Exam 8: Stocks, Stock Markets, and Market Efficiency

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?

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Question 1

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The value of company A is $250,000, which we obtain by taking the share price of $25 and multiplying that by 10,000 shares outstanding.The value of company B is $100,000, which we obtain by taking the share price of $1000 and multiplying by 1000 shares outstanding.A 10% increase in the share price of A results in a market value of $275,000, which is a 10% increase.The index however is constructed from the value of both companies, and the total value increases from $350,000 to $375,000, or 7.14%.When the share price of B increases by 10%, the new market value of the entire company is $110,000, ($110 x 1000), this increases the value of the index to $360,000 from $350,000, or 2.86%.

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?

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Question 2

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Some good did come from the Internet bubble of the late 1990s.One good thing was that:

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Question 3

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

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Question 4

Companies whose stocks increase the most during a stock market bubble will:

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Question 5

The Nasdaq Composite Index:

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Question 6

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

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Question 7

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

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Question 8

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

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Question 9

Which of the following is not a feature of common stock?

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Question 10

The Standard & Poor's 500 Index:

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Question 11

Two characteristics that make owning stock attractive are:

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Question 12

As a company issues more debt:

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Question 13

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?

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Question 14

Use the five issues an investor should consider when purchasing stock to explain the popularity of mutual funds.

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Question 15

Why are stock market bubbles costly for the economy?

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Question 16

The fact that common stockholders are residual claimants means

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Question 17

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?

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Question 18

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

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Question 19

When comparing stock indexes around the world we:

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Question 20

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Exam 8: Stocks, Stock Markets, and Market Efficiency

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?

Some good did come from the Internet bubble of the late 1990s.One good thing was that:

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

Companies whose stocks increase the most during a stock market bubble will:

The Nasdaq Composite Index:

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

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

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

Which of the following is not a feature of common stock?

The Standard & Poor's 500 Index:

Two characteristics that make owning stock attractive are:

As a company issues more debt:

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?

Use the five issues an investor should consider when purchasing stock to explain the popularity of mutual funds.

Why are stock market bubbles costly for the economy?

The fact that common stockholders are residual claimants means

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?

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

When comparing stock indexes around the world we:

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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