Exam 8: Stocks, Stock Markets and Market Efficiency

You start with a portfolio valued at $500. Over the next twelve months it loses 40%; the following year it has a gain of 30%. At the end of two years your portfolio is worth:

An index number is valuable because:

The stock market bubble of the late 1990s and early 2000s:

What do bondholders and stockholders have in common?

If you understood the discussion of the characteristics of common stocks, you should be able to explain the following statement: One of the benefits from stock ownership is the unlimited upside potential and the limited downside. What does this statement mean?

In the first calendar quarter a company issues a surprising report saying that it expects profits to rise in the fourth quarter. The theory of efficient markets says we should expect the price of the company's stock to:

The Dow Jones Industrial Average is a:

Identify the ways in which a bondholder's rights differ from those of a stockholder. In what ways do they differ when a firm is bankrupt?

The notion that stock prices reflect all current available information:

Why does the theory of efficient markets imply that stock price movements are unpredictable?

Which of the following is not a feature of common stock?

According to the theory of efficient markets, mutual fund managers may be expected to earn above-average returns if they:

If a company reports that it is going to have a difficult time meeting its debt obligations, you would expect the Ptoday: $\mathrm{P}_{\text {today }}=\frac{\mathrm{D}_{\text {today }}(1+g)}{r f+r p-g}$

Discuss whether the economy would be more or less efficient if public corporations issued fewer shares of stock.

People who claim to have the ability to accurately predict the future prices of stocks:

After one year, a company will pay $5 in dividends. It commits to paying $5.30 two years from the current date. This growth rate for dividends is expected to continue indefinitely. The U.S. Treasury bond yield is 8% and the equity-risk premium is equal to 2.5%. Compute the required stock return and current price of this stock, using the dividend-discount model.

A stock currently does not pay an annual dividend. An investor expects this policy to remain in force. She believes, however, the stock of this company will sell for $110.00 per share four years from now. If she has an interest (discount) rate of 7% (0.07), the dividend discount model predicts the current price of this stock should be:

The most broadly based stock index in use is the:

The dividends that stockholders receive are:

Stocks appear to present risk, yet many people have substantial parts of their wealth invested in them. This behavior could be explained by: