Question 1

Which of the following could cause a stock market bubble?

Accepted Answer

A)  Changes in the real interest rate 
B)  Better enforcement of insider trading laws 
C)  Investor euphoria 
D)  Changes in dividends 
A)  Changes in the real interest rate 
B)  Better enforcement of insider trading laws 
C)  Investor euphoria 
D)  Changes in dividends C

Question 2

Do the voting rights possessed by common stockholders ensure that managers and directors have the same objectives as stockholders? Explain.

Accepted Answer

Not necessarily. Stockholders are usually interested in receiving the highest return possible and may even desire the firm to take additional risk if it means higher compensation. The managers and directors on the other hand may prefer job security and look at the increased risk as decreasing this job security if the results are poor, so may steer away from opportunities that stockholders would welcome. In fact, stockholders may not even be aware of the opportunities
because managers and directors do not present them. Also managers and directors may have their own interests in the sense that they prefer to manage a "larger" firm, feeling it increases their
own individual influence and power. As a result they may propose mergers or acquisitions, or additional layers of management which may not be in the best interest of the stockholders. In economics, this is known as the principal-agent conflict and is the focus of significant research in economics and management.

Question 3

Voting rights in a corporation are held by the:

Accepted Answer

A)  board of directors. 
B)  preferred stockholders. 
C)  corporate bondholders. 
D)  common stockholders. 
A)  board of directors. 
B)  preferred stockholders. 
C)  corporate bondholders. 
D)  common stockholders. D

Question 4

The fact that returns from the stock market are less volatile over long-periods of time suggests that:

Accepted Answer

A)  investors are more risk averse over the long run. 
B)  stock markets are efficient. 
C)  people get comfortable with the stocks they own. 
D)  stock market bubbles have become more common. 
A)  investors are more risk averse over the long run. 
B)  stock markets are efficient. 
C)  people get comfortable with the stocks they own. 
D)  stock market bubbles have become more common.

Question 5

The Standard & Poor's 500 Index differs from the DJIA in at least two major respects. What are the two major differences?

Accepted Answer

The S&P 500 Index differs from the DJIA

Question 6

Suppose there is a reduction of the return provided on U.S. Treasury bonds. We should expect the current price of stocks to: $ \mathrm{P}_{\text {today }}=\frac{\mathrm{D}_{\text {today }}(1+g)}{r f+r p-g} $

Accepted Answer

A)  increase since the risk-free return is now lower. 
B)  decrease since U.S. Treasury bonds are safer. 
C)  increase since the risk premium on the stocks will increase. 
D)  stay the same; there is no effect on stock prices from this reduction. 
A)  increase since the risk-free return is now lower. 
B)  decrease since U.S. Treasury bonds are safer. 
C)  increase since the risk premium on the stocks will increase. 
D)  stay the same; there is no effect on stock prices from this reduction.

Question 7

You start with a $1,000 portfolio; it loses 50% over the next year, the following year it gains 50% in value. At the end of two years your portfolio is worth:

Accepted Answer

A)  $1,000. 
B)  $500. 
C)  $750. 
D)  $950. 
A)  $1,000. 
B)  $500. 
C)  $750. 
D)  $950.

Question 8

The fact that common stockholders are residual claimants means the stockholders:

Accepted Answer

A)  have a claim against the revenue that remains after everyone else is paid. 
B)  receive their dividends before any other residuals are paid. 
C)  are paid any past due dividends before other claims are paid. 
D)  are paid before the bondholders but after any taxes are paid. 
A)  have a claim against the revenue that remains after everyone else is paid. 
B)  receive their dividends before any other residuals are paid. 
C)  are paid any past due dividends before other claims are paid. 
D)  are paid before the bondholders but after any taxes are paid.

Question 9

The Standard & Poor's 500 Index:

Accepted Answer

A)  gives more weight to large companies than small companies. 
B)  actually includes more than 500 of the largest corporations in the U.S. 
C)  is a price-weighted index. 
D)  assigns equal weight to all the prices of all the stocks in the index. 
A)  gives more weight to large companies than small companies. 
B)  actually includes more than 500 of the largest corporations in the U.S. 
C)  is a price-weighted index. 
D)  assigns equal weight to all the prices of all the stocks in the index.

