FIN3244 Stocks Quiz

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%)? $74.62 $147.14 $142.86 $79.23

$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%? $20 $2 $10 $21

$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%? $52 $25 $26 $50

$52

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

the effect of trading costs and taxes

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

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

The fundamental value of a stock equals the present value of all future capital gains. the future value of all future dividends. the present value of current and future dividends. the present value of all future dividends.

the present value of all future dividends.

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

A economists disagree on how large an impact the crash had on the economy

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.

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.) -23.7% B.) -4.0% C.) -66.0% D.) -31.1%

A.) -23.7%

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

A.) All of these.

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

A.) determine current market prices and changes in market prices.

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

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

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

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

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.

The required return on equity for an individual stock includes which of the following? systemic risk idiosyncratic risk All of these risk-free interest rate

All of these

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

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

B.) varied considerably, but has risen considerably overall.

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.) $33 B.) $30 C.) $3.30 D.) $23

B.) $30

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.

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

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

In the context of the evaluation of the efficient markets hypothesis, pricing anomalies refer to A.) the difficulty in practice of computing stock prices on the basis of expectations of future dividends. B.) the existence of trading strategies that appear to have offered above-normal returns. 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 gap between actual and expected prices.

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

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

C. Moody's Market Index

Which of the following is NOT a result of the double taxation of dividends? A. It gives firms an incentive to take on what may be an excessive level of debt rather than issue stock. WRONG B. 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. C. The decline in retained profits results in increased inefficiency. D. 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. The decline in retained profits results in increased inefficiency.

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

C. decreases; decreases

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

C.) All of these

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

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

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

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

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.) investors must have insider information on these companies. C.) this would be considered a pricing anomaly. D.) purchasers of these stocks must have been noise traders.

C.) this would be considered a pricing anomaly.

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

C.) your broker

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 consider fundamentals.

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

Suppose you buy a stock that sells for $20. It's expected annual dividend is $2 and you expect its price to be $25 in one year. What is your expected rate of return on the stock?

Essay style question 2/20 + (25-20)/20 = 35%

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

D. increases; increases

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

D. possess inside information.

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.) $50 B.) $25 C.) $26 D.) $52

D.) $52

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

D.) All of these.

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

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

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

D.) payments made to stockholders.

How can stock prices affect spending by businesses and households?

Essay - did not answer

In what way do owners of stocks have limited liability?

Essay Question Shareholders have limited liability to what they invested initially. They can not lose more than what they spent on the initial stock purchase.

Explain what is meant by the "double taxation of dividends"?

Essay Question ( My Word) - When a company that issues stock has a profit the company pays income tax on that profit. Any money left after paying taxes can be paid to shareholders as a dividend. Once a shareholder earns a dividend they will be taxed on the dividend. Essentially this is double taxation because the company paid taxes on its profits and then the shareholder is paying taxes on the dividends.

Why do some economists think that taxing capital gains results in a locked-in effect?

Essay Question ( My Words) - Capital gains are taxed when realized but to avoid the high tax owners of the investment may decide to hold onto their investment rather than sell even if it is more profitable to sell or would create more opportunities.

What are the differences between common stock and preferred stock?

Essay Question ( My Words) - Preferred stock would have dividend paid to its holders before holders of common stock would be paid. If a company must liquidate all assets a holder of preferred stock would be paid, common stock holders would be paid back after preferred stock holders but they may not receive any money at all. Preferred stock has a par value which is affected by interest rates. If rates go up the value of the preferred stock value goes down, if rates go down the preferred stock value goes up. Common stock's value is regulated by the market participants supply and demand. Preferred stock can be converted to common stock but common stock can not be converted to preferred stock.

How would proponents of the efficient markets hypothesis use the Gordon growth model to explain the movement of stock prices during the financial crisis of 2007-2009?

Essay Question ( My own words) According to the book during the financial crisis, investors increased the required return on equities, while decreasing the expected growth rate of dividends,which caused stock prices to decline, which is what the Gordon Growth Model indicates should happen. The text indicates that a supporter of the efficient markets hypothesis would argue that the sharp decline in stock prices was caused by investors responding to new information on the increased riskiness of stocks and the lower future growth of dividends. This was a difficult question to answer and I relied heavily on my text to answer.

