A) increases; increases

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) it assumes people ignore information that would be useful in making forecasts.

From the point of view of the efficient markets hypothesis A) it is not surprising that during 2003 the price of JDS Uniphase's stock rose more than the price of Microsoft's stock. B) it is surprising that during 2003 the price of JDS Uniphase's stock rose more than the price of Microsoft's stock. C) it is not surprising that during 2003 the price of Microsoft's stock rose more than the price of JDS Uniphase's stock. D) it is surprising that during 2003 the price of Microsoft's stock rose more than the price of JDS Uniphase's stock.

A) it is not surprising that during 2003 the price of JDS Uniphase's stock rose more than the price of Microsoft's stock.

The January effect A) largely disappeared after receiving attention in the 1980s. B) refers to the gap between futures prices and the prices of the underlying securities that occurs each January. C) was stronger during the 1980s than during previous decades. D) is the observation that stocks tend to be sold off in January.

A) largely disappeared after receiving attention in the 1980s.

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) market participants expected Google's profits to be greater than $1.6 billion for the third quarter.

Noise trading refers to investors who A) overreact to good and bad news. B) strictly follow the efficient markets hypothesis. C) filter out the noise involved in following their stocks. D) ignore new information about stocks.

A) overreact to good and bad news.

Dividends are A) payments made to stockholders. B) payments made to bond holders. C) the total profit earned by a corporation. D) payments to holders of common stock, not preferred stock.

A) payments made to stockholders.

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) possess inside information.

Noise traders A) pursue trading strategies based on an inflated view of their ability to understand the significance of a piece of news. B) make use of inside information. C) reduce the amount of risk in the market. D) help to ensure that asset prices reflect the fundamental values of the securities being traded.

A) pursue trading strategies based on an inflated view of their ability to understand the significance of a piece of news.

Limited liability can best be defined as the legal provision that A) shields owners of a corporation from losing more than what they invested in a firm. B) protects bond holders from being sued by other creditors. C) gives holders of preferred stock priority over holders of common stock. D) reduces the exposure of sole proprietorships to law suits.

A) shields owners of a corporation from losing more than what they invested in a firm.

In Wall Street jargon, a "Bear Market" typically means A) stock prices have declined by at least 20%. B) stock prices have declined by at least 50%. C) stock prices have risen by at least 20%. D) stock prices have risen by at least 50%.

A) stock prices have declined by at least 20%.

What factors do some who promote the profitability of elaborate trading strategies leave out? A) the effect of trading costs and taxes B) the difficulty of calculating the return on investment C) ignoring the effect of dividends D) not accounting for both capital gains and dividends

A) the effect of trading costs and taxes

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) the equilibrium price of an asset equals the optimal forecast of fundamental value based on available information.

In the context of the evaluation of the efficient markets hypothesis, pricing anomalies refer to A) the existence of trading strategies that appear to have offered above-normal returns. B) the gap between actual and expected prices. C) the spread between the price at which a broker will purchase stock from an investor and the price at which the broker will sell stock to an investor. D) the difficulty in practice of computing stock prices on the basis of expectations of future dividends.

A) the existence of trading strategies that appear to have offered above-normal returns.

Since capital gains are only taxed when an investor sells an asset and realizes the gain, a possible result is A) the locked-in effect. B) double taxation. C) an increase in capital losses. D) limited liability.

A) the locked-in effect.

A bubble occurs when A) the price of a stock is above its fundamental value. B) inside information is used to make profits from trading a company's stock. C) a company reports profits that are significantly above or below the expectations of financial analysts. D) the futures price is greater than the price of the underlying asset.

A) the price of a stock is above its fundamental value.

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) the price of an asset equals its fundamental value.

Behavioral economics can best be described as A) the study of situations in which people's choices do not appear to be economically rational. B) the study of human economic behavior. C) the basis for efficient markets. D) the study of how the economy affects human behavior.

A) the study of situations in which people's choices do not appear to be economically rational.

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) they can assume the stock prices they observe represent the fundamental values of those stocks.

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) they use all information available to them.

A key point made by the Gordon growth model is that the A) value of a stock depends on investor's expectations about the future profitability of a firm. B) past trends in a stock's behavior indicate future price trends. C) dividends have little to do with a stock's value. D) risk has little effect on a stock's value.

A) value of a stock depends on investor's expectations about the future profitability of a firm.

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) will not be able consistently to earn above-normal profits from buying or selling stocks.

