Question 1

Someone who is using information outside the efficient markets hypothesis:

Accepted Answer

A)  has information about the aging U.S. population and expects stock for companies that cater to senior citizens to increase in value. 
B)  reads in the newspaper about a merger between two profitable firms and expects the stock prices for these companies to rise. 
C)  while auditing a dishonest company realizes that its profit estimates are greatly inflated and immediately sells her stock in the company. 
D)  hears a rumor that a top bank may be in trouble and decides to sell his stock in that company. 
A)  has information about the aging U.S. population and expects stock for companies that cater to senior citizens to increase in value. 
B)  reads in the newspaper about a merger between two profitable firms and expects the stock prices for these companies to rise. 
C)  while auditing a dishonest company realizes that its profit estimates are greatly inflated and immediately sells her stock in the company. 
D)  hears a rumor that a top bank may be in trouble and decides to sell his stock in that company. C

Question 2

The principle of compounding implies that:

Accepted Answer

A)  we should diversify enough so that the returns on different stocks will be the same at some time in the future. 
B)  any difference in the rate of investment returns will stay constant over time. 
C)  a small difference in the rate of investment returns makes no difference over a long period. 
D)  a small difference in the rate of investment returns can have a large difference over a long period. 
A)  we should diversify enough so that the returns on different stocks will be the same at some time in the future. 
B)  any difference in the rate of investment returns will stay constant over time. 
C)  a small difference in the rate of investment returns makes no difference over a long period. 
D)  a small difference in the rate of investment returns can have a large difference over a long period. D

Question 3

Which of the following stock portfolios offers the greatest diversification?

Accepted Answer

A)  3M and Raytheon 
B)  Adobe Systems and Sara Lee 
C)  Nucor and Wyeth 
D)  Ashland, Baker Hughes, Bemis, and BMC Software 
A)  3M and Raytheon 
B)  Adobe Systems and Sara Lee 
C)  Nucor and Wyeth 
D)  Ashland, Baker Hughes, Bemis, and BMC Software D

Question 4

During the price rise associated with a speculative bubble, capital is invested:

Accepted Answer

A)  efficiently. 
B)  in areas where it is not valuable. 
C)  with less risk than usual. 
D)  to prepare for another wave of price rises. 
A)  efficiently. 
B)  in areas where it is not valuable. 
C)  with less risk than usual. 
D)  to prepare for another wave of price rises.

Question 5

One important "secret" to picking stocks is to:

Accepted Answer

A)  find a highly respected fund manager to pick them for you. 
B)  pick a lot of them. 
C)  choose the best-performing stock and put the majority of your investments in that one stock. 
D)  only invest in no-fee funds. 
A)  find a highly respected fund manager to pick them for you. 
B)  pick a lot of them. 
C)  choose the best-performing stock and put the majority of your investments in that one stock. 
D)  only invest in no-fee funds.

Question 6

Investors should avoid buying mutual funds with high fees because mutual funds with high fees:

Accepted Answer

A)  do not systemically outperform other funds. 
B)  are difficult to redeem. 
C)  do not diversify enough. 
D)  are always risky. 
A)  do not systemically outperform other funds. 
B)  are difficult to redeem. 
C)  do not diversify enough. 
D)  are always risky.

Question 7

NASDAQ stands for the National Association of Security Dealers Automated Quotations.

Accepted Answer

A) True 
 B)False

Question 8

To buy stocks and hold them is the best investment strategy if:

Accepted Answer

A)  you do not want to beat the market in the long run. 
B)  your opportunity cost of researching stocks is high. 
C)  you disagree with the efficient markets hypothesis but realize the value of diversification. 
D)  you accept the current market hypothesis and the value of diversification. 
A)  you do not want to beat the market in the long run. 
B)  your opportunity cost of researching stocks is high. 
C)  you disagree with the efficient markets hypothesis but realize the value of diversification. 
D)  you accept the current market hypothesis and the value of diversification.

Question 9

Which statement correctly describes the relationship between risk and return?

Accepted Answer

A)  Risk and return have no relationship. 
B)  Risk and return have a positive relationship. 
C)  Zero risk instruments have the highest returns. 
D)  The lower the risk is, the higher the return is. 
A)  Risk and return have no relationship. 
B)  Risk and return have a positive relationship. 
C)  Zero risk instruments have the highest returns. 
D)  The lower the risk is, the higher the return is.

Question 10

Stock markets' reactions to the Chernobyl nuclear power plant meltdown was a lesson that:

Accepted Answer

A)  it is not possible to profit from nonpublic information. 
B)  investors are slow to respond to new information. 
C)  the prices of assets quickly adjust to new information. 
D)  prices are sticky in the short run. 
A)  it is not possible to profit from nonpublic information. 
B)  investors are slow to respond to new information. 
C)  the prices of assets quickly adjust to new information. 
D)  prices are sticky in the short run.

Question 11

The efficient markets hypothesis suggests that reading the Wall Street Journal will help you pick top-performing stocks.

Accepted Answer

A) True 
 B)False

Question 12

The efficient markets hypothesis implies that an investor:

Accepted Answer

A)  cannot systematically outperform the market as a whole over time. 
B)  should rely on publicly available information to outperform the market. 
C)  should buy and sell lower volumes of shares. 
D)  can manage a portfolio and regularly outperform the whole market. 
A)  cannot systematically outperform the market as a whole over time. 
B)  should rely on publicly available information to outperform the market. 
C)  should buy and sell lower volumes of shares. 
D)  can manage a portfolio and regularly outperform the whole market.

