Question 1

Investment in a broad portfolio of stocks is most attractive for

Accepted Answer

A) short-term investors. 
B) long-term investors. 
C) investors seeking a steady rate of return. 
D) investors who will need the funds for other purposes in about 10 years. 
A) short-term investors. 
B) long-term investors. 
C) investors seeking a steady rate of return. 
D) investors who will need the funds for other purposes in about 10 years. B

Question 2

A lower interest rate will increase the present value of future income and thereby

Accepted Answer

A) decrease the market value of stocks. 
B) increase the market value of stocks. 
C) have no effect on the market value of stocks. 
D) decrease the discounted market value of stocks. 
A) decrease the market value of stocks. 
B) increase the market value of stocks. 
C) have no effect on the market value of stocks. 
D) decrease the discounted market value of stocks. B

Question 3

Which of the following is true?

Accepted Answer

A) Most stockholders own stock because they want to run the business. 
B) The shareholders of a large well-established firm can be reasonably sure that they will earn a real rate of return of about 7 percent in the future. 
C) Ownership of a corporate bond provides the bondholder with an ownership right to a fraction of the firm's future profits. 
D) Stock ownership makes it possible for investors to own a fractional share of a firm's future profits even if they do not participate in the operation of the firm. 
A) Most stockholders own stock because they want to run the business. 
B) The shareholders of a large well-established firm can be reasonably sure that they will earn a real rate of return of about 7 percent in the future. 
C) Ownership of a corporate bond provides the bondholder with an ownership right to a fraction of the firm's future profits. 
D) Stock ownership makes it possible for investors to own a fractional share of a firm's future profits even if they do not participate in the operation of the firm. D

Question 4

Since 1802, the average annual compound return for stock holdings, adjusted for inflation, has been approximately

Accepted Answer

A) 2 percent. 
B) 7 percent. 
C) 15 percent. 
D) 30 percent. 
A) 2 percent. 
B) 7 percent. 
C) 15 percent. 
D) 30 percent.

Question 5

Which of the following would be most likely to push stock prices higher?

Accepted Answer

A) higher interest rates and the expectation of larger future corporate profits 
B) higher interest rates and the expectation of smaller future corporate profits 
C) lower interest rates and the expectation of larger future corporate profits 
D) lower interest rates and the expectation of smaller future corporate profits 
A) higher interest rates and the expectation of larger future corporate profits 
B) higher interest rates and the expectation of smaller future corporate profits 
C) lower interest rates and the expectation of larger future corporate profits 
D) lower interest rates and the expectation of smaller future corporate profits

Question 6

Which of the following is true?

Accepted Answer

A) The stock market helps channel the savings of individuals into business activities that create wealth. 
B) Individual investors can reduce their risk by holding a large share of their wealth in the form of the stock ownership of a single company. 
C) Historically, the long-term real rate of return of stocks has generally been less than that of bonds. 
D) Mutual funds that have done well in the past are more likely to outperform the market average in the future. 
A) The stock market helps channel the savings of individuals into business activities that create wealth. 
B) Individual investors can reduce their risk by holding a large share of their wealth in the form of the stock ownership of a single company. 
C) Historically, the long-term real rate of return of stocks has generally been less than that of bonds. 
D) Mutual funds that have done well in the past are more likely to outperform the market average in the future.

Question 7

Many personal finance magazines such as Money and Smart Money routinely give advice as to which stocks to buy. Should you take their advice?

Accepted Answer

Current stock prices will reflect all of

Question 8

Stock market analysts often argue that lower interest rates are good for the stock market. Does this argument make sense?

Accepted Answer

A) No; lower interest rates will tend to slow down the economy, and this will be bad for the stock market. 
B) Yes; the lower rates of interest will increase the value of future income (and capital gains), and stock prices will rise to reflect this factor. 
C) No; the lower rates of interest will reduce the value of future income (and capital gains), and this will cause stock prices to fall. 
D) Yes; the lower interest rates will cause inflation, and inflation is generally good for the stock market. 
A) No; lower interest rates will tend to slow down the economy, and this will be bad for the stock market. 
B) Yes; the lower rates of interest will increase the value of future income (and capital gains), and stock prices will rise to reflect this factor. 
C) No; the lower rates of interest will reduce the value of future income (and capital gains), and this will cause stock prices to fall. 
D) Yes; the lower interest rates will cause inflation, and inflation is generally good for the stock market.

Question 9

Which of the following is true of stocks?

Accepted Answer

A) Stock ownership is risky because the investor can never be sure what return they will earn or what the value of their stock holdings will be in the future. 
B) The riskiness of stocks is one reason why their average rate of return has been higher than investments like bonds that guarantee a specified nominal amount in the future. 
C) Both a and b are true. 
D) Neither a nor b is true. 
A) Stock ownership is risky because the investor can never be sure what return they will earn or what the value of their stock holdings will be in the future. 
B) The riskiness of stocks is one reason why their average rate of return has been higher than investments like bonds that guarantee a specified nominal amount in the future. 
C) Both a and b are true. 
D) Neither a nor b is true.