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 D) only those who consistently beat the market

A) your broker

According to the Gordon growth model, what will be the percentage change in the value of the stock of a company whose current dividend is $10.00 and whose dividends had been expected to grow by 3% per year but now are expected to grow by 1% per year? A) -4.0% B) -23.7% C) -31.1% D) -66.0%

B) -23.7%

According to the Gordon growth model, what will be the percentage change in the value of a stock of a company whose current dividend is $10.00 and whose dividends had been expected to grow by 3% but now are expected to grow by 4% per year? A) 4.0% B) 17.8% C) 25.0% D) 33.3%

B) 17.8%

The Dow-Jones Industrial Average is the best-known measure of the performance of the U.S. stock market, and is an average of the stock prices of A) the 500 largest corporations in the United States. B) 30 large corporations. C) over 3,200 high-tech stocks. D) all major banking and financial companies.

B) 30 large corporations.

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) For a trader with rational expectations, the expectation of an asset's price equals the optimal price forecast.

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

B) adaptive expectations

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) applies rational expectations to the pricing of assets.

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) equal to the price of the stock in the current period.

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) have an impact on the company's profitability in the long term.

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) hold a diversified portfolio of assets.

A primary criticism of preferential tax treatment of dividends and capital gains is A) there is not a double taxation of dividends. B) it adversely affects the distribution of after-tax income. C) there is no locked-in effect resulting from taxation of capital gains. D) it does not have any impact on efficiency.

B) it adversely affects the distribution of after-tax income.

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) market participants expected Apple's earnings to be $2 billion.

The small-firm effect A) shows that investments in the stocks of small firms would have earned a below-normal return during the period beginning in the mid-1920s. B) may be the result of the low liquidity and high information costs of small-firm stock. C) was stronger during the 1980s than in previous decades. D) is the tendency for stocks of large firms to outperform those of small firms.

B) may be the result of the low liquidity and high information costs of small-firm stock.

The rate of return of a stock held for one year equals A) the change in the price of the stock. B) the dividend yield plus the rate of capital gain. C) the rate of capital gain minus the dividend yield. D) the dividend yield minus the rate of capital gain

B) the dividend yield plus the rate of capital gain.

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) the index funds provide a higher return after expenses than the actively managed funds.

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) the information they use contains not only past experiences, but also their expectations for the future.

The fundamental value of a stock equals A) the future value of all future dividends. B) the present value of all future dividends. C) the present value of current and future dividends. D) the present value of all future capital gains.

B) the present value of all future dividends.

A corporation's market capitalization is best described as A) the total value of its stocks and bonds. B) the total value of its common and preferred stock. C) its total profit for a particular year. D) its average profit over a period of years.

B) the total value of its common and preferred stock.

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. D) they should petition the Securities and Exchange Commission to authorize an adjustment in the price of the stock.

B) their actions will result in the information they possess being incorporated into the price of the stock.

When economists say consumers, firms, or investors are behaving rationally, they mean A) they recognize that it is not worthwhile to invest in risky stocks. B) they are taking actions to reach their goals, given the available information. C) they have significant investment expertise. D) they are consistently able to avoid poor performing stocks.

B) they are taking actions to reach their goals, given the available information.

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) they only slowly adjust their expectations to news which could affect prices or returns.

Suppose that research shows that by buying stocks issued by companies whose names begin with the letter G investors can earn above-normal returns in even-numbered years. From the perspective of the efficient markets hypothesis A) this is further evidence that the hypothesis is correct. B) this would be considered a pricing anomaly. C) investors must have insider information on these companies. D) purchasers of these stocks must have been noise traders.

B) this would be considered a pricing anomaly.

Noise traders A) tend to lose money on stock trades, but help to stabilize the market. B) tend to make higher returns than do "buy-and-hold" investors. C) create additional risk in the market by increasing price fluctuations. D) trade only when they have inside information.

C) create additional risk in the market by increasing price fluctuations.

Suppose you plan to hold a stock for one year. You expect that, in one year, it will sell for $30 and pay a dividend of $3 per share. If your required return on equity is 10%, what is the most you should be willing to pay for the share today? A) $3.30 B) $23 C) $30 D) $33

C) $30

The economist known for his early empirical work supporting the efficient markets hypothesis is A) Milton Friedman. B) John Muth. C) Eugene Fama. D) Glenn Hubbard.

C) Eugene Fama.

