Question 1

If market participants have rational expectations, then the best forecast of the price of a stock in the next period is

Accepted Answer

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) zero. 
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) zero.

Question 2

Results supporting mean reversion are strongest for

Accepted Answer

A) large-firm stocks during the post-World War II period. 
B) small-firm stocks during the post-World War II period. 
C) large-firm stocks during the pre-World War II period. 
D) small-firm stocks during the pre-World War II period. 
A) large-firm stocks during the post-World War II period. 
B) small-firm stocks during the post-World War II period. 
C) large-firm stocks during the pre-World War II period. 
D) small-firm stocks during the pre-World War II period.

Question 3

Which of the following is a correct statement about interpreting an increase in risk premiums?

Accepted Answer

A) An increase in risk premiums results only from expectations of greater default risk. 
B) An increase in risk premiums results only from expectations of lower liquidity. 
C) An increase in risk premiums results only from expectations of higher information costs. 
D) An increase in risk premiums can result from expectations of greater default risk, lower liquidity, or higher information costs. 
A) An increase in risk premiums results only from expectations of greater default risk. 
B) An increase in risk premiums results only from expectations of lower liquidity. 
C) An increase in risk premiums results only from expectations of higher information costs. 
D) An increase in risk premiums can result from expectations of greater default risk, lower liquidity, or higher information costs.

Question 4

Which of the following is the correct expression for the price of an asset at time t?

Accepted Answer

A) Pt= (   + 1+
  +1)/(1 + i) 
B)    = (   + 1 + Pt +1)/(1 + i) 
C) Pt +   + 1 =
  +1/(1 + i) 
D) Pt = (   + 1 +
  +1) 
A) Pt= (   + 1+
  +1)/(1 + i) 
B)    = (   + 1 + Pt +1)/(1 + i) 
C) Pt +   + 1 =
  +1/(1 + i) 
D) Pt = (   + 1 +
  +1)

Question 5

The efficient markets hypothesis predicts that an investor

Accepted Answer

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 us 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. 
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 us of adaptive expectations. 
D) will be able consistently to earn above-normal profits so long as stock prices in general are rising.

Question 6

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

Accepted Answer

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 affect the liquidity of the company's stock. 
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 affect the liquidity of the company's stock.

Question 7

A decline in market interest rates

Accepted Answer

A) reduces the value of future interest payments. 
B) reduces the value of future principal payments. 
C) increases the prices of bonds. 
D) increases the prices only of newly issued bonds. 
A) reduces the value of future interest payments. 
B) reduces the value of future principal payments. 
C) increases the prices of bonds. 
D) increases the prices only of newly issued bonds.

Question 8

Expectations of asset values by participants in financial markets

Accepted Answer

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) are determined largely by governmental actions. 
D) determine market prices and changes in market prices. 
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) are determined largely by governmental actions. 
D) determine market prices and changes in market prices.

Question 9

Which of the following is a correct statement about interpreting an increase in the upward slope of the term structure?

Accepted Answer

A) An increase in the upward slope of the term structure results only from expectations of lower future real interest rates. 
B) An increase in the upward slope of the term structure results only from expectations of higher future real interest rates. 
C) An increase in the upward slope of the term structure results only from expectations of higher inflation. 
D) An increase in the upward slope of the term structure may result either from expectations of higher real interest rates or expectations of higher inflation. 
A) An increase in the upward slope of the term structure results only from expectations of lower future real interest rates. 
B) An increase in the upward slope of the term structure results only from expectations of higher future real interest rates. 
C) An increase in the upward slope of the term structure results only from expectations of higher inflation. 
D) An increase in the upward slope of the term structure may result either from expectations of higher real interest rates or expectations of higher inflation.

Question 10

If traders in a market have rational expectations, then

Accepted Answer

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. 
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.

Question 11

In the context of analyzing movements in stock prices, "fads" refer to

Accepted Answer

A) trading days on which bond prices and stock prices move in opposite directions. 
B) gaps between futures prices and the prices of the underlying assets. 
C) trades made as a result of computer programs. 
D) overreaction to good or bad news. 
A) trading days on which bond prices and stock prices move in opposite directions. 
B) gaps between futures prices and the prices of the underlying assets. 
C) trades made as a result of computer programs. 
D) overreaction to good or bad news.

Question 12

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,

Accepted Answer

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. 
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.

