Question 1

What is meant by "value investing"? Is it consistent with the efficient markets hypothesis?

Accepted Answer

Value investing refers to investing in stocks that have low prices relative to their values as measured by their prices or earnings. There is some evidence that investing in such stocks yields a higher rate of return in the long run. Although this higher return would appear to be incompatible with the efficient markets hypothesis, value investing may involve greater risk, for which the higher return is compensation.

Question 2

In an efficient market, the market price of an asset

Accepted Answer

A) reflects the returns the asset has been earning previously. 
B) is fixed by federal regulators after a thorough consideration of all available information. 
C) equals the present value of expected future returns. 
D) is largely determined on the demand side, because the supply of assets in such markets is generally fixed. 
A) reflects the returns the asset has been earning previously. 
B) is fixed by federal regulators after a thorough consideration of all available information. 
C) equals the present value of expected future returns. 
D) is largely determined on the demand side, because the supply of assets in such markets is generally fixed. C

Question 3

When market participants have rational expectations, the deviation of the expected price from the actual future price is

Accepted Answer

A) zero. 
B) predictable, provided all relevant information is made use of. 
C) not predictable. 
D) predictable under certain circumstances, but not under others. 
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

Question 4

If a company's sales begin to fall off so that it is now more likely to default on its bonds than financial markets had previously believed, the yields on the company's bonds will

Accepted Answer

A) rise to compensate investors for this greater risk. 
B) fall because the company will no longer be able to afford to pay as much interest. 
C) fall as investors insist on higher prices for the bonds to compensate them for the greater risk. 
D) be unchanged; once issued yields on bonds do not change. 
A) rise to compensate investors for this greater risk. 
B) fall because the company will no longer be able to afford to pay as much interest. 
C) fall as investors insist on higher prices for the bonds to compensate them for the greater risk. 
D) be unchanged; once issued yields on bonds do not change.

Question 5

In the context of the evaluation of the efficient markets hypothesis, pricing anomalies refer to

Accepted Answer

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. 
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.

Question 6

Which of the following will NOT result in an asset having a high price today in an efficient market?

Accepted Answer

A) It is expected to have high returns. 
B) It is not very risky. 
C) It has a high interest rate. 
D) It is expected to rise in value in the future. 
A) It is expected to have high returns. 
B) It is not very risky. 
C) It has a high interest rate. 
D) It is expected to rise in value in the future.

Question 7

The efficient markets hypothesis

Accepted Answer

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. 
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.

Question 8

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

Accepted Answer

Better informed investors may be able to

Question 9

Between 1989 and 2003, the Japanese Nikkei stock index

Accepted Answer

A) declined by about than 50%. 
B) rose more than 500%. 
C) remained unchanged. 
D) declined by about 80%. 
A) declined by about than 50%. 
B) rose more than 500%. 
C) remained unchanged. 
D) declined by about 80%.

Question 10

The January effect

Accepted Answer

A) is sometimes argued to be tax motivated. 
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) reflects the effects of the Christmas season on the stock of department store chains. 
A) is sometimes argued to be tax motivated. 
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) reflects the effects of the Christmas season on the stock of department store chains.

Question 11

Investors are better off when financial asset prices are determined in an efficient market because

Accepted Answer

A) returns on assets will be higher. 
B) funds will flow from savers to investors offering the most profitable investment opportunities. 
C) returns from assets traded in an efficient market are not subject to state or local taxes. 
D) risky assets are not allowed to be traded in an efficient market. 
A) returns on assets will be higher. 
B) funds will flow from savers to investors offering the most profitable investment opportunities. 
C) returns from assets traded in an efficient market are not subject to state or local taxes. 
D) risky assets are not allowed to be traded in an efficient market.

Question 12

What is considered the original bubble?

Accepted Answer

A) Gold in England in the twelfth century 
B) Tulips in Holland in the seventeenth century 
C) Stocks in the United States in the 1920s 
D) Silver in the United States in the 1830s 
A) Gold in England in the twelfth century 
B) Tulips in Holland in the seventeenth century 
C) Stocks in the United States in the 1920s 
D) Silver in the United States in the 1830s

Question 13

If the dollar is expected to depreciate against the British pound during the next 60 days, then

Accepted Answer

A) the current pound/dollar exchange rate should be higher than the 60-day forward pound/dollar exchange rate. 
B) the current pound/dollar exchange rate should be lower than the 60-day forward pound/dollar exchange rate. 
C) buying dollars today with pounds and selling them in 60 days for pounds will yield a profit. 
D) the pound price of U.S. goods sold in Britain must be expected to rise. 
A) the current pound/dollar exchange rate should be higher than the 60-day forward pound/dollar exchange rate. 
B) the current pound/dollar exchange rate should be lower than the 60-day forward pound/dollar exchange rate. 
C) buying dollars today with pounds and selling them in 60 days for pounds will yield a profit. 
D) the pound price of U.S. goods sold in Britain must be expected to rise.