Question 10

Which of the following will reduce the risk accompanying equity (stock) investments?

Accepted Answer

A) the purchase of shares of a mutual fund that holds the stocks of many diverse corporations 
B) the purchasing and holding of equities over a lengthy period of time 
C) the purchase of shares in firms doing business in a wider variety of industries and markets 
D) all of the above 
A) the purchase of shares of a mutual fund that holds the stocks of many diverse corporations 
B) the purchasing and holding of equities over a lengthy period of time 
C) the purchase of shares in firms doing business in a wider variety of industries and markets 
D) all of the above

Question 11

The variation in the rate of return one can expect from ownership of stocks will generally be smaller if

Accepted Answer

A) all of the funds are invested in a specific sector of the economy such as the automobile industry. 
B) a diverse set of stocks is held over a lengthy period of time such as 30 or 40 years. 
C) all of the funds are invested in a single stock. 
D) the funds are invested for a relatively short period of time. 
A) all of the funds are invested in a specific sector of the economy such as the automobile industry. 
B) a diverse set of stocks is held over a lengthy period of time such as 30 or 40 years. 
C) all of the funds are invested in a single stock. 
D) the funds are invested for a relatively short period of time.

Question 12

Which of the following is true?

Accepted Answer

A) Managed equity funds that have yielded attractive returns during the last 5 or 10 years can generally be counted on to yield similar returns in the future. 
B) Managed funds generally outperform indexed equity mutual funds. 
C) An investment strategy that yielded a high rate of return in the past will often be disastrous in the future. 
D) Indexed equity mutual funds are usually tied directly to either the Consumer Price Index or the GDP deflator. 
A) Managed equity funds that have yielded attractive returns during the last 5 or 10 years can generally be counted on to yield similar returns in the future. 
B) Managed funds generally outperform indexed equity mutual funds. 
C) An investment strategy that yielded a high rate of return in the past will often be disastrous in the future. 
D) Indexed equity mutual funds are usually tied directly to either the Consumer Price Index or the GDP deflator.

Question 13

Does it ever make sense to purchase a stock that has never paid a dividend? Explain.

Accepted Answer

Yes. If a firm does not pay out its prof

Question 14

The random walk theory indicates that

Accepted Answer

A) investors can make money by purchasing stocks that are widely expected to earn substantial profits in the future. 
B) while changes in the prices of specific stocks are difficult to predict, experts are able to forecast the future direction of broad stock market indexes with a high degree of accuracy. 
C) changes in stock prices are driven by surprise occurrences that are difficult for anyone to predict accurately. 
D) managed mutual funds will persistently outperform indexed funds. 
A) investors can make money by purchasing stocks that are widely expected to earn substantial profits in the future. 
B) while changes in the prices of specific stocks are difficult to predict, experts are able to forecast the future direction of broad stock market indexes with a high degree of accuracy. 
C) changes in stock prices are driven by surprise occurrences that are difficult for anyone to predict accurately. 
D) managed mutual funds will persistently outperform indexed funds.

Question 15

During the 1970s, the price/earnings ratio of stocks in the S&P 500 was relatively low. This low P/E ratio was

Accepted Answer

A) surprising because the inflation rate was high during the 1970s. 
B) not surprising because interest rates were low during the inflationary 1970s. 
C) not surprising because interest rates were high during the inflationary 1970s. 
D) surprising because the inflation rate was low during the 1970s. 
A) surprising because the inflation rate was high during the 1970s. 
B) not surprising because interest rates were low during the inflationary 1970s. 
C) not surprising because interest rates were high during the inflationary 1970s. 
D) surprising because the inflation rate was low during the 1970s.

Question 16

According to the random walk theory, which of the following is true?

Accepted Answer

A) Stock prices reflect all available information about factors that affect stock prices. 
B) Future movements of stock prices are unpredictable. 
C) Changes in stock prices are driven by surprise occurrences. 
D) All of the above are true. 
A) Stock prices reflect all available information about factors that affect stock prices. 
B) Future movements of stock prices are unpredictable. 
C) Changes in stock prices are driven by surprise occurrences. 
D) All of the above are true.

Question 17

(I) The market for new issues of stock is called the primary market. (II) The New York Stock Exchange is an example of a secondary market in which previously issued shares are traded between investors.

Accepted Answer

A) I is true; II is false. 
B) I is false; II is true. 
C) Both I and II are true. 
D) Both I and II are false. 
A) I is true; II is false. 
B) I is false; II is true. 
C) Both I and II are true. 
D) Both I and II are false.

Question 18

Which of the following is true?

