hw5
D. A and B only.
Stocks are called "equities" because: A. ownership of a firm's stock represents a legal claim on the firm's profits. B. ownership of a firm's stock represents partial ownership of the firm. C. owners of a firm's stock are protected by the legal provision of limited liability. D. A and B only. E. all of the above.
133.33 16/0.12=133.33
Suppose that a company is expected to pay a dividend per share of $16 per year forever. If investors require a rate of return of 12% to invest in this stock, what is its price? The stock price is $______. (Round your response to two decimal places.)
should
Suppose that the price of Goldman Sachs stock is currently $146 per share. You expect that the firm will pay a dividend of $1.54 per share at the end of the year, at which time you expect that the stock will be selling for $159 per share. If you require a return of 8% to invest in this stock, you ______ buy the stock.
53 P= (1+g)*D/(r-g) (1.06)*1.5/0.03=53
Suppose that Coca-Cola is currently paying a dividend of $1.5 per share, the dividend is expected to grow at a rate of 6% per year, and the rate of return investors require to buy Coca-Cola's stock is 9%. Calculate the price per share for Coca-Cola's stock. The price per share of Coca-Cola stock is $______. (Round your response to two decimal places.)
Yes, according to the efficient markets hypothesis, if you could derive an efficient model to forecast stock returns, it is possible to earn infinitely high profits.
The business writer Michael Lewis has quoted Michael Burry, a fund manager, as saying: "I also immediately internalized the idea that no school could teach someone how to be a great investor. If that were true, it'd be the most popular school in the world, with an impossibly high tuition. So it must not be true." Do you agree with Burry's reasoning? Source: Michael Lewis, The Big Short: Inside the Doomsday Machine, New York: W.W. Norton, 2010, p. 35.
A profit from the sale of an investment.
A column in the Wall Street Journal, asks the question: open double quoteAre capital gains so different from earned income that they should be taxed at a different rate?close double quote Source: Scott Sumner and Leonard E. Burman, open double quoteIs It Fair to Tax Capital Gains at Lower Rates Than Earned Income?close double quote Wall Street Journal, March 1, 2015. What is a capital gain?
C. A and B only.
A columnist in the Economist argues that: The past ten years have dealt a series of blows to efficient-market theory, the idea that asset prices accurately reflect all available information. In the late 1990s dotcom companies with no profits and barely any earnings were valued in billions of dollars; and in 2006 investors massively underestimated the risks in bundling together portfolios of American subprime mortgages. Source: Buttonwood, "The Grand Illusion," Economist, May 5, 2009. Explain how the incidents this columnist discusses may be inconsistent with the efficient markets hypothesis. A. Despite the availability of information, investors overvalued the price of tech stocks for an extended period of time, which may indicate that asset prices do not accurately reflect all available information. B. The magnitude of the market's inability to assess value in technology stocks and to assess risk in mortgage-backed securities may indicate that asset prices do not accurately reflect all available information. C. A and B only. D. Neither answer is correct.
No, these indexes are averages of stock prices and indicate the overall performance of the stock market.
A student makes the following observation: "The Dow Jones Industrial Average currently has a value of 13,500, while the S&P 500 has a value of 1,500. Therefore, the prices of the stocks in the DJIA are nine times as high as the price of the stocks in the S&P 500." Is the student's observation correct?
No, these shares were likely traded in the secondary market, so General Electric would not receive any of the money.
A student remarks: "135,000,000 shares of General Electric were sold yesterday on the New York Stock Exchange, at an average price of $25 per share. That means General Electric just received a little over $3.4 billion from investors." Do you agree with the student's analysis?
Invest in index funds.
According to an article in the New York Times, "millions of amateur investors continue to actively buy and sell securities regularly." Source: Gary Belsky, "Why We Think We're Better Investors Than We Are," New York Times, March 25, 2016. What alternative strategy might be better for an investor to follow instead of actively buying and selling securities regularly?