Question 14

Under the efficient markets hypothesis, what will be the percentage change in the stock price 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?

Accepted Answer

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

Question 15

In studying the gold price of greenbacks, researchers have shown that

Accepted Answer

A) the gold price of greenbacks rose when the Union forces did well. 
B) the gold price of greenback fell when the Union forces did well. 
C) events in the Civil War had little impact on the gold price of greenbacks. 
D) currency markets during the Civil War were not efficient. 
A) the gold price of greenbacks rose when the Union forces did well. 
B) the gold price of greenback fell when the Union forces did well. 
C) events in the Civil War had little impact on the gold price of greenbacks. 
D) currency markets during the Civil War were not efficient.

Question 16

Program trading

Accepted Answer

A) is the likeliest cause of the stock market crash of October 1987. 
B) occurs only in the over-the-counter market. 
C) refers to computer-generated orders to buy or sell many stocks at the same time. 
D) has been abolished by order of the Brady Commission. 
A) is the likeliest cause of the stock market crash of October 1987. 
B) occurs only in the over-the-counter market. 
C) refers to computer-generated orders to buy or sell many stocks at the same time. 
D) has been abolished by order of the Brady Commission.

Question 17

Mean reversion refers to the tendency for

Accepted Answer

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. 
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.

Question 18

If major traders believe the price of a stock should be higher than its current market price,

Accepted Answer

A) they have an incentive to bid down the price of 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. 
A) they have an incentive to bid down the price of 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.

Question 19

A researcher shows that stock prices reflect all available information, including "insider information" known only to corporate managers. This indicates that the efficient markets hypothesis has passed the test of

Accepted Answer

A) weak-form efficiency. 
B) semistrong-form efficiency. 
C) strong-form efficiency. 
D) noise-trading efficiency. 
A) weak-form efficiency. 
B) semistrong-form efficiency. 
C) strong-form efficiency. 
D) noise-trading efficiency.

Question 20

Which of the following statements is true of rational expectations?

Accepted Answer

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 trade really has rational expectations, he or she was always earn a greater than normal return on his or her financial portfolio. 
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 trade really has rational expectations, he or she was always earn a greater than normal return on his or her financial portfolio.

Exam 10: Information and Financial Market Efficiency

What is meant by "value investing"? Is it consistent with the efficient markets hypothesis?

In an efficient market, the market price of an asset

When market participants have rational expectations, the deviation of the expected price from the actual future price is

If a company's sales begin to fall off so that it is now more likely to default on its bonds than financial markets had previously believed, the yields on the company's bonds will

In the context of the evaluation of the efficient markets hypothesis, pricing anomalies refer to

Which of the following will NOT result in an asset having a high price today in an efficient market?

The efficient markets hypothesis

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

Between 1989 and 2003, the Japanese Nikkei stock index

The January effect

Investors are better off when financial asset prices are determined in an efficient market because

What is considered the original bubble?

If the dollar is expected to depreciate against the British pound during the next 60 days, then

Under the efficient markets hypothesis, what will be the percentage change in the stock price 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?

In studying the gold price of greenbacks, researchers have shown that

Program trading

Mean reversion refers to the tendency for

If major traders believe the price of a stock should be higher than its current market price,

A researcher shows that stock prices reflect all available information, including "insider information" known only to corporate managers. This indicates that the efficient markets hypothesis has passed the test of

Which of the following statements is true of rational expectations?

Introducing Money and the Financial System

Money and the Payments System

Overview of the Financial System

Interest Rates and Rates of Return

The Theory of Portfolio Allocation

Determining Market Interest Rates

Risk Structure and Term Structure of Interest Rates

The Foreign-Exchange Market and Exchange Rates

Derivative Securities and Derivative Markets

Reducing Transactions Costs and Information Costs

What Financial Institutions Do

The Business of Banking

The Banking Industry

Banking Regulation: Crisis and Response

Banking in the International Economy

The Money Supply Process

Changes in the Monetary Base

Organization of Central Banks

Monetary Policy Tools

The Conduct of Monetary Policy

The International Financial System and Monetary Policy

The Demand for Money

Linking the Financial System and the Economy: the Is-Lm-Fe Model

Aggregate Demand and Aggregate Supply

Money and Output in the Short Run

Information Problems and Channels for Monetary Policy

Inflation: Causes and Consequences

Filters