Econ practice Midterm 2

Megan has loaded historical stock prices for about 100 blue chip stocks into Excel. She is now analyzing the data for trends and patterns. What type of analysis is she conducting?

technical analysis

Megan is looking for patterns by analyzing historical stock prices. What type of analysis is she conducting?

technical analysis

Suppose you are looking at two investment portfolios. Portfolio A has an expected annual return of 10%, and Portfolio B has an expected annual return of 5%. Which portfolio do you expected to be riskier?

Portfolio A

The source of the _______ for loanable funds is investment.

demand

The _______ represents the price of a loan.

interest rate

Which of the terms acts as the "price" in the market for loanable funds?

interest rate

Alex purchases U.S. T-bills, while his twin brother, Adam, prefers investing in the stock market. Alex:

is taking on less risk than is his brother.

A mutual fund that mimics a broad stock market index is called a(n):

passive fund

The source of the _______ for loanable funds is saving.

supply

What describes financial intermediary?

A financial institution that transforms investor funds into financial assets

People who might need to retrieve part or all of their investment relatively soon, such as the elderly, are often advised to invest a higher percentage of their money in bonds, and thus a lower percentage in stocks, than people who can leave the investment untouched for decades. We know, however, that bonds typically have a lower rate of return than stocks. Why would people be advised to invest in assets that give lower average rates of return?

Although stocks have a higher rate of return in the long run, they are much more volatile, or riskier, in the short run. Therefore, there is a higher probability that the value of the stocks will be less than the original value of the investment for people who might need to withdraw the investment in the short run.

A futures contract essentially gives the owner of the contract the ability to buy a specific amount of a good at a given price at a point in the future. In a 1984 paper titled Orange Juice and the Weather, economist Richard Roll showed that the price of frozen orange juice futures could be used to predict errors in weather forecasts for Florida made by the National Weather Service. That is, there were times when the price of orange juice futures did a better job of predicting the temperatures in Florida than did the National Weather Service!

Investors in orange juice futures were using publicly available information that scientists at the National Weather Service were not using.

How do mutual funds reduce risk for the average individual investor?

Mutual funds reduce risk through portfolio diversification.

As interest rate decreases, what happens to the quantity of loanable funds demanded?

Quantity demanded will increase.

What effect will an increase in interest rates have on the quantity of loanable funds supplied?

Quantity supplied will increase.

Miguel is concerned because stock prices are rising far faster and far higher than can be accounted for by the fundamental prospects of the company. What might hurt an economy after the collapse of this bubble?

Some workers may have to move from one sector to another because they lose their jobs.

If the projected rate of return for a project is less than the interest rate for a loan that is necessary to complete the project, how will the borrowing business act?

The business will not take out the loan.

Which statement is TRUE if the efficient market hypothesis holds, and an investor is systematically outperforming the market?

The investor is using inside information.

What is NOT true of mutual fund managers?

They consistently beat the market average.

Identify an example of consumption smoothing. - depositing a portion of one's salary into a retirement account - acquiring a mortgage to purchase a house - taking student loans

all of these are examples of consumption smoothing

Select the definition of consumption smoothing.

borrowing in periods of low income and saving in periods of high income to make consumption less variable than income