Question 1

A comparison of historical performance of mutual funds and the S&P 500 suggests that:

Accepted Answer

A)  most mutual funds consistently outperform the S&P 500. 
B)  active funds consistently outperform the S&P 500, and passive funds consistently underperform the S&P 500. 
C)  mutual funds outperform the S&P 500 when they are undervalued. 
D)  mutual funds on average underperform the S&P 500 at least half of the time. 
A)  most mutual funds consistently outperform the S&P 500. 
B)  active funds consistently outperform the S&P 500, and passive funds consistently underperform the S&P 500. 
C)  mutual funds outperform the S&P 500 when they are undervalued. 
D)  mutual funds on average underperform the S&P 500 at least half of the time.

Question 2

Investing in the U.S. stock market offers ________ odds than gambling in Vegas or with a local bookie.

Accepted Answer

A)  worse 
B)  better 
C)  the same 
D)  impossible 
A)  worse 
B)  better 
C)  the same 
D)  impossible

Question 3

The efficient markets hypothesis implies that:

Accepted Answer

A)  it is easy to earn above market rates of return using the appropriate investment strategies at the right time. 
B)  investors don't make mistakes when determining when to buy and sell stocks. 
C)  it is not possible to systematically pick stocks that outperform the market. 
D)  stock prices are never too high or too low; they always accurately reflect the underlying value of the company. 
A)  it is easy to earn above market rates of return using the appropriate investment strategies at the right time. 
B)  investors don't make mistakes when determining when to buy and sell stocks. 
C)  it is not possible to systematically pick stocks that outperform the market. 
D)  stock prices are never too high or too low; they always accurately reflect the underlying value of the company.

Question 4

Consider the market for ABC Company's stock. What should happen in this market after an announcement that the company is having financial difficulties?

Accepted Answer

A)  The demand for the stock would shift to the left. 
B)  The demand for the stock would shift to the right. 
C)  The supply of the stock would shift to the left. 
D)  The supply of the stock would shift to the right. 
A)  The demand for the stock would shift to the left. 
B)  The demand for the stock would shift to the right. 
C)  The supply of the stock would shift to the left. 
D)  The supply of the stock would shift to the right.

Question 5

If a person diversifies her stock portfolio, then:

Accepted Answer

A)  the expected return of her portfolio will increase. 
B)  the risk of her portfolio will decrease. 
C)  both the risk and expected return of her portfolio will increase. 
D)  neither the risk nor the expected return of her portfolio will change. 
A)  the expected return of her portfolio will increase. 
B)  the risk of her portfolio will decrease. 
C)  both the risk and expected return of her portfolio will increase. 
D)  neither the risk nor the expected return of her portfolio will change.

Question 6

The efficient markets hypothesis states that:

Accepted Answer

A)  the price of assets already reflects all publicly available information. 
B)  arbitrage is impossible in financial markets. 
C)  in financial markets both buyers and sellers will be equally informed. 
D)  financial markets are, on average, more efficient than product markets. 
A)  the price of assets already reflects all publicly available information. 
B)  arbitrage is impossible in financial markets. 
C)  in financial markets both buyers and sellers will be equally informed. 
D)  financial markets are, on average, more efficient than product markets.

Question 7

Which of the following statements is TRUE?
I. The riskiest stocks tend to move in sync with the economy.
II. A relatively safe stock is one that does not vary much with the state of the economy.
III. Health care stocks are some of the riskiest stocks.

Accepted Answer

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

Question 8

A mutual fund run by a manager who picks stocks is termed a(n) ______ fund.

Accepted Answer

A)  active 
B)  passive 
C)  dormant 
D)  moving 
A)  active 
B)  passive 
C)  dormant 
D)  moving

Question 9

Because baby boomers are retiring, investing in firms that produce goods and services for senior citizens is definitely a sure road to riches.

Accepted Answer

A) True 
 B)False

Question 10

Which statement is TRUE?

Accepted Answer

A)  Investing in art is more lucrative than investing in stocks and bonds. 
B)  Investing in bonds is more lucrative than investing in stocks. 
C)  Investing in real estate is more lucrative than investing in stocks. 
D)  Because there is a fun factor associated with owning art, the returns to investing in art are reduced by this fun factor. 
A)  Investing in art is more lucrative than investing in stocks and bonds. 
B)  Investing in bonds is more lucrative than investing in stocks. 
C)  Investing in real estate is more lucrative than investing in stocks. 
D)  Because there is a fun factor associated with owning art, the returns to investing in art are reduced by this fun factor.

Question 11

Diversification:

Accepted Answer

A)  reduces risk but also reduces expected returns. 
B)  increases risk but also increases your expected returns. 
C)  reduces risk but does not reduce your expected returns. 
D)  reduces risk and increases your expected returns. 
A)  reduces risk but also reduces expected returns. 
B)  increases risk but also increases your expected returns. 
C)  reduces risk but does not reduce your expected returns. 
D)  reduces risk and increases your expected returns.