D. noise trading.
All of the following are concepts from behavioral economics that help us understand how people make choices in financial markets, except: A. overconfidence. B. loss aversion. C. hindsight bias. D. noise trading.
D. All of the above.
Is it possible that these incidents might have occurred even though the efficient markets hypothesis is correct? A. Rational expectations does not mean perfect foresight. B. It is possible that even with full information investors overestimated the profitability of tech companies. C. It is possible that even with full information investors underestimated the risk of mortgage-backed securities. D. All of the above.
nominal, without an adjustment
One economic argument for taxing capital gains differently than other income is that investors have to pay taxes on their ______ gain ______ for inflation.
impossible, existing
An article in the Economist notes that according to the efficient markets hypothesis: "Buying shares in Google because its latest profits were good, or because of a particular pattern in the price charts, was unlikely to deliver an excess return." Source: "What's Wrong with Finance," Economist, May 1, 2015. The efficient market hypothesis states it is ______ to "beat the market" because stock market efficiency causes ______ share prices to always incorporate and reflect all relevant information.
D. all of the above
An article in the Wall Street Journal contained the following: "Burberry Group issued a surprise profit warning on Tuesday. . . . The announcement sent Burberry's stock down 21%." Source: Paul Sonne and Peter Evans, "Burberry Sends a Warning," Wall Street Journal, September 12, 2012. Buying stock in a company gives an investor a legal claim on _____. A. a firm's profits B. a firm's equity C. the value of a firm's assets minus the value of its liabilities D. all of the above
Index funds.
An article in the Wall Street Journal described "a sea change in the fund business in which investors are increasingly opting for products that track the market rather than relying on managers to pick winners." Source: Kirsten Grind, "Investors Pour Into Vanguard, Eschewing Stock Pickers," Wall Street Journal, August 21, 2014. Based on the information in the article, which of the following investments are investors increasingly choosing?
C. Efficient markets hypothesis.
An article in the Wall Street Journal in 2016, observed that the price of Apple's stock had started to decline a year before "when fears of an iPhone slowdown surfaced." At the time the article was written, the author claims that, "The iPhone slump is now more than priced in." Source: Dan Gallagher, "Apple Has Upside as Investors Worry," Wall Street Journal, April 24, 2016. Which of the following best explains the author's comment, "The iPhone slump is now more than priced in"? A. Unsystematic risk component of equity premium. B. Equity premium. C. Efficient markets hypothesis. D. Systematic risk component of equity premium.
buy a set portfolio of stocks, frequently buy and sell individual stocks
An article in the Wall Street Journal says this about Burton Malkiel: "Even before index funds existed, the now-retired Princeton University professor argued that they could outperform actively managed funds....." Source: Silvia Ascarelli, "Burton Malkiel Is Still an Indexing Fan, but a 'Smart Beta' Skeptic," Wall Street Journal, May 8, 2016. Index funds ______, whereas actively managed funds ______ .
are not, debt for a firm
Bonds ______ equities because they represent ______.
1929, consumer confidence, lack
Christina Romer would argue that the impact of the crash of ______ was more severe because of its effect on ______ as well as the ______ of regulations in place at the time.
C. The breakout of war in the Europe.
Economist Peter Temin of MIT argues that, open double quoteIf the crash of 1929 was an important independent shock to the economy, then the crash of 1987 should have been equally disastrous.close double quote Source: Peter Temin, Lessons from the Great Depression, Cambridge, MA: MIT University Press, 1989 p. 41. Which of the following events would be considered an "important independent shock to an economy"? A. Inflation. B. An increase in the Federal Funds rate. C. The breakout of war in the Europe. D. A stock market crash.
rises above D. All of the above.
Former Federal Reserve Chairman Alan Greenspan once argued that it is very difficult to identify bubbles until after they pop. What is a bubble, and why might they be difficult to identify? A bubble is a situation in which the price of an asset ______ its fundamental value. Why might bubbles be difficult to identify? A. Investors may not exhibit rational behavior when purchasing an overvalued stock. B. For every overvalued asset, there is always an investor willing to buy the asset at an even higher price. C. Poor investor psychology, such as herd behavior, may not allow investors to see an asset as overvalued. D. All of the above.