Question 13

If the dollar is expected to depreciate against the Japanese yen during the next 60 days, then

Accepted Answer

A) the 60-day forward yen/dollar exchange rate should be lower than the current exchange rate. 
B) the 60-day forward yen/dollar exchange rate should be higher than the current exchange rate. 
C) the yen price of dollar-denominated asset is expected to rise. 
D) the foreign exchange market must not be an efficient market. 
A) the 60-day forward yen/dollar exchange rate should be lower than the current exchange rate. 
B) the 60-day forward yen/dollar exchange rate should be higher than the current exchange rate. 
C) the yen price of dollar-denominated asset is expected to rise. 
D) the foreign exchange market must not be an efficient market.

Question 14

Which of the following is a correct statement about interpreting an increase in bond prices?

Accepted Answer

A) An increase in bond prices results from an increase in the expected inflation rate. 
B) An increase in bond prices results from an increase in default risk. 
C) An increase in bond prices results from an increase in liquidity. 
D) An increase in bond prices results from a lower overall level of interest rates. 
A) An increase in bond prices results from an increase in the expected inflation rate. 
B) An increase in bond prices results from an increase in default risk. 
C) An increase in bond prices results from an increase in liquidity. 
D) An increase in bond prices results from a lower overall level of interest rates.

Question 15

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% but now are expected to grow by 4% per year?

Accepted Answer

A) 4.0% 
B) 17.8% 
C) 25.0% 
D) 33.3% 
A) 4.0% 
B) 17.8% 
C) 25.0% 
D) 33.3%

Question 16

Suppose that Google announces that its profits for the third quarter of 2006 were $1.6 billion. As a result of this announcement the price of Google's stock declines. The best explanation of this is

Accepted Answer

A) market participants were expecting Google's profits to be greater than $1.6 billion for the third quarter. 
B) market participants were 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 were expecting Google's profits to be greater than $1.6 billion for the third quarter. 
B) market participants were 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.

Question 17

When market participants have rational expectations,

Accepted Answer

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. 
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.

Question 18

Noise traders

Accepted Answer

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. 
D) trade only when they have inside information. 
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. 
D) trade only when they have inside information.

Question 19

In an efficient market the price of a bond

Accepted Answer

A) is generally greater than the present value of future interest and principal payments. 
B) is generally less than the present value of future interest and principal payments. 
C) equals the present value of future interest and principal payments. 
D) will be less than, greater than, or equal to the present value of future interest and principal payments, depending upon prevailing interest rates. 
A) is generally greater than the present value of future interest and principal payments. 
B) is generally less than the present value of future interest and principal payments. 
C) equals the present value of future interest and principal payments. 
D) will be less than, greater than, or equal to the present value of future interest and principal payments, depending upon prevailing interest rates.

Question 20

Specialists are

Accepted Answer

A) financial analysts who focus on only one company's securities. 
B) market makers in individual stocks on the floor of the New York Stock Exchange. 
C) purchasers of futures contracts and sellers of options contracts. 
D) sellers of futures contracts and purchasers of options contracts. 
A) financial analysts who focus on only one company's securities. 
B) market makers in individual stocks on the floor of the New York Stock Exchange. 
C) purchasers of futures contracts and sellers of options contracts. 
D) sellers of futures contracts and purchasers of options contracts.

Exam 10: Information and Financial Market Efficiency

If market participants have rational expectations, then the best forecast of the price of a stock in the next period is

Results supporting mean reversion are strongest for

Which of the following is a correct statement about interpreting an increase in risk premiums?

Which of the following is the correct expression for the price of an asset at time t?

The efficient markets hypothesis predicts that an investor

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 decline in market interest rates

Expectations of asset values by participants in financial markets

Which of the following is a correct statement about interpreting an increase in the upward slope of the term structure?

If traders in a market have rational expectations, then

In the context of analyzing movements in stock prices, "fads" refer to

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,

If the dollar is expected to depreciate against the Japanese yen during the next 60 days, then

Which of the following is a correct statement about interpreting an increase in bond prices?

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% but now are expected to grow by 4% per year?

Suppose that Google announces that its profits for the third quarter of 2006 were $1.6 billion. As a result of this announcement the price of Google's stock declines. The best explanation of this is

When market participants have rational expectations,

Noise traders

In an efficient market the price of a bond

Specialists are

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