Exam 23: Stock Markets and Personal Finance

If a cable news channel breaks news one morning that a major light bulb company announced a new long-lasting light bulb and you call your broker the next day to buy stock in the company, will you make money based on this information?

Mutual funds can let you invest in hundreds of stocks with just one purchase.

Suppose 1,000 experts flip a coin once each year and half say the market will go up while the other half say the market will go down. After 6 years how many experts would have been correct every year?

It is possible for active investing to consistently beat average market returns.

Which is consistent with the no free lunch principle?

When a fund manager tries to pick stocks to outperform the market averages, the mutual fund is called a(n):

The S&P 500 Index fund is a(n) ______ fund.

If a stock market bubble bursts:

You are starting your first job after college and are looking for a mutual fund in which to invest some of your retirement savings. Your college economics course taught that it is virtually impossible to beat the market in the long run given the efficient markets hypothesis, so you are looking at funds that try to mimic the market and produce the same 7% annual return as the market has produced since 1802. You have narrowed it down to three mutual funds (A, B, and C), all of which have consistently produced an average annual rate of return of 7%. Fund A charges a 1.5% annual fee, fund B charges 0.2% annually, and fund C is a no-fee fund. Compare how much your investment will be worth after 10 years if you initially invest $10,000 in fund A versus fund B versus fund C. How much will you end up paying in fees for each fund over the course of 10 years if your initial investment is $10,000?

Which of the following tends to be least risky in its stock value when the economy is in a deep recession?

Which is NOT a typical index used to practice a buy-and-hold strategy?

Which of the following investment instruments would a risk-loving individual choose?

The efficient markets hypothesis states that current prices reflect all publicly available information.

Suppose that someone has decided to follow a buy-and-hold strategy in technology stock purchases and buys these stocks 8 years before retirement. The stocks grow in value and this person's retirement wealth increases. Critically evaluate this investment decision. Was it smart? Could it have been improved?

The manager of a passive mutual fund:

Active mutual funds historically outperform passive mutual funds.

All of the following are economic roles of the stock market, EXCEPT that it:

Diversification means buying a stock at a low price and then selling it later at a higher price.

The investment approach of one of T. Rowe Price's mutual funds is: "Reflecting a value approach to investing, the fund will seek the stocks of companies whose current stock prices do not appear to adequately reflect their underlying value as measured by assets, earnings, cash flow, or business franchises." This fund is a(n):

Stocks are a good investment if: I. one is prepared to hold them for a while through market fluctuations. II. one can buy them immediately after prices have fallen. III. one is not averse to risk.