Question 1

Professor Jeremy Siegel, of the University of Pennsylvania, did research showing that:

Accepted Answer

A) Owning stocks over the long run produces returns below the risk-free return. 
B) If an investor owns stocks for a very short time the risk is greater than if the stocks are held for a long time. 
C) The return on the S&P 500 for a 25-year period often produces returns below zero. 
D) Bonds really are less risky to hold over the long term. 
A) Owning stocks over the long run produces returns below the risk-free return. 
B) If an investor owns stocks for a very short time the risk is greater than if the stocks are held for a long time. 
C) The return on the S&P 500 for a 25-year period often produces returns below zero. 
D) Bonds really are less risky to hold over the long term.

Question 2

Why isn't the actual level of an index, for example the Dow Jones Industrial Average, very useful on its own?

Accepted Answer

The real value of an index is to be able

Question 3

Mutual funds are characterized by the fact that the 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 4

Management fees for mutual funds are:

Accepted Answer

A) Fixed by regulation. 
B) Fixed by regulation and can vary by the size of the fund. 
C) Usually a percentage of the gains the fund achieves. 
D) Usually a percentage of the funds under management. 
A) Fixed by regulation. 
B) Fixed by regulation and can vary by the size of the fund. 
C) Usually a percentage of the gains the fund achieves. 
D) Usually a percentage of the funds under management.

Question 5

XYZ Inc.announces plans to finance the expansion of the firm by issuing hundreds of millions of dollars of bonds.Discuss how the current stockholders of XYZ Inc.will feel about this plan.

Accepted Answer

The common stockholders may have mixed f

Question 6

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) $1000 
B) $500 
C) $750 
D) $950 
A) $1000 
B) $500 
C) $750 
D) $950

Question 7

The dividend-discount model of stock valuation:

Accepted Answer

A) Is an application of the net present value formula 
B) Takes the net present value of expected dividends and add it to the future sale price of the stock 
C) Takes the net present value of the expected future price of the stock and adds the annual dividend 
D) Takes the annual dividend, adds it to the expected future selling price and divides by the number of years to get the current price 
A) Is an application of the net present value formula 
B) Takes the net present value of expected dividends and add it to the future sale price of the stock 
C) Takes the net present value of the expected future price of the stock and adds the annual dividend 
D) Takes the annual dividend, adds it to the expected future selling price and divides by the number of years to get the current price

Question 8

The theory of efficient markets means

Accepted Answer

A) Professional fund managers should be able to consistently beat the market average. 
B) A professional fund manager should really not expect to beat the market average consistently. 
C) A professional fund manager who beats the market average one year should expected to beat the market average the next year. 
D) A professional fund manager who beats the market average one year should be expected to not beat the market average the next year. 
A) Professional fund managers should be able to consistently beat the market average. 
B) A professional fund manager should really not expect to beat the market average consistently. 
C) A professional fund manager who beats the market average one year should expected to beat the market average the next year. 
D) A professional fund manager who beats the market average one year should be expected to not beat the market average the next year.

Question 9

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 10

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

Accepted Answer

The stockholders, being residual claiman

Question 11

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

Accepted Answer

A) Over the long run, stocks are less risky than bonds. 
B) Over the long run, bonds are 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 are less risky than bonds. 
B) Over the long run, bonds are 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.

Question 12

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 13

Considering the S&P 500 Index, if each company's stock price increased by 10%:

Accepted Answer

A) The weights in the index would remain the same 
B) The companies with the most shares outstanding would have even greater weight after the increase 
C) The companies with fewer shares would gain more weight at the expense of the companies with greater shares 
D) The weights in the index would change to reflect the percentage changes in the prices of the various stocks 
A) The weights in the index would remain the same 
B) The companies with the most shares outstanding would have even greater weight after the increase 
C) The companies with fewer shares would gain more weight at the expense of the companies with greater shares 
D) The weights in the index would change to reflect the percentage changes in the prices of the various stocks

Question 14

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 15

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 16

The price of a stock is currently $750 and the stock will pay a $43 dividend.The interest rate is 7.5%.Based on the dividend-discount model, 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 17

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

Accepted Answer

Hardly.The hypothesis does not claim tha

Question 18

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 19

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 the dividend-discount model, what is the current price of this stock?

Accepted Answer

A) $1980 
B) $2000 
C) $2050 
D) $2035 
A) $1980 
B) $2000 
C) $2050 
D) $2035

Question 20

Use the following to answer questions 55 - 58: $\mathrm { P } _ { \text {today } } = \frac { \mathrm { D } _ { \text {today } } ( 1 + g ) } { r f + r p - g }$
-Which of the following will cause a reduction in the current price of a stock?

Accepted Answer

A) A decrease in the current dividend 
B) An increase in the risk-free return 
C) A decrease in the growth rate of the dividend 
D) Both a decrease in the current dividend and an increase in the risk-free return 
A) A decrease in the current dividend 
B) An increase in the risk-free return 
C) A decrease in the growth rate of the dividend 
D) Both a decrease in the current dividend and an increase in the risk-free return

Exam 8: Stocks, Stock Markets, and Market Efficiency

Professor Jeremy Siegel, of the University of Pennsylvania, did research showing that:

Why isn't the actual level of an index, for example the Dow Jones Industrial Average, very useful on its own?

Mutual funds are characterized by the fact that the all:

Management fees for mutual funds are:

XYZ Inc.announces plans to finance the expansion of the firm by issuing hundreds of millions of dollars of bonds.Discuss how the current stockholders of XYZ Inc.will feel about this plan.

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:

The dividend-discount model of stock valuation:

The theory of efficient markets means

In the event of bankruptcy, stockholders:

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

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

The theory of efficient markets implies:

Considering the S&P 500 Index, if each company's stock price increased by 10%:

Which of the following statements is not true?

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

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

The dividend-discount model predicts that stock prices:

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 the dividend-discount model, what is the current price of this stock?

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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