Shouldn't better informed investors be able to profit from the deviations from pricing efficiency caused by noise traders?

Essay Question ( My own words) Better informed investors should be able to profit from the deviations from pricing efficiency caused by noise traders. There are issues with noise traders though and the longer the deviations continue it is not likely that more knowledgeable will continue to profit. Noise traders create additional risk in the market by increasing price fluctuations, as well as increasing the volatility in the financial market, cause asset prices to differ from fundamental values, and herd behavior contributing to speculative bubbles.

Explain how a bubble can develop in the market for an asset.

Essay Question - Ran out of time on Quiz did not answer An asset bubble happens when the price of said asset is over-inflated, price will rise very quickly over a short time span. There are a few reasons this happens. One is when interest rates are low and money is easy and cheap to come by. Another reason is when a particular asset becomes highly popular and everyone starts buying it so they can reap the rewards. Another reason is when an asset becomes popular but there may be a supply shortage so investors buy more before it is gone.

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

New York Stock Exchange

Which type of stock should result in the best return according to the efficient markets hypothesis? a firm that is expected to be highly profitable in the future a firm expected to earn little profit in the future a firm that is considered to be undervalued None of these

None of these

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

October 1987

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

Ran out of time on Quiz I think answer is A.) are unable to consistently earn better than the long-run average return on stocks.

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.) is likely to make forecasts that reflect closely IBM stock's fundamental value. C.) has rational expectations. D.) is likely to rapidly adjust his forecast to news affecting the future profitability of IBM.

Ran out of time on Quiz I think answer is A.) has adaptive expectations.

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

Ran out of time on Quiz I think answer is B.) a significantly higher enrollment in 401K plans if people are automatically enrolled rather than having the option of signing up on their own

Mean reversion refers to the tendency for A.) 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. B.) futures prices to revert to the prices of the underlying securities. 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.) the long-run mean return on stocks to equal the long-run mean return on bonds.

Ran out of time on Quiz I think answer is 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.

What are the effects of the double taxation of dividends?

When a company that issues stock has a profit the company pays income tax on that profit. Any money left after paying taxes can be paid to shareholders as a dividend. Once a shareholder earns a dividend they will be taxed on the dividend. Essentially this is double taxation because the company paid taxes on its profits and then the shareholder is paying taxes on the dividends. First, the return investors receive from buying stocks is reduced, which reduces the incentive individuals have to save in the form of stock investments and increases the costs to firms of raising funds. Second, firms have an incentive to retain profits rather than to distribute them to stockholders. Finally, because firms can deduct from their profits the interest payments they make on loans and bonds, the double taxation of dividends gives firms an incentive to take on what may be an excessive level of debt rather than issue stock.

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

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

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

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

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

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

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

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 adaptive analysts. technical analysts. fundamental analysts. rational analysts.

fundamental analysts.

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

holders of preferred stock

Rising stock prices ________ household wealth, which ________ consumption spending. increases; decreases decreases; decreases increases; increases decreases; increases

increases; increases

The "greater fool" theory assumes that bubbles cannot exist in well-organized markets. bond market returns are always above stock market returns. 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. markets are efficient.

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.

Given the behavior of the stock market in recent years most economists still think the efficient markets hypothesis is an accurate description of the daily behavior of the stock market. - WRONG 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. most economists think the rational investor can outperform the stock market in the long run. most economists think the efficient markets hypothesis provides little insight into the behavior of the stock market.

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

market participants make use of all available information.

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

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

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

over-the-counter market.

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

overreact to good and bad news.

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

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

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

reduced volatility of asset prices.

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

stock prices have declined by at least 20%.

According to the efficient markets hypothesis 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. common stock prices should be constant. the price of a corporation's stock will fluctuate significantly only in response to news about changes in the company's long-term prospects. 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.

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

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

the total value of its common and preferred stock.

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

the trend is your friend.

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

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 they recognize that it is not worthwhile to invest in risky stocks. they are taking actions to reach their goals, given the available information. they are consistently able to avoid poor performing stocks. they have significant investment expertise.

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

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

they have adaptive expectations.

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

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

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

unforecastable.

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

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