Question 10

In the event of bankruptcy, stockholders:

Accepted Answer

A)  are paid before bondholders. 
B)  receive at least their initial investment due to limited liability. 
C)  could lose more than their initial investment. 
D)  are the last to be paid and could end up losing what they have invested. 
A)  are paid before bondholders. 
B)  receive at least their initial investment due to limited liability. 
C)  could lose more than their initial investment. 
D)  are the last to be paid and could end up losing what they have invested.

Question 11

The Nasdaq Composite Index:

Accepted Answer

A)  is made of of mainly newer, smaller firms. 
B)  is a price-weighted index. 
C)  is made up of over 5000 companies traded on the NYSE. 
D)  is made of mainly older firms and is heavily weighted by manufacturing. 
A)  is made of of mainly newer, smaller firms. 
B)  is a price-weighted index. 
C)  is made up of over 5000 companies traded on the NYSE. 
D)  is made of mainly older firms and is heavily weighted by manufacturing.

Question 12

A company currently pays an annual dividend of $6.50 per share. It expects the growth rate of the dividend will be 2.5% (0.025) annually. If the interest (discount) rate is 5% (0.05) what does the dividend-discount model predict the current price of the stock should be?

Accepted Answer

A)  It doesn't, you need an expected future price to use the model 
B)  $257.50 
C)  $130.00 
D)  $266.50 
A)  It doesn't, you need an expected future price to use the model 
B)  $257.50 
C)  $130.00 
D)  $266.50

Question 13

Mutual funds are characterized by the fact that they all:

Accepted Answer

A)  have the same management fee set by regulation. 
B)  require the same minimum investment of $10,000. 
C)  provide some degree of diversification. 
D)  provide the same degree of liquidity. 
A)  have the same management fee set by regulation. 
B)  require the same minimum investment of $10,000. 
C)  provide some degree of diversification. 
D)  provide the same degree of liquidity.

Question 14

You make a $1,000 investment in the stock of ABC Inc. Over the next year the investment decreases by 60%. What percentage increase do you need in the following year on your holding to be back to $1,000?

Accepted Answer

We can employ the formula from

Question 15

When studying world stock indexes, we observe that:

Accepted Answer

A)  the S&P 500 is largest in terms of index value. 
B)  most of the world's indexes are price-weighted. 
C)  the indexes are very comparable. 
D)  the indexes are comparable but only in percentage terms. 
A)  the S&P 500 is largest in terms of index value. 
B)  most of the world's indexes are price-weighted. 
C)  the indexes are very comparable. 
D)  the indexes are comparable but only in percentage terms.

Question 16

You have a value-weighted index made up of two companies. One company, we will call A, has a stock price of $25 per share and there are 10,000 shares outstanding. The other company, we will call B, has a stock price of $100 per share and has 1000 shares outstanding. What will be the percentage change in the index from a 10% increase in the share price of company A? What will be the percentage change in the index from a 10% increase in the share price of company B?

Accepted Answer

The value of company A is $250,000, whic

Question 17

As a company issues more debt:

Accepted Answer

A)  its leverage decreases. 
B)  the share of financing from equity increases. 
C)  the expected return to equity holders falls. 
D)  risk increases 
A)  its leverage decreases. 
B)  the share of financing from equity increases. 
C)  the expected return to equity holders falls. 
D)  risk increases

Question 18

Management fees for mutual funds are:

Accepted Answer

A)  fixed by regulation. 
B)  fixed by regulation and can vary by the size of the fund. 
C)  usually a percentage of the gains the fund achieves. 
D)  usually a percentage of the funds under management. 
A)  fixed by regulation. 
B)  fixed by regulation and can vary by the size of the fund. 
C)  usually a percentage of the gains the fund achieves. 
D)  usually a percentage of the funds under management.

