Question 1

When stock prices reflect fundamental values:

Accepted Answer

A)  all investors will have positive returns. 
B)  the allocation of resources will be more efficient. 
C)  all companies will have an easier task of obtaining financing for investment projects. 
D)  the overall level of the stock market should move higher. 
A)  all investors will have positive returns. 
B)  the allocation of resources will be more efficient. 
C)  all companies will have an easier task of obtaining financing for investment projects. 
D)  the overall level of the stock market should move higher.

Question 2

Stock market bubbles impact consumers by:

Accepted Answer

A)  encouraging greater consumption and greater saving. 
B)  encouraging greater consumption and less saving. 
C)  encouraging more work and delaying retirement. 
D)  resulting in less investment in home ownership and more into stocks. 
A)  encouraging greater consumption and greater saving. 
B)  encouraging greater consumption and less saving. 
C)  encouraging more work and delaying retirement. 
D)  resulting in less investment in home ownership and more into stocks.

Question 3

Which of the following statements is most correct?

Accepted Answer

A)  Stockholders have limited liability and have no control over corporate leadership. 
B)  Stockholders can dislodge the managers of the corporation but not the board of directors. 
C)  Stockholders have unlimited liability and can dislodge members of the board of directors. 
D)  Stockholders can dislodge members of the board and have limited liability. 
A)  Stockholders have limited liability and have no control over corporate leadership. 
B)  Stockholders can dislodge the managers of the corporation but not the board of directors. 
C)  Stockholders have unlimited liability and can dislodge members of the board of directors. 
D)  Stockholders can dislodge members of the board and have limited liability.

Question 4

Discuss how changes in economic conditions are likely to affect the equity-risk premium and stock prices. Considering the risks associated with investing in stocks (over short periods of time), what types of investments would you expect investors to buy during an economic recession?

Accepted Answer

If investors expect a recession, it is l

Question 5

If each company that made up the Dow Jones Industrial Average increased the number of their shares outstanding by 10%, but the share prices did not change, the value of the index would:

Accepted Answer

A)  not change. 
B)  increase by 10%. 
C)  increase, but by less than 10%. 
D)  decrease since there are more shares outstanding. 
A)  not change. 
B)  increase by 10%. 
C)  increase, but by less than 10%. 
D)  decrease since there are more shares outstanding.

Question 6

You are a top Treasury official for a developing country who has been asked for advice on how to best open the nation's stock market to foreign investment. Previously, the government did not permit foreigners to purchase domestic stock. Now, the government has a plan to create two markets: one for domestic residents and one for foreign investment. What are the potential drawbacks of this system, compared to allowing both domestic and foreign investors to trade in the same market? What are the larger implications for economic efficiency? How might the government be able to address these issues?

Accepted Answer

The creation of two distinct markets wil

Question 7

Stock market bubbles typically lead to all of the following except:

Accepted Answer

A)  an efficient allocation of resources. 
B)  stock market crashes. 
C)  patterns of volatile returns from the stock market. 
D)  gaps between actual stock prices and those warranted by the fundamentals. 
A)  an efficient allocation of resources. 
B)  stock market crashes. 
C)  patterns of volatile returns from the stock market. 
D)  gaps between actual stock prices and those warranted by the fundamentals.

Question 8

As the corporation uses more debt financing, which of the following holds true for the stockholders?

Accepted Answer

A)  The expected return to the stockholders decreases and the standard deviation of that return decreases. 
B)  The expected return to the stockholders increases and the standard deviation of the return decreases. 
C)  The expected return to the stockholders increases and the standard deviation of the return increases. 
D)  The expected return to the stockholders decreases and the standard deviation of the return increases. 
A)  The expected return to the stockholders decreases and the standard deviation of that return decreases. 
B)  The expected return to the stockholders increases and the standard deviation of the return decreases. 
C)  The expected return to the stockholders increases and the standard deviation of the return increases. 
D)  The expected return to the stockholders decreases and the standard deviation of the return increases.

Question 9

When comparing stock indexes around the world we:

Accepted Answer

A)  find that a given percentage change across all indexes has the same value. 
B)  observe that they always move together. 
C)  can see that the numeric change in indices allows investors to make easy comparisons of value. 
D)  can examine their respective movements if we look at them as percentage changes. 
A)  find that a given percentage change across all indexes has the same value. 
B)  observe that they always move together. 
C)  can see that the numeric change in indices allows investors to make easy comparisons of value. 
D)  can examine their respective movements if we look at them as percentage changes.

Question 10

Two characteristics that make owning stock attractive are:

Accepted Answer

A)  unlimited liability and first claim on assets. 
B)  share prices are relatively inexpensive and are transferable. 
C)  each share represents a large percentage of ownership and dividends are fixed. 
D)  dividends are paid before any other distributions are made and stocks are transferable. 
A)  unlimited liability and first claim on assets. 
B)  share prices are relatively inexpensive and are transferable. 
C)  each share represents a large percentage of ownership and dividends are fixed. 
D)  dividends are paid before any other distributions are made and stocks are transferable.

Question 11

Without the stockholders' limited liability, the risk from the use of leverage would:

Accepted Answer

A)  be significantly less. 
B)  be significantly greater. 
C)  still be the same. 
D)  be irrelevant. 
A)  be significantly less. 
B)  be significantly greater. 
C)  still be the same. 
D)  be irrelevant.

Question 12

You have a portfolio valued at $1,000. Over the next twelve months it loses 75% of its value. What return does the portfolio need to earn over the following twelve months to restore the portfolio to its original value?