Accepted Answer

A) Investment in the stock market is a relatively foolproof method for an investor to earn a high rate of return during the next five years. 
B) Current stock prices already reflect information that is known with a high degree of certainty. 
C) Experts are able to predict changes in the direction of the broad stock market indexes with a high degree of accuracy. 
D) While changes in the prices of specific stocks are difficult to predict, it is relatively easy to predict the future direction of the broad stock market. 
E) Both c and d are true. 
A) Investment in the stock market is a relatively foolproof method for an investor to earn a high rate of return during the next five years. 
B) Current stock prices already reflect information that is known with a high degree of certainty. 
C) Experts are able to predict changes in the direction of the broad stock market indexes with a high degree of accuracy. 
D) While changes in the prices of specific stocks are difficult to predict, it is relatively easy to predict the future direction of the broad stock market. 
E) Both c and d are true.

Question 19

Investors can make their investments in corporate stocks less risky by

Accepted Answer

A) purchasing shares of a mutual fund, which holds the stocks of many diverse corporations. 
B) buying stocks and holding them each for only for short periods of time. 
C) investing in firms that are in the same, rather than different, industries. 
D) none of the above. 
A) purchasing shares of a mutual fund, which holds the stocks of many diverse corporations. 
B) buying stocks and holding them each for only for short periods of time. 
C) investing in firms that are in the same, rather than different, industries. 
D) none of the above.

Question 20

Which of the following is an advantage of an indexed equity mutual fund relative to a managed equity fund?

Accepted Answer

A) Indexed funds generally have better stock pickers. 
B) Indexed funds engage in more detailed research. 
C) Indexed funds have lower operating costs because they engage in less stock trading. 
D) Indexed funds earn a significantly higher rate of return than a broad portfolio that represents the entire stock market. 
A) Indexed funds generally have better stock pickers. 
B) Indexed funds engage in more detailed research. 
C) Indexed funds have lower operating costs because they engage in less stock trading. 
D) Indexed funds earn a significantly higher rate of return than a broad portfolio that represents the entire stock market.

Exam 18: Appendix: the Stock Market: Its Function, Performance, and Potential As an Investment Opportunity

Investment in a broad portfolio of stocks is most attractive for

A lower interest rate will increase the present value of future income and thereby

Which of the following is true?

Since 1802, the average annual compound return for stock holdings, adjusted for inflation, has been approximately

Which of the following would be most likely to push stock prices higher?

Which of the following is true?

Many personal finance magazines such as Money and Smart Money routinely give advice as to which stocks to buy. Should you take their advice?

Stock market analysts often argue that lower interest rates are good for the stock market. Does this argument make sense?

Which of the following is true of stocks?

Which of the following will reduce the risk accompanying equity (stock) investments?

The variation in the rate of return one can expect from ownership of stocks will generally be smaller if

Which of the following is true?

Does it ever make sense to purchase a stock that has never paid a dividend? Explain.

The random walk theory indicates that

During the 1970s, the price/earnings ratio of stocks in the S&P 500 was relatively low. This low P/E ratio was

According to the random walk theory, which of the following is true?

(I) The market for new issues of stock is called the primary market. (II) The New York Stock Exchange is an example of a secondary market in which previously issued shares are traded between investors.

Which of the following is true?

Investors can make their investments in corporate stocks less risky by

Which of the following is an advantage of an indexed equity mutual fund relative to a managed equity fund?

The Economic Approach

A: Some Tools of the Economist

B: Some Tools of the Economist

A: Supply, Demand, and the Market Process

B: Supply, Demand, and the Market Process

A: Supply and Demand: Applications and Extensions

B: Supply and Demand: Applications and Extensions

Difficult Cases for the Market and the Role of Government

The Economics of Collective Decision-Making

Consumer Choice and Elasticity

A: Costs and the Supply of Goods

B: Costs and the Supply of Goods

A: Price Takers and the Competitive Process

B: Price Takers and the Competitive Process

Price-Searcher Markets With Low Entry Barriers

A: Price-Searcher Markets With High Entry Barriers

B: Price-Searcher Markets With High Entry Barriers

The Supply of and Demand for Productive Resources

Earnings, Productivity, and the Job Market

Investment, the Capital Market, and the Wealth of Nations

Income Inequality and Poverty

Appendix: Government Spending and Taxation

Appendix: the Economics of Social Security

Appendix: Great Debates in Economics: Keynes Versus Hayek

Appendix: the Crisis of 2008: Causes and Lessons for the Future

Appendix: Lessons From the Great Depression

Appendix: the Economics of Healthcare

Appendix:education: Problems and Performance

Appendix: Earnings Differences Between Men and Women

Appendix: the Question of Resource Exhaustion

Appendix: Do Labor Unions Increase the Wages of Workers

Appendix: Difficult Environmental Cases and the Role of Government

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