Question 1

Identify at least two reasons an investor may want to consider an index fund over a managed (mutual) fund. What are these reasons?

Accepted Answer

(1) Managed funds or mutual funds tended

Question 2

Companies whose stocks increase the most during a stock market bubble will:

Accepted Answer

A)  have a difficult time raising investment capital. 
B)  tend to under-invest. 
C)  usually rebound faster once the bubble bursts. 
D)  find it difficult to put their capital to profitable use after the bubble bursts. 
A)  have a difficult time raising investment capital. 
B)  tend to under-invest. 
C)  usually rebound faster once the bubble bursts. 
D)  find it difficult to put their capital to profitable use after the bubble bursts.

Question 3

Why does the Dow Jones Industrial Average have a value over 15,000 when the 30 stocks that make up the index all have values less than $200 per share?

Accepted Answer

The DJIA accounts for stock sp

Question 4

Is the efficient markets hypothesis (EMH) responsible for the financial crisis of 2007-
2009?

Accepted Answer

Hardly. The hypothesis does not claim th

Question 5

What price would an individual would be willing to pay for a stock that currently pays a
$5.00 annual dividend if the individual expects the dividend to grow by 4% (0.04) per year and the individual has a discount rate of 6.0% (0.06)?

Accepted Answer

We can calculate the Ptₒdₐᵧ by using equ

Question 6

The required stock return an investor seeks can best be represented by which of the following?

Accepted Answer

A)  Risk Premium - Risk-free Return 
B)  Risk-free Return × Risk Premium 
C)  (Risk-free Return + Risk Premium)/(1 + i) 
D)  Risk-free Return + Risk Premium 
A)  Risk Premium - Risk-free Return 
B)  Risk-free Return × Risk Premium 
C)  (Risk-free Return + Risk Premium)/(1 + i) 
D)  Risk-free Return + Risk Premium

Question 7

What possibilities exist to explain the claim made by many professional portfolio managers that they can exceed the average stock market return year after year?

Accepted Answer

As the chapter points out there are four

Question 8

Stock market bubbles are:

Accepted Answer

A)  the increase in a stock's price resulting from reported higher profits by a firm. 
B)  persistent and expanding gaps between stocks' actual prices and the prices warranted by the fundamentals. 
C)  synonymous to stock market crashes. 
D)  those periods of time when the overall level of the stock market is rising at a slow rate reflecting market fundamentals. 
A)  the increase in a stock's price resulting from reported higher profits by a firm. 
B)  persistent and expanding gaps between stocks' actual prices and the prices warranted by the fundamentals. 
C)  synonymous to stock market crashes. 
D)  those periods of time when the overall level of the stock market is rising at a slow rate reflecting market fundamentals.

Question 9

If the Dow Jones Industrial Average is at 10,205 and it is up 4% from the previous day, what was the index at the close of the market the previous day?

Accepted Answer

A)  10,201.0 
B)  9,805.0 
C)  9,812.5 
D)  9800. 0 
A)  10,201.0 
B)  9,805.0 
C)  9,812.5 
D)  9800. 0

Question 10

The Dow Jones Industrial Average:

Accepted Answer

A)  gives equal weight to a change in the price of the stock of any company in the index. 
B)  reflects that a 10% increase in a share of stock selling for $30 will have the same effect on the index as a 10% increase in the price of a stock selling for $60. 
C)  is a value-weighted index. 
D)  gives greater weight to shares with higher prices. 
A)  gives equal weight to a change in the price of the stock of any company in the index. 
B)  reflects that a 10% increase in a share of stock selling for $30 will have the same effect on the index as a 10% increase in the price of a stock selling for $60. 
C)  is a value-weighted index. 
D)  gives greater weight to shares with higher prices.

Question 11

You have a price-weighted index made up of two stocks, A and B. The price of A equals
$30 and the price of B equals $70. What is the current value of this index? Also, what will be the percentage change in the index resulting from a 10 % increase only in the price of A? A 10% increase only in the price of B?

Accepted Answer

The current value of the index is 50. Th

Question 12

Management fees for mutual funds are:

Accepted Answer

A)  different across funds and can significantly impact the return to an investor. 
B)  fixed by regulation. 
C)  fixed by regulation but can vary by the size of the fund. 
D)  usually a percentage of the return achieved by fund managers. 
A)  different across funds and can significantly impact the return to an investor. 
B)  fixed by regulation. 
C)  fixed by regulation but can vary by the size of the fund. 
D)  usually a percentage of the return achieved by fund managers.

Question 13

According to the theory of efficient markets:

Accepted Answer

A)  investors use rules of thumb to make choices about which stocks to buy and sell. 
B)  investors are able to use forecasts based on the dividend-discount model to generate above- average returns. 
C)  a portfolio manager who charges no commission should not, on average, outperform an individual investor with access to the same funds. 
D)  the stock price should remain constant. 
A)  investors use rules of thumb to make choices about which stocks to buy and sell. 
B)  investors are able to use forecasts based on the dividend-discount model to generate above- average returns. 
C)  a portfolio manager who charges no commission should not, on average, outperform an individual investor with access to the same funds. 
D)  the stock price should remain constant.

