Question 1

The fact that returns from the stock market are less volatile over long-periods of time suggests that:

Accepted Answer

A) investors are more risk averse over the long run. 
B) stock markets are efficient. 
C) people get comfortable with the stocks they own. 
D) stock market bubbles have become more common. 
A) investors are more risk averse over the long run. 
B) stock markets are efficient. 
C) people get comfortable with the stocks they own. 
D) stock market bubbles have become more common.

Question 2

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

Accepted Answer

A) people are irrational in their investment behavior, only focusing on positive outcomes. 
B) people are not very risk-averse and do not require a risk premium for stocks. 
C) investing in stocks over the long run is not as risky as short-term holdings of stocks. 
D) people are not efficient users of information. 
A) people are irrational in their investment behavior, only focusing on positive outcomes. 
B) people are not very risk-averse and do not require a risk premium for stocks. 
C) investing in stocks over the long run is not as risky as short-term holdings of stocks. 
D) people are not efficient users of information.

Question 3

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 4

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:

Accepted Answer

A) you cannot apply the model to this example since it requires a dividend be offered. 
B) $82.00 
C) $83.92 
D) $86.35 
A) you cannot apply the model to this example since it requires a dividend be offered. 
B) $82.00 
C) $83.92 
D) $86.35

Question 5

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 6

Which of the following stock price indexes is a price-weighted index?

Accepted Answer

A) Dow Jones Industrial Average 
B) Standard & Poor's 500 Index 
C) Nasdaq 
D) Wilshire 5000 
A) Dow Jones Industrial Average 
B) Standard & Poor's 500 Index 
C) Nasdaq 
D) Wilshire 5000

Question 7

As the corporation uses more debt financing, which of the following holds true for the stockholders?

Accepted Answer

A) The expected return to the stockholders decreases and the standard deviation of that return decreases. 
B) The expected return to the stockholders increases and the standard deviation of the return decreases. 
C) The expected return to the stockholders increases and the standard deviation of the return increases. 
D) The expected return to the stockholders decreases and the standard deviation of the return increases. 
A) The expected return to the stockholders decreases and the standard deviation of that return decreases. 
B) The expected return to the stockholders increases and the standard deviation of the return decreases. 
C) The expected return to the stockholders increases and the standard deviation of the return increases. 
D) The expected return to the stockholders decreases and the standard deviation of the return increases.

Question 8

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 P_today by using equation

Question 9

A stock has an annual dividend of $10.00 and it is expected not to grow.It is believed the stock will sell for $100 one year from now, and an investor has a discount (interest) rate of 6% (0.06).The dividend discount model predicts the stock's current price should be:

Accepted Answer

A) $94.67 
B) $116.00 
C) $103.77 
D) $106.60 
A) $94.67 
B) $116.00 
C) $103.77 
D) $106.60

Question 10

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 11

When comparing stock indexes around the world we:

Accepted Answer

A) find that a given percentage change across all indexes has the same value. 
B) observe that they always move together. 
C) can see that the numeric change in indices allows investors to make easy comparisons of value. 
D) can examine their respective movements if we look at them as percentage changes. 
A) find that a given percentage change across all indexes has the same value. 
B) observe that they always move together. 
C) can see that the numeric change in indices allows investors to make easy comparisons of value. 
D) can examine their respective movements if we look at them as percentage changes.

Question 12

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 13

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:

Accepted Answer

A) rise in the fourth quarter when the higher profits are actually seen. 
B) fall immediately as stockholders will be disappointed about having to wait until the fourth quarter for higher profits. 
C) rise immediately on the expectation of higher profits in the future. 
D) rise around the third quarter since this information will take time to disseminate. 
A) rise in the fourth quarter when the higher profits are actually seen. 
B) fall immediately as stockholders will be disappointed about having to wait until the fourth quarter for higher profits. 
C) rise immediately on the expectation of higher profits in the future. 
D) rise around the third quarter since this information will take time to disseminate.

Question 14

Next year, the price of a stock is expected to be $2200 and the stock will pay a $55 dividend.The interest rate is 10%.Based on equation 7 in the chapter, 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 15

When stock prices reflect fundamental values:

Accepted Answer

A) all investors will have positive returns. 
B) the allocation of resources will be more efficient. 
C) all companies will have an easier task of obtaining financing for investment projects. 
D) the overall level of the stock market should move higher. 
A) all investors will have positive returns. 
B) the allocation of resources will be more efficient. 
C) all companies will have an easier task of obtaining financing for investment projects. 
D) the overall level of the stock market should move higher.

Question 16

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.

Accepted Answer

The required stock return is 10.5%.To fi

Question 17

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 18

The price of a stock is currently $750 and the stock will pay a $43 dividend.The interest rate is 7.5%.Based on equation 7 in the chapter, 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 19

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 20

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?

Accepted Answer

The common stockholders are residual cla

Exam 8: Stocks, Stock Markets, and Market Efficiency

The fact that returns from the stock market are less volatile over long-periods of time suggests that:

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

According to the theory of efficient markets:

Stock market bubbles are:

Which of the following stock price indexes is a price-weighted index?

As the corporation uses more debt financing, which of the following holds true for the stockholders?

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)?

A stock has an annual dividend of $10.00 and it is expected not to grow.It is believed the stock will sell for $100 one year from now, and an investor has a discount (interest) rate of 6% (0.06).The dividend discount model predicts the stock's current price should be:

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

When comparing stock indexes around the world we:

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

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:

Next year, the price of a stock is expected to be $2200 and the stock will pay a $55 dividend.The interest rate is 10%.Based on equation 7 in the chapter, what is the current price of this stock?

When stock prices reflect fundamental values:

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?

The price of a stock is currently $750 and the stock will pay a $43 dividend.The interest rate is 7.5%.Based on equation 7 in the chapter, what is the expected price of this stock for next year?

The dividend-discount model predicts that stock prices:

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?

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

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