Question 1

Discuss the inefficiencies that can be caused by stock market bubbles, especially focusing on firms and consumers.

Accepted Answer

Stock market bubbles can lead to the ine

Question 2

The Nasdaq Composite Index is:

Accepted Answer

A)  made up of over 50,000 firms traded on the Over-the-Counter market.? 
B)  a price-weighted index. 
C)  made up of mainly newer firms, and heavily influenced by technology and internet companies. 
D)  the most broadly based index in use. 
A)  made up of over 50,000 firms traded on the Over-the-Counter market.? 
B)  a price-weighted index. 
C)  made up of mainly newer firms, and heavily influenced by technology and internet companies. 
D)  the most broadly based index in use.

Question 3

You hear someone claim that stocks are less risky than bonds. What possible evidence could this person offer for such a claim?

Accepted Answer

Professor Jeremy Siegel's research point

Question 4

The investment you made in a mutual fund one year ago lost 50% of its value over the past year. What percentage increase is needed in the fund to restore your portfolio to the level it was one year ago?

Accepted Answer

We can employ the formula from

Question 5

Professor Jeremy Siegel, of the University of Pennsylvania, conducted research that showed that:

Accepted Answer

A)  over the long run, stocks have been less risky than bonds. 
B)  over the long run, bonds have been less risky than stocks. 
C)  over the long run, bonds frequently outperform stocks. 
D)  investors should only own stocks for short periods of time to maximize returns. 
A)  over the long run, stocks have been less risky than bonds. 
B)  over the long run, bonds have been less risky than stocks. 
C)  over the long run, bonds frequently outperform stocks. 
D)  investors should only own stocks for short periods of time to maximize returns.

Question 6

The fact that many corporations use debt financing as well as equity financing creates all of the following except:

Accepted Answer

A)  the opportunity for a greater expected return for the stockholders. 
B)  greater risk for the stockholders. 
C)  leverage for the stockholders. 
D)  consistently lower debt-to-equity ratios. 
A)  the opportunity for a greater expected return for the stockholders. 
B)  greater risk for the stockholders. 
C)  leverage for the stockholders. 
D)  consistently lower debt-to-equity ratios.

Question 7

Which of the following statements is not true?

Accepted Answer

A)  A value-weighted index is a better index to use to reflect changes in the economy's overall wealth. 
B)  A price-weighted index is a better index to use to reflect the average change in the price of a typical share of stock. 
C)  The Dow Jones Industrial Average is a price-weighted index. 
D)  The S&P 500 is a price-weighted index. 
A)  A value-weighted index is a better index to use to reflect changes in the economy's overall wealth. 
B)  A price-weighted index is a better index to use to reflect the average change in the price of a typical share of stock. 
C)  The Dow Jones Industrial Average is a price-weighted index. 
D)  The S&P 500 is a price-weighted index.

Question 8

A share of stock resembles a consol in all of the following ways except that the:

Accepted Answer

A)  share of stock does not have a maturity date. 
B)  annual dividend the stock pays resembles the coupon on a consol. 
C)  prices of both can be computed using a variation of the net present value formula. 
D)  are both residual claims. 
A)  share of stock does not have a maturity date. 
B)  annual dividend the stock pays resembles the coupon on a consol. 
C)  prices of both can be computed using a variation of the net present value formula. 
D)  are both residual claims.

Question 9

XYZ Inc. announces plans to finance the expansion of the firm by issuing hundreds of millions of dollars of bonds. Discuss how the current stockholders of XYZ Inc. will feel about this plan.

Accepted Answer

The common stockholders may have mixed f

Question 10

A stock has a current annual dividend of $6.00 per year and it is expected to grow by 3% (0.03) a year. It is expected that two years from now the stock will sell for $90.00 a share. If the interest rate is 5% (0.05), the dividend-discount model predicts the stock's current price should be:

Accepted Answer

A)  $94.90 
B)  $93.29 
C)  $101.30 
D)  $94.30 
A)  $94.90 
B)  $93.29 
C)  $101.30 
D)  $94.30

Question 11

From the perspective of the theory of efficient markets, explain why it may be difficult for professional portfolio managers who have an exceptional year to continuously outperform the market average.

Accepted Answer

A professional money manager who has an

Question 12

Next year, the price of a stock is expected to be $2,200 and the stock will pay a $55 dividend. The interest rate is 10%. Based on the dividend-discount model, what is the current price of this stock?

Accepted Answer

A)  $1,980 
B)  $2,000 
C)  $2,050 
D)  $2,035 
A)  $1,980 
B)  $2,000 
C)  $2,050 
D)  $2,035

Question 13

What price would an individual be willing to pay today for a stock that is expected to sell for $100 two years from now and which pays an annual dividend that is $6.00? Assume the individual has a discount rate of 8% (0.08).