Question 14

A company currently pays a dividend of $4.00 per share. It expects the growth rate of the dividend to be 3% (0.03) annually. If the interest rate is 6% (0.06) what does the dividend- discount model predict the current price of the stock should be?

Accepted Answer

A)  $103.33 
B)  it doesn't, you need an expected future selling price to use the model. 
C)  $ 137.33 
D)  $66.67 
A)  $103.33 
B)  it doesn't, you need an expected future selling price to use the model. 
C)  $ 137.33 
D)  $66.67

Question 15

Many small companies currently pay no dividends to their shareholders. Based on the dividend discount model, how is it possible for these stocks to sell for a positive price?

Accepted Answer

According to the dividend discount model

Question 16

Some good did come from the internet bubble of the late 1990s. One good thing was that:

Accepted Answer

A)  people learned they should not invest in dotcom companies. 
B)  start-up companies found they could bypass venture capitalists and raise funds directly from the capital markets. 
C)  stock market bubbles do not have to result in an inefficient allocation of resources. 
D)  the theory of efficient markets doesn't always hold and consistently better-than-market returns are achievable. 
A)  people learned they should not invest in dotcom companies. 
B)  start-up companies found they could bypass venture capitalists and raise funds directly from the capital markets. 
C)  stock market bubbles do not have to result in an inefficient allocation of resources. 
D)  the theory of efficient markets doesn't always hold and consistently better-than-market returns are achievable.

Question 17

The price of a stock is currently $750 and the stock will pay a $43 dividend. The interest rate is 7.5%. Based on the dividend-discount model, what is the expected price of this stock for next year?

Accepted Answer

A)  $651.17 
B)  $657.67 
C)  $691.17 
D)  $763.25 
A)  $651.17 
B)  $657.67 
C)  $691.17 
D)  $763.25

Question 18

The dividend-discount model predicts that stock prices:

Accepted Answer

A)  should be high when dividends are high. 
B)  will be high when interest rates are high. 
C)  will be higher when the growth rate of dividends is low. 
D)  should be high when dividends are low. 
A)  should be high when dividends are high. 
B)  will be high when interest rates are high. 
C)  will be higher when the growth rate of dividends is low. 
D)  should be high when dividends are low.

Question 19

The theory of efficient markets implies:

Accepted Answer

A)  stock prices should be highly unpredictable. 
B)  the price at which stocks currently trade only reflect past information. 
C)  expectations do not play a role in stock prices because this isn't real information. 
D)  the chartists are in fact correct that there are patterns in stock prices. 
A)  stock prices should be highly unpredictable. 
B)  the price at which stocks currently trade only reflect past information. 
C)  expectations do not play a role in stock prices because this isn't real information. 
D)  the chartists are in fact correct that there are patterns in stock prices.

Question 20

Use the five issues an investor should consider when purchasing stock to explain the popularity of mutual funds.

Accepted Answer

(1) Affordability, (2) liquidity, (3) di

Exam 8: Stocks, Stock Markets and Market Efficiency

Identify at least two reasons an investor may want to consider an index fund over a managed (mutual) fund. What are these reasons?

Companies whose stocks increase the most during a stock market bubble will:

Why does the Dow Jones Industrial Average have a value over 15,000 when the 30 stocks that make up the index all have values less than $200 per share?

Is the efficient markets hypothesis (EMH) responsible for the financial crisis of 2007- 2009?

What price would an individual would be willing to pay for a stock that currently pays a $5.00 annual dividend if the individual expects the dividend to grow by 4% (0.04) per year and the individual has a discount rate of 6.0% (0.06)?

The required stock return an investor seeks can best be represented by which of the following?

What possibilities exist to explain the claim made by many professional portfolio managers that they can exceed the average stock market return year after year?

Stock market bubbles are:

If the Dow Jones Industrial Average is at 10,205 and it is up 4% from the previous day, what was the index at the close of the market the previous day?

The Dow Jones Industrial Average:

Management fees for mutual funds are:

According to the theory of efficient markets:

A company currently pays a dividend of $4.00 per share. It expects the growth rate of the dividend to be 3% (0.03) annually. If the interest rate is 6% (0.06) what does the dividend- discount model predict the current price of the stock should be?

Many small companies currently pay no dividends to their shareholders. Based on the dividend discount model, how is it possible for these stocks to sell for a positive price?

Some good did come from the internet bubble of the late 1990s. One good thing was that:

The price of a stock is currently $750 and the stock will pay a $43 dividend. The interest rate is 7.5%. Based on the dividend-discount model, what is the expected price of this stock for next year?

The dividend-discount model predicts that stock prices:

The theory of efficient markets implies:

Use the five issues an investor should consider when purchasing stock to explain the popularity of mutual funds.

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