Question 12

On average, returns on investments in art ____________ returns in the stock market.

Accepted Answer

A)  exceed 
B)  underperform 
C)  equal 
D)  cannot compare to 
A)  exceed 
B)  underperform 
C)  equal 
D)  cannot compare to

Question 13

______ mutual fund managers can consistently beat the market average.

Accepted Answer

A)  All 
B)  No 
C)  Relatively many 
D)  Relatively few 
A)  All 
B)  No 
C)  Relatively many 
D)  Relatively few

Question 14

Passive investing is buying the stocks that make up a broad market index; there is no attempt to figure out which stocks will perform better than others.

Accepted Answer

A) True 
 B)False

Question 15

People who accept the efficient markets hypothesis should:

Accepted Answer

A)  buy a large number of stocks from different companies and hold them for a long period. 
B)  buy a small number of stocks from several companies, selling the stocks whose price has fallen and keeping the rest. 
C)  buy stocks only at a low price and sell them when their prices have increased by more than the market average. 
D)  constantly buy and sell stocks to avoid the risk of large price swings. 
A)  buy a large number of stocks from different companies and hold them for a long period. 
B)  buy a small number of stocks from several companies, selling the stocks whose price has fallen and keeping the rest. 
C)  buy stocks only at a low price and sell them when their prices have increased by more than the market average. 
D)  constantly buy and sell stocks to avoid the risk of large price swings.

Question 16

Due to banking regulations, banks in the early part of the twentieth century were not allowed to nationalize and thus many banks had most of their investments tied up in the agricultural sector. The Dust Bowl and retaliatory tariffs caused many banks to fail, particularly during the Great Depression. Ignoring legal and cultural restrictions, what piece of advice would have served banks very well during this time?

Accepted Answer

A)  employing compound returns 
B)  diversification 
C)  having more low-risk investments 
D)  reducing the fees the banks charged on checking accounts 
A)  employing compound returns 
B)  diversification 
C)  having more low-risk investments 
D)  reducing the fees the banks charged on checking accounts

Question 17

Suppose 80 experts flip a coin to predict whether the prices of stocks will rise or fall for the year. After 4 years, how many experts will have correctly predicted the direction of the stock market?

Accepted Answer

A)  13 
B)  8 
C)  33 
D)  5 
A)  13 
B)  8 
C)  33 
D)  5

Question 18

The efficient markets hypothesis most clearly implies that extra-market returns are:

Accepted Answer

A)  common in the long run. 
B)  rare in the long run. 
C)  always attained in the long run. 
D)  never attained in the long run. 
A)  common in the long run. 
B)  rare in the long run. 
C)  always attained in the long run. 
D)  never attained in the long run.

Question 19

According to the efficient markets hypothesis, the person who most likely earns the highest return for holding the stock of Company ABC on a single day is:

Accepted Answer

A)  a person who follows a buy-and-hold strategy. 
B)  an active trader who knows the historical prices of ABC. 
C)  ABC's CEO who has inside information about the company's new projects. 
D)  None of the answers is correct. No one can outperform anyone else at any time. 
A)  a person who follows a buy-and-hold strategy. 
B)  an active trader who knows the historical prices of ABC. 
C)  ABC's CEO who has inside information about the company's new projects. 
D)  None of the answers is correct. No one can outperform anyone else at any time.

Question 20

The Dow is a better indicator of the market as a whole than the S&P 500.

Accepted Answer

A) True 
 B)False

Exam 23: Stock Markets and Personal Finance

A comparison of historical performance of mutual funds and the S&P 500 suggests that:

Investing in the U.S. stock market offers ________ odds than gambling in Vegas or with a local bookie.

The efficient markets hypothesis implies that:

Consider the market for ABC Company's stock. What should happen in this market after an announcement that the company is having financial difficulties?

If a person diversifies her stock portfolio, then:

The efficient markets hypothesis states that:

Which of the following statements is TRUE? I. The riskiest stocks tend to move in sync with the economy. II. A relatively safe stock is one that does not vary much with the state of the economy. III. Health care stocks are some of the riskiest stocks.

A mutual fund run by a manager who picks stocks is termed a(n) ______ fund.

Because baby boomers are retiring, investing in firms that produce goods and services for senior citizens is definitely a sure road to riches.

Which statement is TRUE?

Diversification:

On average, returns on investments in art ____________ returns in the stock market.

______ mutual fund managers can consistently beat the market average.

Passive investing is buying the stocks that make up a broad market index; there is no attempt to figure out which stocks will perform better than others.

People who accept the efficient markets hypothesis should:

Suppose 80 experts flip a coin to predict whether the prices of stocks will rise or fall for the year. After 4 years, how many experts will have correctly predicted the direction of the stock market?

The efficient markets hypothesis most clearly implies that extra-market returns are:

According to the efficient markets hypothesis, the person who most likely earns the highest return for holding the stock of Company ABC on a single day is:

The Dow is a better indicator of the market as a whole than the S&P 500.

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