Accepted Answer

We can use the formula from the chapter

Question 14

The theory of efficient markets:

Accepted Answer

A)  rules out high returns due to chance. 
B)  says insider information makes markets less efficient. 
C)  allows for higher than average returns if the investor takes higher than average risk. 
D)  assumes people have equal luck. 
A)  rules out high returns due to chance. 
B)  says insider information makes markets less efficient. 
C)  allows for higher than average returns if the investor takes higher than average risk. 
D)  assumes people have equal luck.

Question 15

Which of the following will cause an increase in the current price of a stock? $ \mathrm{P}_{\text {today }}=\frac{\mathrm{D}_{\text {today }}(1+g)}{r f+r p-g} $

Accepted Answer

A)  A decrease in the risk-free return 
B)  A decrease in the current dividend 
C)  A decrease in the dividend growth rate 
D)  Both an increase in the risk-free return or an increase in the current dividend 
A)  A decrease in the risk-free return 
B)  A decrease in the current dividend 
C)  A decrease in the dividend growth rate 
D)  Both an increase in the risk-free return or an increase in the current dividend

Question 16

Consider the effect of business cycles on bondholders versus stockholders. We expect that business cycles will affect:

Accepted Answer

A)  bondholders and stockholders about the same. 
B)  bondholders more since the amount they receive depends on profits. 
C)  stockholders more since they are residual claimants. 
D)  bondholders more since they do not have any claim to property. 
A)  bondholders and stockholders about the same. 
B)  bondholders more since the amount they receive depends on profits. 
C)  stockholders more since they are residual claimants. 
D)  bondholders more since they do not have any claim to property.

Question 17

The Dow Jones Industrial Average is:

Accepted Answer

A)  an index made up of the stock prices of the 100 largest corporations in the U.S. 
B) an index that measures the value of purchasing 100 shares in each of the corporations that make up the index. 
C)  the average price of stock in 30 of the largest companies in the U.S. 
D)  the broadest measure of stock market performance. 
A)  an index made up of the stock prices of the 100 largest corporations in the U.S. 
B) an index that measures the value of purchasing 100 shares in each of the corporations that make up the index. 
C)  the average price of stock in 30 of the largest companies in the U.S. 
D)  the broadest measure of stock market performance.

Question 18

What price would an individual be willing to pay today for a stock he/she expects can be sold for $200 one year from now, if the individual has a discount rate of 6% (.06) and the stock pays an annual dividend of $7.50?

Accepted Answer

We can use the following formula to dete

Question 19

Compare/contrast the Nasdaq Composite Index with the Dow Jones Industrial Average.

Accepted Answer

The Nasdaq is a value-weighted index, wh

Question 20

Explain how a well-functioning stock market contributes to the efficiency of the economy.

Accepted Answer

If the prices of stocks reflect fundamen

Exam 8: Stocks, Stock Markets and Market Efficiency

Discuss the inefficiencies that can be caused by stock market bubbles, especially focusing on firms and consumers.

The Nasdaq Composite Index is:

You hear someone claim that stocks are less risky than bonds. What possible evidence could this person offer for such a claim?

The investment you made in a mutual fund one year ago lost 50% of its value over the past year. What percentage increase is needed in the fund to restore your portfolio to the level it was one year ago?

Professor Jeremy Siegel, of the University of Pennsylvania, conducted research that showed that:

The fact that many corporations use debt financing as well as equity financing creates all of the following except:

Which of the following statements is not true?

A share of stock resembles a consol in all of the following ways except that the:

XYZ Inc. announces plans to finance the expansion of the firm by issuing hundreds of millions of dollars of bonds. Discuss how the current stockholders of XYZ Inc. will feel about this plan.

A stock has a current annual dividend of $6.00 per year and it is expected to grow by 3% (0.03) a year. It is expected that two years from now the stock will sell for $90.00 a share. If the interest rate is 5% (0.05), the dividend-discount model predicts the stock's current price should be:

From the perspective of the theory of efficient markets, explain why it may be difficult for professional portfolio managers who have an exceptional year to continuously outperform the market average.

Next year, the price of a stock is expected to be $2,200 and the stock will pay a $55 dividend. The interest rate is 10%. Based on the dividend-discount model, what is the current price of this stock?

What price would an individual be willing to pay today for a stock that is expected to sell for $100 two years from now and which pays an annual dividend that is $6.00? Assume the individual has a discount rate of 8% (0.08).

The theory of efficient markets:

Which of the following will cause an increase in the current price of a stock? 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)​

Consider the effect of business cycles on bondholders versus stockholders. We expect that business cycles will affect:

The Dow Jones Industrial Average is:

What price would an individual be willing to pay today for a stock he/she expects can be sold for $200 one year from now, if the individual has a discount rate of 6% (.06) and the stock pays an annual dividend of $7.50?

Compare/contrast the Nasdaq Composite Index with the Dow Jones Industrial Average.

Explain how a well-functioning stock market contributes to the efficiency of the economy.

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

Which of the following will cause an increase in the current price of a stock? $\mathrm{P}_{\text {today }}=\frac{\mathrm{D}_{\text {today }}(1+g)}{r f+r p-g}$