Question 1

Briefly explain the different focus of valuing stocks taken by behaviorists, chartists, and fundamentalists.

Accepted Answer

The behaviorists estimate the value of stocks based on their perceptions of investor psychology and behavior.Chartists look for patterns in the price movements of a stock.And others focus on the financial statements, where they determine a stock's fundamental value from current assets and estimates of future profitability.

Question 2

Why does the Dow Jones Industrial Average have a value over 10,000 when the 30 stocks that make up the index all have values less than $200 per share?

Accepted Answer

The DJIA accounts for stock splits over the years, which are reflected in the average but not in the current price of the stock, and the companies included in the index change periodically.

Question 3

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. B

Question 4

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 5

A company currently pays an annual dividend of $6.50 per share.It expects the growth rate of the dividend will be 2.5% (0.025) annually.If the interest (discount) rate is 5% (0.05) what does the dividend-discount model predict the current price of the stock should be?

Accepted Answer

A) It doesn't, you need an expected future price to use the model 
B) $257.50 
C) $130.00 
D) $266.50 
A) It doesn't, you need an expected future price to use the model 
B) $257.50 
C) $130.00 
D) $266.50

Question 6

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 7

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

Accepted Answer

A) take on less risk. 
B) have access to illegal, private information. 
C) participate in efficient markets. 
D) have learned from investing in the same stocks repeatedly. 
A) take on less risk. 
B) have access to illegal, private information. 
C) participate in efficient markets. 
D) have learned from investing in the same stocks repeatedly.

Question 8

If a company reports that it is going to have a difficult time meeting its debt obligations, you would expect the Ptoday:

Accepted Answer

A) to fall since the risk-free return will rise. 
B) to rise since the Dtoday will likely fall. 
C) to fall since the risk premium will likely rise. 
D) to remain about the same until the Dtoday actually changes. 
A) to fall since the risk-free return will rise. 
B) to rise since the Dtoday will likely fall. 
C) to fall since the risk premium will likely rise. 
D) to remain about the same until the Dtoday actually changes.

Question 9

From information presented in Chapter 8, you should be able to 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 10

The dividends that stockholders receive are:

Accepted Answer

A) fixed by contract and paid annually. 
B) distributions from profits. 
C) paid before all other obligations of the company are met. 
D) always equal to the average amount of interest paid to a bond holder, adjusting for the value of the holdings. 
A) fixed by contract and paid annually. 
B) distributions from profits. 
C) paid before all other obligations of the company are met. 
D) always equal to the average amount of interest paid to a bond holder, adjusting for the value of the holdings.

Question 11

Discuss the effects on the current price of a stock from each of the following: a) An increase in the growth rate of the dividend; b) A decrease in the risk-free interest rate; c) An increase in the equity-risk premium; and finally d) A decrease in the annual dividend.

Accepted Answer

We can use the Dividend-Discount Model f

Question 12

Do the voting rights possessed by common stockholders ensure that managers and directors have the same objectives as stockholders? Explain.

Accepted Answer

Not necessarily.Stockholders are usually

Question 13

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

Accepted Answer

A) are strong advocates of the theory of efficient markets. 
B) should be looked at with skepticism, unless they have information not available to others. 
C) are unusually lucky, and should be listened to intently. 
D) are always psychologists. 
A) are strong advocates of the theory of efficient markets. 
B) should be looked at with skepticism, unless they have information not available to others. 
C) are unusually lucky, and should be listened to intently. 
D) are always psychologists.

Question 14

According to Robert Shiller, a dark-horse candidate for the next speculative bubble is:

Accepted Answer

A) stock market. 
B) farmland. 
C) housing market. 
D) student loans. 
A) stock market. 
B) farmland. 
C) housing market. 
D) student loans.

Question 15

Suppose that the current dividend for a stock is Dtoday, the expected dividend growth rate is r, and the interest rate is i.If we ignore risk, which of the following represents the dividend-discount model formula for the fundamental price of a stock?

Accepted Answer

A) Dtoday/(i + g) 
B) (i + g)/Dtoday 
C) Dtoday(1 + g)/(i - g) 
D) Dtoday/(i - g) 
A) Dtoday/(i + g) 
B) (i + g)/Dtoday 
C) Dtoday(1 + g)/(i - g) 
D) Dtoday/(i - g)

Question 16

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

Accepted Answer

If the prices of stocks reflect fundamen

Question 17

The Standard & Poor's 500 Index differs from the DJIA in at least two major respects.What are the two major differences?

Accepted Answer

The S&P 500 Index differs from the DJIA

Question 18

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 19

The Nasdaq Composite Index is:

Accepted Answer

A) a value-weighted index. 
B) a price-weighted index. 
C) made up of over 5000 companies traded on the NYSE. 
D) made of mainly older firms and is heavily weighted by manufacturing. 
A) a value-weighted index. 
B) a price-weighted index. 
C) made up of over 5000 companies traded on the NYSE. 
D) made of mainly older firms and is heavily weighted by manufacturing.

Question 20

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.

Exam 8: Stocks, Stock Markets, and Market Efficiency

Briefly explain the different focus of valuing stocks taken by behaviorists, chartists, and fundamentalists.

Why does the Dow Jones Industrial Average have a value over 10,000 when the 30 stocks that make up the index all have values less than $200 per share?

Which of the following statements is most correct?

Which of the following statements is not true?

A company currently pays an annual dividend of $6.50 per share.It expects the growth rate of the dividend will be 2.5% (0.025) annually.If the interest (discount) rate is 5% (0.05) what does the dividend-discount model predict the current price of the stock should be?

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?

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:

From information presented in Chapter 8, you should be able to identify at least two reasons an investor may want to consider an index fund over a managed (mutual) fund.What are these reasons?

The dividends that stockholders receive are:

Discuss the effects on the current price of a stock from each of the following: a) An increase in the growth rate of the dividend; b) A decrease in the risk-free interest rate; c) An increase in the equity-risk premium; and finally d) A decrease in the annual dividend.

Do the voting rights possessed by common stockholders ensure that managers and directors have the same objectives as stockholders? Explain.

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

According to Robert Shiller, a dark-horse candidate for the next speculative bubble is:

Suppose that the current dividend for a stock is Dtoday, the expected dividend growth rate is r, and the interest rate is i.If we ignore risk, which of the following represents the dividend-discount model formula for the fundamental price of a stock?

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

The Standard & Poor's 500 Index differs from the DJIA in at least two major respects.What are the two major differences?

The Dow Jones Industrial Average:

The Nasdaq Composite Index is:

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

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

If a company reports that it is going to have a difficult time meeting its debt obligations, you would expect the P_today:

Suppose that the current dividend for a stock is D_today, the expected dividend growth rate is r, and the interest rate is i.If we ignore risk, which of the following represents the dividend-discount model formula for the fundamental price of a stock?