Question 1

Explain why the willingness to purchase stocks is influenced heavily by shareholders' legal rights with respect to control of the corporation.

Accepted Answer

Shareholders' legal rights include the a

Question 2

The Standard & Poor's 500 Index:

Accepted Answer

A) gives more weight to large companies than small companies. 
B) actually includes more than 500 of the largest corporations in the U.S. 
C) is a price-weighted index. 
D) assigns equal weight to all the prices of all the stocks in the index. 
A) gives more weight to large companies than small companies. 
B) actually includes more than 500 of the largest corporations in the U.S. 
C) is a price-weighted index. 
D) assigns equal weight to all the prices of all the stocks in the index.

Question 3

All other things equal, a decrease in the equity risk premium leads to a(n):

Accepted Answer

A) increase in the required return on stock. 
B) decrease in the present value of stock. 
C) increase in the price of equity shares. 
D) decrease in dividend growth. 
A) increase in the required return on stock. 
B) decrease in the present value of stock. 
C) increase in the price of equity shares. 
D) decrease in dividend growth.

Question 4

According to Robert Shiller, speculative bubbles are difficult to predict because:

Accepted Answer

A) they depend on the existence of a particular pattern of thinking which is difficult to predict. 
B) they are totally random events. 
C) they arise because of government regulatory activity which is difficult to predict. 
D) turns in business cycles are difficult to predict. 
A) they depend on the existence of a particular pattern of thinking which is difficult to predict. 
B) they are totally random events. 
C) they arise because of government regulatory activity which is difficult to predict. 
D) turns in business cycles are difficult to predict.

Question 5

Why are stock market bubbles costly for the economy?

Accepted Answer

A) They imply that the actual stock price is equal to the fundamental value of the stock. 
B) They hurt consumers more than corporations. 
C) They lead to a reduction in real investment in both the short-term and long-term. 
D) They lead to a misallocation of resources in both the short-term and long-term. 
A) They imply that the actual stock price is equal to the fundamental value of the stock. 
B) They hurt consumers more than corporations. 
C) They lead to a reduction in real investment in both the short-term and long-term. 
D) They lead to a misallocation of resources in both the short-term and long-term.

Question 6

Identify the ways in which a bondholder's rights differ from those of a stockholder.In what ways do they differ when a firm is bankrupt?

Accepted Answer

Bondholders are not owners of the compan

Question 7

You start with a $1000 portfolio; it loses 50% over the next year, the following year it gains 50% in value.At the end of two years your portfolio is worth:

Accepted Answer

A) $1,000. 
B) $500. 
C) $750. 
D) $950. 
A) $1,000. 
B) $500. 
C) $750. 
D) $950.

Question 8

Does the concept of limited liability make owning stocks more or less attractive? Explain.

Accepted Answer

Limited liability makes owning stocks (e

Question 9

The theory of efficient markets assumes that:

Accepted Answer

A) prices of bonds, but not stocks, reflect all available information. 
B) the prices of all financial instruments reflect all available information. 
C) stock prices are relatively rigid because it takes a while for information to efficiently move through the market. 
D) the best approach to determining stock prices is to follow the chartists. 
A) prices of bonds, but not stocks, reflect all available information. 
B) the prices of all financial instruments reflect all available information. 
C) stock prices are relatively rigid because it takes a while for information to efficiently move through the market. 
D) the best approach to determining stock prices is to follow the chartists.

Question 10

You hear someone claim that stocks are less risky than bonds.What possible evidence could this person offer for such a claim?

Accepted Answer

Professor Jeremy Siegel's research point

Question 11

Is the Efficient Markets Hypothesis (EMH) responsible for the financial crisis of 2007-2009?

Accepted Answer

Hardly.The hypothesis does not claim tha

Question 12

Stock market bubbles impact consumers by:

Accepted Answer

A) encouraging greater consumption and greater saving. 
B) encouraging greater consumption and less saving. 
C) encouraging more work and delaying retirement. 
D) resulting in less investment in home ownership and more into stocks. 
A) encouraging greater consumption and greater saving. 
B) encouraging greater consumption and less saving. 
C) encouraging more work and delaying retirement. 
D) resulting in less investment in home ownership and more into stocks.

Question 13

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 14

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 15

Discuss the inefficiencies that can be caused by stock market bubbles, especially focusing on firms and consumers.

Accepted Answer

Stock market bubbles can lead to the ine

Question 16

You are a top Treasury official for a developing country who has been asked for advice on how to best open the nation's stock market to foreign investment.Previously, the government did not permit foreigners to purchase domestic stock.Now, the government has a plan to create two markets: one for domestic residents and one for foreign investment.What are the potential drawbacks of this system, compared to allowing both domestic and foreign investors to trade in the same market? What are the larger implications for economic efficiency? How might the government be able to address these issues?