The S&P 500 declined by more than 20%, its largest one day decline ever, in A) October 1929. B) August 1934. C) October 1987. D) December 2007

C) October 1987.

Which of the following is an example of behavior that is NOT rational? A) buying stocks after stock prices have declined B) buying stocks after stock prices have risen C) a significantly higher enrollment in 401K plans if people are automatically enrolled rather than having the option of signing up on their own D) enrollment in 401K plans during a bear market

C) a significantly higher enrollment in 401K plans if people are automatically enrolled rather than having the option of signing up on their own

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) above-normal profits will be eliminated in the trading process.

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) are unable to consistently earn better than the long-run average return on stocks.

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) change frequently as evaluations of existing information about the securities change.

The difference between a firm's assets and its liabilities is known as A) limited liability. B) stock. C) equity. D) profit

C) equity.

Which of the following is a behavior inconsistent with the efficient markets hypothesis? A) diversification of one's portfolio B) avoiding active trading of stocks C) holding onto a losing stock while being more likely to sell a stock that has increased in value D) the purchase of a stock index fund

C) holding onto a losing stock while being more likely to sell a stock that has increased in value

According to the Gordon growth model, which of the following can cause the value of a stock to decline? A) higher expected growth rate of dividends B) increase in the current dividend C) increased systemic risk D) decreased required return on equity

C) increased systemic risk

The "greater fool" theory assumes that A) markets are efficient. B) bubbles cannot exist in well-organized markets. C) it makes sense for an investor to buy an asset as long as there is someone else to buy it later for a higher price. D) bond market returns are always above stock market returns.

C) it makes sense for an investor to buy an asset as long as there is someone else to buy it later for a higher price.

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) not predictable.

According to the Gordon growth model, an increase in the required return on equity A) increases the future value of the stock. B) reduces the current dividend. C) reduces the value of a stock. D) reduces the expected growth rate of the dividend.

C) reduces the value of a stock.

Mean reversion refers to the tendency for A) futures prices to revert to the prices of the underlying securities. B) the long-run mean return on stocks to equal the long-run mean return on bonds. C) stocks with high returns today to experience low returns in the future and for stocks with low returns today to experience high returns in the future. D) financial analysts whose stock picks have earned above-normal returns in the past to be unable to pick stocks that will perform as well in the future.

C) stocks with high returns today to experience low returns in the future and for stocks with low returns today to experience high returns in the future.

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) the change in price from one trading period to the next is not predictable.

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) the market's best guess of the present value of the asset's expected future returns

"Tips" published in leading commercial or financial publications are unlikely to lead to profitable trades because A) only wealthy individuals can buy stocks in the volume necessary to take advantage of tips. B) whatever is gained by trading on the basis of tips will be taxed away by the government. 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) the news will already be reflected in the market prices of the assets.

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) the price of a corporation's stock will fluctuate significantly only in response to news about changes in the company's long-term prospects.

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) they have adaptive expectations.

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) thirteen times as much than if the person had invested in CDs.

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) unforecastable.

From April 2000 to June 2016, the price of Apple stock has A) consistently increased. B) consistently decreased. C) varied considerably, but has risen considerably overall. D) varied considerably, but has remained relatively unchanged overall.

C) varied considerably, but has risen considerably overall.

Stocks of small firms have a higher annual average return than stocks in general. Some economists attribute this to A) compensation for the higher risk of small firms. B) lower liquidity of stocks of small firms. C) higher information costs of stocks of small firms. D) all of the above.

D) all of the above.

The efficient markets hypothesis implies that stock investments should have the same expected return after adjusting for A) risk. B) information costs. C) liquidity. D) all of the above.

D) all of the above.

Falling stock prices ________ the funds that firms can raise, which ________ their spending on physical capital. A) increases; increases B) increases; decreases C) decreases; increases D) decreases; decreases

D) decreases; decreases

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) $147.14

According to the Gordon growth model, what is the value of a stock with a dividend of $1, required return on equity of 10% and expected growth rate of dividends of 5%? A) $2 B) $10 C) $20 D) $21

D) $21

According to the Gordon growth model, what is the value of a stock with a dividend of $2, required return on equity of 8% and expected growth rate of dividends of 4%? A) $25 B) $26 C) $50 D) $52

D) $52

Which of the following is NOT a popular stock market index? A) Dow Jones Industrial Average B) NASDAQ C) S&P 500 D) Moody's Market Index

D) Moody's Market Index

Which of the following is NOT a result of the double taxation of dividends? A) Because profits that firms distribute to stockholders are taxed a second time, firms have an incentive to retain profits rather than to distribute them to stockholders. B) The return investors receive from buying stocks is reduced, which reduces the incentive people have to save in the form of stock investments and increases the costs to firms of raising funds. C) It gives firms an incentive to take on what may be an excessive level of debt rather than issue stock. D) The decline in retained profits results in increased inefficiency.