D. A and B only.
How might an investor use excess volatility to earn above-average returns? A. By selling stocks when they are above their fundamental values. B. By buying stocks when they are below their fundamental values. C. By repeatedly buying and selling stocks in a short period of time. D. A and B only. E. All of the above.
D. A and B only.
How might an investor use mean reversion to earn above-average returns? A. By selling stocks whose returns have recently been high. B. By buying stocks whose returns have recently been low. C. By buying only blue-chip stocks. D. A and B only.
an increase, an increase
If a firm's profits are expected to increase there will be ______ in demand for that firm's stock and therefore _____ in its price.
A. No, the share price already reflects the expected future sales decline.
If iPhone sales continue to decline as investors expect them to, will the decline lead to a further fall in the price of Apple's stock? A. No, the share price already reflects the expected future sales decline. B. Yes, a decline in sales will lead to a decline in profit. C. No, Apple will make up for the decline by selling more Apple Watches. D. Yes, a decline in sales will lead to a price decrease.
Yes, investors would have already decreased their demand for this stock causing its price to drop before the announcement was made.
If the decrease in Burberry's profits had not been a surprise, would the effect of the announcement on its stock price have been different?
Capital gains are taxed at a lower rate than salary and wage income.
In what way are capital gains taxed differently than salary and wage income?
R = D<t+1>^e/P<t> + (P<t+1>^e - P<t>)/P<t>
In symbols, write the two components of the rate of return on a stock investment.
The rate of return is equal to the rate of return on the dividend plus the rate of return on the price change from the purchase price.
In words, write the two components of the rate of return on a stock investment.
A. NASDAQ Composite. B. Dow Jones Industrial Average. C. S&P 500.
What are the three most important stock market indexes? (Check all that apply.) A. NASDAQ Composite. B. Dow Jones Industrial Average. C. S&P 500. D. Standard & Poor's. E. AMERITRADE.
A stock exchange is a physical location where trading occurs face-to-face, while over-the-counter markets are virtual markets where dealers are linked by computers to buy and sell stocks.
What is the difference between a stock exchange and an over-the-counter market?
B. Adaptive expectations assume that investors' expectations are based on past values of a variable, whereas rational expectations assume that investors make forecasts of future values using all available information.
What is the difference between adaptive expectations and rational expectations? A. Adaptive expectations assume that investors' expectations are based on the future values of a variable, whereas rational expectations assume that investors make forecasts using all available information. B. Adaptive expectations assume that investors' expectations are based on past values of a variable, whereas rational expectations assume that investors make forecasts of future values using all available information. C. Rational expectations assume that investors' expectations are based on past values of a variable, whereas adaptive expectations assume that investors make forecasts of future values using all available information. D. Adaptive expectations assume that investors' expectations are based on one variable, whereas rational expectations assume that investors make forecasts of future values using multiple variables.
D. All of the above.
What is the efficient markets hypothesis? A. The application of rational expectations to financial markets. B. The hypothesis that the equilibrium price of a stock is equal to its fundamental value. C. The assumption that stock prices are not predictable and follow a random walk. D. All of the above.
The sum of the present value of all dividend payments expected to be received into the infinite future time.
What is the fundamental value of a share of stock?
P = D<t+1>^e/(1+r<e>) + D<t+2>^e/(1+r<e>)^2 + P<t+2>^e/(1+r<e>)^2
What is the relationship between the price of a financial asset and the payments investors will receive from owning that asset?
Economic conditions were more severe after the crash of 1929 even though the decline in the market in 1987 was twice as large as the decline in the market in 1929.
What reason might Temin give to support his argument that what happened to the economy following the crash of 1987 is evidence against the crash of 1929 being an important shock to the economy?
It is extremely difficult to outperform the long-run average return on stocks.
Which of the following might explain why investors might expect to receive a higher return in the long run from buying index funds rather than actively managed funds?