Accepted Answer

A)  75% 
B)  200% 
C)  300% 
D)  25% 
A)  75% 
B)  200% 
C)  300% 
D)  25%

Question 13

If a public corporation goes bankrupt and does not have enough assets to pay off all creditors:

Accepted Answer

A)  the stockholders are personally liable for the balance. 
B)  the fact that stockholders are residual claimants means they may have to pay in additional capital to cover the obligations. 
C)  the stockholders receive any dividends due before the other creditors are paid. 
D)  the stockholders cannot lose more than their investment. 
A)  the stockholders are personally liable for the balance. 
B)  the fact that stockholders are residual claimants means they may have to pay in additional capital to cover the obligations. 
C)  the stockholders receive any dividends due before the other creditors are paid. 
D)  the stockholders cannot lose more than their investment.

Question 14

You have a portfolio valued at $10,000. Over the next twelve months it loses 50% of its value. What return does the portfolio need to earn over the following twelve months to be restored to its original value?

Accepted Answer

A)  100% 
B)  50% 
C)  200% 
D)  25% 
A)  100% 
B)  50% 
C)  200% 
D)  25%

Question 15

Index funds are often preferred to other mutual funds because:

Accepted Answer

A)  they offer greater diversification. 
B)  they are managed better. 
C)  they have greater liquidity. 
D)  on average they have lower management fees. 
A)  they offer greater diversification. 
B)  they are managed better. 
C)  they have greater liquidity. 
D)  on average they have lower management fees.

Question 16

The Standard & Poor's 500 Index differs from the Dow Jones Industrial Index because:

Accepted Answer

A)  it takes into account the stock prices of 500 of the largest firms, which is less than the DJIA. 
B)  it is a price-weighted index, where the DJIA is a value-weighted index. 
C)  larger firms are less important in the S&P 500 than in the DJIA. 
D)  it takes into account the prices of more stocks and it uses a different weighting scheme. 
A)  it takes into account the stock prices of 500 of the largest firms, which is less than the DJIA. 
B)  it is a price-weighted index, where the DJIA is a value-weighted index. 
C)  larger firms are less important in the S&P 500 than in the DJIA. 
D)  it takes into account the prices of more stocks and it uses a different weighting scheme.

Question 17

The basic dividend-discount model is a bit of an oversimplification for valuing stocks because it:

Accepted Answer

A)  ignores expected dividend growth. 
B)  ignores the value of future dividends. 
C)  ignores the risk involved in holding stocks. 
D)  cannot handle stocks that do not pay dividends. 
A)  ignores expected dividend growth. 
B)  ignores the value of future dividends. 
C)  ignores the risk involved in holding stocks. 
D)  cannot handle stocks that do not pay dividends.

Question 18

Why must caution be employed in comparing stock indexes across countries?

Accepted Answer

Since stock indexes are made up of diffe

Question 19

Considering the S&P 500 Index, if each company's stock price increased by 10%:

Accepted Answer

A)  the weights in the index would remain the same. 
B)  the companies with the most shares outstanding would have even greater weight after the increase. 
C)  the companies with fewer shares would gain more weight at the expense of the companies with greater shares. 
D)  the weights in the index would change to reflect the percentage changes in the prices of the various stocks. 
A)  the weights in the index would remain the same. 
B)  the companies with the most shares outstanding would have even greater weight after the increase. 
C)  the companies with fewer shares would gain more weight at the expense of the companies with greater shares. 
D)  the weights in the index would change to reflect the percentage changes in the prices of the various stocks.

Question 20

Which of the following statements is most correct?

Accepted Answer

A)  Managers, directors, and stockholders almost always share the same interest. 
B)  Managers' and directors' interests often conflict with stockholders' interest. 
C)  Managers and stockholders have the same interests, but this usually conflicts with the interests of directors. 
D)  Directors and stockholders have the same interests, but this usually conflicts with the interests of managers. 
A)  Managers, directors, and stockholders almost always share the same interest. 
B)  Managers' and directors' interests often conflict with stockholders' interest. 
C)  Managers and stockholders have the same interests, but this usually conflicts with the interests of directors. 
D)  Directors and stockholders have the same interests, but this usually conflicts with the interests of managers.

Exam 8: Stocks, Stock Markets and Market Efficiency

When stock prices reflect fundamental values:

Stock market bubbles impact consumers by:

Which of the following statements is most correct?

Discuss how changes in economic conditions are likely to affect the equity-risk premium and stock prices. Considering the risks associated with investing in stocks (over short periods of time), what types of investments would you expect investors to buy during an economic recession?

If each company that made up the Dow Jones Industrial Average increased the number of their shares outstanding by 10%, but the share prices did not change, the value of the index would:

Stock market bubbles typically lead to all of the following except:

As the corporation uses more debt financing, which of the following holds true for the stockholders?

When comparing stock indexes around the world we:

Two characteristics that make owning stock attractive are:

Without the stockholders' limited liability, the risk from the use of leverage would:

You have a portfolio valued at $1,000. Over the next twelve months it loses 75% of its value. What return does the portfolio need to earn over the following twelve months to restore the portfolio to its original value?

If a public corporation goes bankrupt and does not have enough assets to pay off all creditors:

You have a portfolio valued at $10,000. Over the next twelve months it loses 50% of its value. What return does the portfolio need to earn over the following twelve months to be restored to its original value?

Index funds are often preferred to other mutual funds because:

The Standard & Poor's 500 Index differs from the Dow Jones Industrial Index because:

The basic dividend-discount model is a bit of an oversimplification for valuing stocks because it:

Why must caution be employed in comparing stock indexes across countries?

Considering the S&P 500 Index, if each company's stock price increased by 10%:

Which of the following statements is most correct?

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

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