Question 1

Why must caution be employed in comparing stock indexes across countries?

Accepted Answer

Since stock indexes are made up of diffe

Question 2

You make a $1,000 investment in the stock of ABC Inc.Over the next year the investment decreases by 60%.What percentage increase do you need in the following year on your holding to be back to $1,000?

Accepted Answer

We can employ the formula from

Question 3

In the event of bankruptcy, stockholders:

Accepted Answer

A) are paid before bondholders. 
B) receive at least their initial investment due to limited liability. 
C) could lose more than their initial investment. 
D) are the last to be paid and could end up losing what they have invested. 
A) are paid before bondholders. 
B) receive at least their initial investment due to limited liability. 
C) could lose more than their initial investment. 
D) are the last to be paid and could end up losing what they have invested.

Question 4

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 5

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

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 6

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 7

The stocks that make up the Dow Jones Industrial Average:

Accepted Answer

A) are dominated by the automobile industry. 
B) are the same ones that were originally used to construct the index. 
C) are not a broad measure of the market since they do not include any technology companies. 
D) have changed as the structure of the economy has changed. 
A) are dominated by the automobile industry. 
B) are the same ones that were originally used to construct the index. 
C) are not a broad measure of the market since they do not include any technology companies. 
D) have changed as the structure of the economy has changed.

Question 8

The Nasdaq Composite Index:

Accepted Answer

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

Question 9

Which of the following statements is most correct?

Accepted Answer

A) Stockholders have limited liability and have no control over corporate leadership. 
B) Stockholders can dislodge the managers of the corporation but not the board of directors. 
C) Stockholders have unlimited liability and can dislodge members of the board of directors. 
D) Stockholders can dislodge members of the board and have limited liability. 
A) Stockholders have limited liability and have no control over corporate leadership. 
B) Stockholders can dislodge the managers of the corporation but not the board of directors. 
C) Stockholders have unlimited liability and can dislodge members of the board of directors. 
D) Stockholders can dislodge members of the board and have limited liability.

Question 10

If a public corporation goes bankrupt and does not have enough assets to pay off all creditors:

Accepted Answer

A) the stockholders are personally liable for the balance. 
B) the fact that stockholders are residual claimants means they may have to pay in additional capital to cover the obligations. 
C) the stockholders receive any dividends due before the other creditors are paid. 
D) the stockholders cannot lose more than their investment. 
A) the stockholders are personally liable for the balance. 
B) the fact that stockholders are residual claimants means they may have to pay in additional capital to cover the obligations. 
C) the stockholders receive any dividends due before the other creditors are paid. 
D) the stockholders cannot lose more than their investment.

Question 11

Two characteristics that make owning stock attractive are:

Accepted Answer

A) unlimited liability and first claim on assets. 
B) share prices are relatively inexpensive and are transferable. 
C) each share represents a large percentage of ownership and dividends are fixed. 
D) dividends are paid before any other distributions are made and stocks are transferable. 
A) unlimited liability and first claim on assets. 
B) share prices are relatively inexpensive and are transferable. 
C) each share represents a large percentage of ownership and dividends are fixed. 
D) dividends are paid before any other distributions are made and stocks are transferable.

Question 12

If each company that made up the Dow Jones Industrial Average increased the number of their shares outstanding by 10%, but the share prices did not change, the value of the index would:

Accepted Answer

A) not change. 
B) increase by 10%. 
C) increase, but by less than 10%. 
D) decrease since there are more shares outstanding. 
A) not change. 
B) increase by 10%. 
C) increase, but by less than 10%. 
D) decrease since there are more shares outstanding.

Question 13

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 14

You have a value-weighted index made up of two companies.One company, we will call A, has a stock price of $25 per share and there are 10,000 shares outstanding.The other company, we will call B, has a stock price of $100 per share and has 1000 shares outstanding.What will be the percentage change in the index from a 10% increase in the share price of company A? What will be the percentage change in the index from a 10% increase in the share price of company B?

Accepted Answer

The value of company A is $250,000, whic

Question 15

Discuss whether the economy would be more or less efficient if public corporations issued fewer shares of stock.

Accepted Answer

The economy would probably be less effic

Question 16

You start with a portfolio valued at $500.Over the next twelve months it loses 40%; the following year it has a gain of 30%.At the end of two years your portfolio is worth:

Accepted Answer

A) $390. 
B) $450. 
C) $300. 
D) $410. 
A) $390. 
B) $450. 
C) $300. 
D) $410.

Question 17

Mutual funds are characterized by the fact that they all:

Accepted Answer

A) have the same management fee set by regulation. 
B) require the same minimum investment of $10,000. 
C) provide some degree of diversification. 
D) provide the same degree of liquidity. 
A) have the same management fee set by regulation. 
B) require the same minimum investment of $10,000. 
C) provide some degree of diversification. 
D) provide the same degree of liquidity.

Question 18

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 19

Explain why being a residual claimant can increase the risk from owning stocks.

Accepted Answer

The stockholders, being residual claiman

Question 20

The basic dividend-discount model is a bit of an oversimplification for valuing stocks because it:

Accepted Answer

A) ignores expected dividend growth. 
B) ignores the value of future dividends. 
C) ignores the risk involved in holding stocks. 
D) cannot handle stocks that do not pay dividends. 
A) ignores expected dividend growth. 
B) ignores the value of future dividends. 
C) ignores the risk involved in holding stocks. 
D) cannot handle stocks that do not pay dividends.

Exam 8: Stocks, Stock Markets, and Market Efficiency

Why must caution be employed in comparing stock indexes across countries?

You make a $1,000 investment in the stock of ABC Inc.Over the next year the investment decreases by 60%.What percentage increase do you need in the following year on your holding to be back to $1,000?

In the event of bankruptcy, stockholders:

The Dow Jones Industrial Average is:

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

The Nasdaq Composite Index is:

The stocks that make up the Dow Jones Industrial Average:

The Nasdaq Composite Index:

Which of the following statements is most correct?

If a public corporation goes bankrupt and does not have enough assets to pay off all creditors:

Two characteristics that make owning stock attractive are:

If each company that made up the Dow Jones Industrial Average increased the number of their shares outstanding by 10%, but the share prices did not change, the value of the index would:

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?

Discuss whether the economy would be more or less efficient if public corporations issued fewer shares of stock.

You start with a portfolio valued at $500.Over the next twelve months it loses 40%; the following year it has a gain of 30%.At the end of two years your portfolio is worth:

Mutual funds are characterized by the fact that they all:

The theory of efficient markets:

Explain why being a residual claimant can increase the risk from owning stocks.

The basic dividend-discount model is a bit of an oversimplification for valuing stocks because it:

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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