Accepted Answer

The creation of two distinct markets wil

Question 17

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?
The current value of the index is 50.This is determined by taking the current stock prices and dividing by two, similar to the construction of the DJIA.If the price of A increases by 10% this raises A's price to $33 and the value of the index to 51.5, or an increase of 3%.If only the price of stock B increases by 10%, the price of B will rise to $77, and the index will have a value of 53.5, or an increase of 7%.

Accepted Answer

The current value of the index is 50.Thi

Question 18

The fact that many corporations use debt financing as well as equity financing creates all of the following except:

Accepted Answer

A) the opportunity for a greater expected return for the stockholders. 
B) greater risk for the stockholders. 
C) leverage for the stockholders. 
D) consistently lower debt-to-equity ratios. 
A) the opportunity for a greater expected return for the stockholders. 
B) greater risk for the stockholders. 
C) leverage for the stockholders. 
D) consistently lower debt-to-equity ratios.

Question 19

This is a two-part question: We have a firm that needs $1000 to obtain a new machine for its business.It can either issue stock or bonds, or some combination of both.If it issues bonds it will have to pay $8.00 in interest for every $100 borrowed.Finally, assume the company will earn $150 in good years and $75 in bad years, with equal probability.The first part of the question is to (a) determine the payment to the equity holders under the following three scenarios: (i) the first is the firm uses 0% debt financing; (ii) the second is the firm uses 50% debt financing, and (iii) the third finds the firm using 80% debt financing.
The second part of the question is to (b) determine the expected equity return (%) under each scenario.

Accepted Answer

The payment to the equity holders and th

Question 20

You have a portfolio valued at $1000.Over the next twelve months it loses 75% of its value.What return does the portfolio need to earn over the following twelve months to restore the portfolio to its original value?

Accepted Answer

A) 75% 
B) 200% 
C) 300% 
D) 25% 
A) 75% 
B) 200% 
C) 300% 
D) 25%

Explain why the willingness to purchase stocks is influenced heavily by shareholders' legal rights with respect to control of the corporation.

The Standard & Poor's 500 Index:

All other things equal, a decrease in the equity risk premium leads to a(n):

According to Robert Shiller, speculative bubbles are difficult to predict because:

Why are stock market bubbles costly for the economy?

Identify the ways in which a bondholder's rights differ from those of a stockholder.In what ways do they differ when a firm is bankrupt?

You start with a $1000 portfolio; it loses 50% over the next year, the following year it gains 50% in value.At the end of two years your portfolio is worth:

Does the concept of limited liability make owning stocks more or less attractive? Explain.

The theory of efficient markets assumes that:

You hear someone claim that stocks are less risky than bonds.What possible evidence could this person offer for such a claim?

Is the Efficient Markets Hypothesis (EMH) responsible for the financial crisis of 2007-2009?

Stock market bubbles impact consumers by:

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

The theory of efficient markets implies:

Discuss the inefficiencies that can be caused by stock market bubbles, especially focusing on firms and consumers.

The fact that many corporations use debt financing as well as equity financing creates all of the following except:

You have a portfolio valued at $1000.Over the next twelve months it loses 75% of its value.What return does the portfolio need to earn over the following twelve months to restore the portfolio to its original value?

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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Exam 8: Stocks, Stock Markets, and Market Efficiency

Explain why the willingness to purchase stocks is influenced heavily by shareholders' legal rights with respect to control of the corporation.

The Standard & Poor's 500 Index:

All other things equal, a decrease in the equity risk premium leads to a(n):

According to Robert Shiller, speculative bubbles are difficult to predict because:

Why are stock market bubbles costly for the economy?

Identify the ways in which a bondholder's rights differ from those of a stockholder.In what ways do they differ when a firm is bankrupt?

You start with a $1000 portfolio; it loses 50% over the next year, the following year it gains 50% in value.At the end of two years your portfolio is worth:

Does the concept of limited liability make owning stocks more or less attractive? Explain.

The theory of efficient markets assumes that:

You hear someone claim that stocks are less risky than bonds.What possible evidence could this person offer for such a claim?

Is the Efficient Markets Hypothesis (EMH) responsible for the financial crisis of 2007-2009?

Stock market bubbles impact consumers by:

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

The theory of efficient markets implies:

Discuss the inefficiencies that can be caused by stock market bubbles, especially focusing on firms and consumers.

The fact that many corporations use debt financing as well as equity financing creates all of the following except:

You have a portfolio valued at $1000.Over the next twelve months it loses 75% of its value.What return does the portfolio need to earn over the following twelve months to restore the portfolio to its original value?

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