D) The decline in retained profits results in increased inefficiency

Which of the following expressions gives the present value of future dividends for a company whose current dividend is $5.00 and whose future dividends are expected to grow at rate g? A) [$5.00(1 - g)]/(i - g) B) [$5.00(1 + g)]/(i + g) C) [$5.00(1 - g)]/(i + g) D) [$5.00(1 + g)]/(i - g)

D) [$5.00(1 + g)]/(i - g)

In what way can the stock market affect the overall economy? A) It's an important source of funds for corporations. B) It can affect consumer and business sentiment. C) It is an important factor affecting consumer wealth and thus consumer spending. D) all of the above

D) all of the above

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) determine current market prices and changes in market prices.

With respect to the stock market crash of 1929 being the primary cause of the Great Depression A) most economists agree that this is true. B) most economists agree that this is not true. C) economists are all in agreement that this is, in fact, correct. D) economists disagree on how large an impact the crash had on the economy.

D) economists disagree on how large an impact the crash had on the economy.

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) equals its expected price plus a random error term.

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) fundamental analysts

Given the behavior of the stock market in recent years A) most economists still think the efficient markets hypothesis is an accurate description of the daily behavior of the stock market. B) most economists think the efficient markets hypothesis provides little insight into the behavior of the stock market. C) most economists think the rational investor can outperform the stock market in the long run. D) many economists still believe that it is unlikely that investors can hope to earn above-average returns in the stock market by following traditional strategies.

D) many economists still believe that it is unlikely that investors can hope to earn above-average returns in the stock market by following traditional strategies.

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) market participants make use of all available information.

Which of the following bonds will have the highest yield-to-maturity if all three bonds appear identical to investors in terms of risk, liquidity, information costs, and tax treatment? A) one with a coupon of $50 B) one with a coupon of $100 C) one with a coupon of $200 D) none of the above

D) none of the above

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) none of the above

Which type of stock should result in the best return according to the efficient markets hypothesis? A) a firm that is expected to be highly profitable in the future B) a firm that is considered to be undervalued C) a firm expected to earn little profit in the future D) none of the above

D) none of the above

Financial securities are exchanged by dealers linked by computers in a A) stock exchange. B) public exchange. C) financial exchange. D) over-the-counter market.

D) over-the-counter market.

All of the following are possible consequences of noise traders EXCEPT A) increased volatility in the financial market. B) asset prices differing from fundamental values. C) herd behavior contributing to speculative bubbles. D) reduced volatility of asset prices.

D) reduced volatility of asset prices.

Herd behavior can best be described as A) the large number of investors involved in the stock market. B) how large participation in financial markets increase market efficiency. C) informed investors can outperform relatively uninformed investors. D) relatively uninformed investors follow the behavior of other investors instead of considering fundamentals.

D) relatively uninformed investors follow the behavior of other investors instead of considering fundamentals.

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) result in about the same return, but will be more expensive than placing money in an index mutual fund.

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) rise, fall, or remain unchanged depending on the expectations of market participants before the announcement

Excess volatility refers to A) the unwillingness of financial analysts to consistently recommend the same stocks. B) the greater volatility of futures prices compared to the volatility of prices of the underlying assets. C) the tendency for stocks with high rates of returns also to have quite variable returns. D) the larger movements in market prices of stock than in their fundamental values.

D) the larger movements in market prices of stock than in their fundamental values

For index numbers like stock market indexes A) the numbers are measured in dollars and their values are meaningful by themselves. B) the numbers are measured in dollars and changes in their values are more important that the values themselves. C) the numbers are not measured in dollars or any other units and their values are meaningful by themselves. D) the numbers are not measured in dollars or any other units and changes in their values are more important that the values themselves.

D) the numbers are not measured in dollars or any other units and changes in their values are more important that the values themselves.

Momentum investing can be described as A) consistent with the efficient markets hypothesis. B) similar to mean reversion. C) follow the picks of investors who have been successful in the past. D) the trend is your friend.

D) the trend is your friend.