Question 13

An active fund is a fund that:

Accepted Answer

A)  uses stock-picking techniques to buy stocks that are projected to beat market averages. 
B)  invests in the most actively traded stocks. 
C)  avoids investing in low-return assets, such as bonds and real estate. 
D)  is diversified in stocks, bonds, currency, and precious metals. 
A)  uses stock-picking techniques to buy stocks that are projected to beat market averages. 
B)  invests in the most actively traded stocks. 
C)  avoids investing in low-return assets, such as bonds and real estate. 
D)  is diversified in stocks, bonds, currency, and precious metals.

Question 14

The only way someone can take advantage of information that other people don't have is to start buying or selling large numbers of shares.

Accepted Answer

A) True 
 B)False

Question 15

High-frequency trading involves scanning the latest news and stock quotes with high-tech computers and using the information to trade stocks very quickly. Because it is highly automated, it happens a thousand times faster than an eye can blink. Though each trade might make a fraction of a penny, it accounts for about two-thirds of the stock market trading. How does this financing trend reflect the efficient markets hypothesis?

Accepted Answer

A)  Computers ensure public knowledge is instantly embodied in the stock price. 
B)  Buying and holding stocks allows the investor to circumvent this volatility. 
C)  Investing in stocks this way has a low risk of failure, thus a low return. 
D)  The firms that make a lot of money using this strategy are likely just very lucky. 
A)  Computers ensure public knowledge is instantly embodied in the stock price. 
B)  Buying and holding stocks allows the investor to circumvent this volatility. 
C)  Investing in stocks this way has a low risk of failure, thus a low return. 
D)  The firms that make a lot of money using this strategy are likely just very lucky.

Question 16

How fast will a $10,000 portfolio double if it is earning 10% annual returns?

Accepted Answer

A)  every 10 years 
B)  every 7 years 
C)  every 5 years 
D)  every 14 years 
A)  every 10 years 
B)  every 7 years 
C)  every 5 years 
D)  every 14 years

Question 17

Choose the series that places these financial instruments in order of increasing average return.

Accepted Answer

A)  U.S. T-Bills, corporate bonds, small stocks, S&P 500 Index fund 
B)  corporate bonds, U.S. T-Bills, small stocks, S&P 500 Index fund 
C)  U.S. T-Bills, corporate bonds, S&P 500 Index fund, small stocks 
D)  corporate bonds, U.S. T-Bills, S&P 500 Index fund, small stocks 
A)  U.S. T-Bills, corporate bonds, small stocks, S&P 500 Index fund 
B)  corporate bonds, U.S. T-Bills, small stocks, S&P 500 Index fund 
C)  U.S. T-Bills, corporate bonds, S&P 500 Index fund, small stocks 
D)  corporate bonds, U.S. T-Bills, S&P 500 Index fund, small stocks

Question 18

According to the efficient markets hypothesis, investors who trade stocks actively earn higher than average returns.

Accepted Answer

A) True 
 B)False

Question 19

An investor who already has a stock portfolio can best diversify further investment by:

Accepted Answer

A)  keeping all the money as cash. 
B)  holding assets that are negatively correlated with the existing portfolio. 
C)  buying stocks with no risk. 
D)  depositing the money in a bank. 
A)  keeping all the money as cash. 
B)  holding assets that are negatively correlated with the existing portfolio. 
C)  buying stocks with no risk. 
D)  depositing the money in a bank.

Question 20

Which of the following statements is TRUE?
I. For every transaction in the stock market there is a buyer and a seller.
II. At any point in time, the price of a stock tends to reflect all available public information about the company's future prospects.
III. A revolutionary cancer treatment pill will be released next year. An investor will get rich by buying stock in that company now.

Accepted Answer

A)  I and II only 
B)  III only 
C)  II and III only 
D)  I, II, and III 
A)  I and II only 
B)  III only 
C)  II and III only 
D)  I, II, and III

Exam 23: Stock Markets and Personal Finance

Someone who is using information outside the efficient markets hypothesis:

The principle of compounding implies that:

Which of the following stock portfolios offers the greatest diversification?

During the price rise associated with a speculative bubble, capital is invested:

One important "secret" to picking stocks is to:

Investors should avoid buying mutual funds with high fees because mutual funds with high fees:

NASDAQ stands for the National Association of Security Dealers Automated Quotations.

To buy stocks and hold them is the best investment strategy if:

Which statement correctly describes the relationship between risk and return?

Stock markets' reactions to the Chernobyl nuclear power plant meltdown was a lesson that:

The efficient markets hypothesis suggests that reading the Wall Street Journal will help you pick top-performing stocks.

The efficient markets hypothesis implies that an investor:

An active fund is a fund that:

The only way someone can take advantage of information that other people don't have is to start buying or selling large numbers of shares.

How fast will a $10,000 portfolio double if it is earning 10% annual returns?

Choose the series that places these financial instruments in order of increasing average return.

According to the efficient markets hypothesis, investors who trade stocks actively earn higher than average returns.

An investor who already has a stock portfolio can best diversify further investment by:

The Big Ideas

The Power of Trade and Comparative

Supply and Demand

Equilibrium

Elasticity and Its Applications

Taxes and Subsidies

The Price System

Price Ceilings and Floors

International Trade

Externalities- When the Price Is Not Right

Costs and Profit Maximization Under Competition

Competition and the Invisible Hand

Monopoly

Price Discrimination

Oligopoly and Game Theory

Competing for Monopoly

Monopolistic Competition and Advertising

Labor Markets

Public Goods and the Tragedy of the Commons

Political Economy and Public Choice

Economics, Ethics, and Public Policy

Managing Incentives

Price Discrimination

Consumer Choice

Filters