Question 19

If the Dow Jones Industrial Average is currently at 10,000 and the price of one stock included in the index increases by $10, the Dow Jones Industrial Average will:

Accepted Answer

A)  not change; it is a value-weighted index. 
B)  increase by 10.0%. 
C)  increase by 1.0%. 
D)  increase by 0.1%. 
A)  not change; it is a value-weighted index. 
B)  increase by 10.0%. 
C)  increase by 1.0%. 
D)  increase by 0.1%.

Question 20

The concept of limited liability says a stockholder of a corporation:

Accepted Answer

A)  is liable for the corporation's liabilities, but nothing more. 
B)  cannot receive dividends that exceed his/her investment. 
C)  cannot lose more than his/her investment. 
D)  is only responsible for any taxes that the corporation may owe but not its other debts. 
A)  is liable for the corporation's liabilities, but nothing more. 
B)  cannot receive dividends that exceed his/her investment. 
C)  cannot lose more than his/her investment. 
D)  is only responsible for any taxes that the corporation may owe but not its other debts.

Exam 8: Stocks, Stock Markets and Market Efficiency

Which of the following could cause a stock market bubble?

Do the voting rights possessed by common stockholders ensure that managers and directors have the same objectives as stockholders? Explain.

Voting rights in a corporation are held by the:

The fact that returns from the stock market are less volatile over long-periods of time suggests that:

The Standard & Poor's 500 Index differs from the DJIA in at least two major respects. What are the two major differences?

Suppose there is a reduction of the return provided on U.S. Treasury bonds. We should expect the current price of stocks to: Ptoday =Dtoday (1+g)rf+rp−g \mathrm{P}_{\text {today }}=\frac{\mathrm{D}_{\text {today }}(1+g)}{r f+r p-g} Ptoday ​=rf+rp−gDtoday ​(1+g)​

You start with a $1,000 portfolio; it loses 50% over the next year, the following year it gains 50% in value. At the end of two years your portfolio is worth:

The fact that common stockholders are residual claimants means the stockholders:

The Standard & Poor's 500 Index:

In the event of bankruptcy, stockholders:

The Nasdaq Composite Index:

A company currently pays an annual dividend of $6.50 per share. It expects the growth rate of the dividend will be 2.5% (0.025) annually. If the interest (discount) rate is 5% (0.05) what does the dividend-discount model predict the current price of the stock should be?

Mutual funds are characterized by the fact that they all:

You make a $1,000 investment in the stock of ABC Inc. Over the next year the investment decreases by 60%. What percentage increase do you need in the following year on your holding to be back to $1,000?

When studying world stock indexes, we observe that:

As a company issues more debt:

Management fees for mutual funds are:

If the Dow Jones Industrial Average is currently at 10,000 and the price of one stock included in the index increases by $10, the Dow Jones Industrial Average will:

The concept of limited liability says a stockholder of a corporation:

An Introduction to Money and the Financial System

Money and the Payments System

Financial Instruments, Financial Markets, and Financial Institutions

Future Value, Present Value and Interest Rates

Understanding Risk

Bonds, Bond Prices, and the Determination of Interest Rates

The Risk and Term Structure of Interest Rates

Derivatives: Futures, Options, and Swaps

Foreign Exchange

The Economics of Financial Intermediation

Depository Institutions: Banks and Bank Management

Financial Industry Structure

Regulating the Financial System

Central Banks in the World Today

The Structure of Central Banks: The Federal Reserve and the European Central Bank

The Central Bank Balance Sheet and the Money Supply Process

Monetary Policy: Stabilizing the Domestic Economy

Exchange Rate Policy and the Central Bank

Money Growth, Money Demand and Modern Monetary Policy

Output, Inflation, and Monetary Policy

Understanding Business Cycle Fluctuations

Modern Monetary Policy and the Challenges Facing Central Bankers

Filters

Suppose there is a reduction of the return provided on U.S. Treasury bonds. We should expect the current price of stocks to: $\mathrm{P}_{\text {today }}=\frac{\mathrm{D}_{\text {today }}(1+g)}{r f+r p-g}$