Question 1

Based on the efficient markets hypothesis, which of the following mutual funds has the better chance of beating the market in the long run?

Accepted Answer

A)  a low-fee fund that is actively managed by a highly respected fund manager 
B)  a passive fund that simply attempts to mimic a financial index such as the S&P 500 
C)  a portfolio of stocks that you choose, since nobody has more incentive to manage your money correctly than you do 
D)  Forget about it-it is nearly impossible to choose a fund that will systematically outperform the market. 
A)  a low-fee fund that is actively managed by a highly respected fund manager 
B)  a passive fund that simply attempts to mimic a financial index such as the S&P 500 
C)  a portfolio of stocks that you choose, since nobody has more incentive to manage your money correctly than you do 
D)  Forget about it-it is nearly impossible to choose a fund that will systematically outperform the market.

Question 2

One reason why stock picking cannot work well in the long run is that:

Accepted Answer

A)  the stock market is controlled by a small number of investors. 
B)  stock market information is widely available. 
C)  there is always inside information that most investors do not have. 
D)  the stock market is heavily regulated by the government. 
A)  the stock market is controlled by a small number of investors. 
B)  stock market information is widely available. 
C)  there is always inside information that most investors do not have. 
D)  the stock market is heavily regulated by the government.

Question 3

If stock prices rise at a very fast rate, this may be indicative of:

Accepted Answer

A)  a speculative bubble. 
B)  low covariance with the market. 
C)  moderate profitability forecasts. 
D)  All of the answers are correct. 
A)  a speculative bubble. 
B)  low covariance with the market. 
C)  moderate profitability forecasts. 
D)  All of the answers are correct.

Question 4

Suppose you have two individuals, one of whom is very risk-averse and the other loves risk. What kind of financial instruments would you advise these individuals to purchase based solely on their risk tolerance levels?

Accepted Answer

A risk-averse person should go for T-bil

Question 5

The benefits of stock markets for the economy include:
I. serving as an intermediary between savers and investors.
II. revealing information about firm performance.
III. increasing the efficiency of resource allocation among firms.

Accepted Answer

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

Question 6

Suppose the benefit of owning a painting, in terms of your personal enjoyment, is worth 5% of the value of the painting. If the expected rate of return on stocks is 7%, then the painting should grow in value by _________ per year.

Accepted Answer

A)  5% 
B)  12% 
C)  7% 
D)  2% 
A)  5% 
B)  12% 
C)  7% 
D)  2%

Question 7

The major difference between active and passive mutual funds is that active funds:

Accepted Answer

A)  are classed as mutual funds, but passive funds are not. 
B)  involve stock picks by managers, while passive funds involve stock picks by the investors themselves. 
C)  are more risky than passive funds. 
D)  involve stock picks by managers, while passive funds match the movements of a broad market index. 
A)  are classed as mutual funds, but passive funds are not. 
B)  involve stock picks by managers, while passive funds involve stock picks by the investors themselves. 
C)  are more risky than passive funds. 
D)  involve stock picks by managers, while passive funds match the movements of a broad market index.

Question 8

Which investment strategy is typically more profitable over a long period of time?

Accepted Answer

A)  active 
B)  passive 
C)  introversive 
D)  subversive 
A)  active 
B)  passive 
C)  introversive 
D)  subversive

Question 9

Stocks typically earn a higher average rate of return than bonds because:

Accepted Answer

A)  stocks are riskier than bonds. 
B)  bonds are unsecured. 
C)  stocks are better managed than bonds. 
D)  there is a higher demand for stocks. 
A)  stocks are riskier than bonds. 
B)  bonds are unsecured. 
C)  stocks are better managed than bonds. 
D)  there is a higher demand for stocks.

Question 10

Speculative bubbles can make some people very rich and other people very poor. Explain why these bubbles are bad for the economy as a whole. What role does price as a conveyor of information play? Explain.

Accepted Answer

Speculative bubbles are bad for the econ

Question 11

Diversification is the only strategy that leads to a higher-than-market-average return.

Accepted Answer

A) True 
 B)False

Question 12

If your investment money is evenly divided among stocks in your investment portfolio, which of these four stock portfolios would suffer the most from an Adobe Systems bankruptcy?

Accepted Answer

A)  Adobe Systems 
B)  Adobe Systems and Best Buy 
C)  Adobe Systems, Nucor, and Wyeth 
D)  Adobe Systems, Ashland, Baker Hughes, Bemis, BMC Software, CA Inc., Century Telephone, Dean Foods, Dover Corp., Eastman Kodak, EQT Corp., and Exxon Mobil 
A)  Adobe Systems 
B)  Adobe Systems and Best Buy 
C)  Adobe Systems, Nucor, and Wyeth 
D)  Adobe Systems, Ashland, Baker Hughes, Bemis, BMC Software, CA Inc., Century Telephone, Dean Foods, Dover Corp., Eastman Kodak, EQT Corp., and Exxon Mobil

Question 13

Briefly discuss the four pieces of advice on financial investment given in the text.

Accepted Answer

The four pieces of advice on financial i

Question 14

The benefit of a stock market to the economy is that it makes some people rich without making other people poor.

Accepted Answer

A) True 
 B)False

Question 15

High fees:

Accepted Answer

A)  are not likely to generate higher returns in the long run because of the efficient markets hypothesis. 
B)  are not likely to generate higher returns in the long run because of diversification issues. 
C)  can often signal a higher-quality management and thus higher returns in the long run. 
D)  have little impact on your long-run returns to investing. 
A)  are not likely to generate higher returns in the long run because of the efficient markets hypothesis. 
B)  are not likely to generate higher returns in the long run because of diversification issues. 
C)  can often signal a higher-quality management and thus higher returns in the long run. 
D)  have little impact on your long-run returns to investing.

Question 16

Which refers to a mutual fund for which its manager buys and sells stocks regularly in order to maximize the fund's returns?

Accepted Answer

A)  liquid fund 
B)  efficient market fund 
C)  active fund 
D)  passive fund 
A)  liquid fund 
B)  efficient market fund 
C)  active fund 
D)  passive fund

Question 17

In a typical year, passive infesting in the S&P 500 Index does not beat about 60% of all mutual funds.

Accepted Answer

A) True 
 B)False

Question 18

The efficient markets hypothesis implies that active investing strategies can outperform passive investing strategies.

Accepted Answer

A) True 
 B)False

Question 19

Figure: Mutual Funds   Refer to the figure. From this Mutual Funds figure (John Stossel dart-throwing experiment) we can say that:

Accepted Answer

A)  mutual funds typically outperform the S&P 500. 
B)  mutual fund managers are no smarter than monkeys. 
C)  knowledge of stock market behavior does not guarantee its predictability. 
D)  mutual funds can never outperform the stock market. 
A)  mutual funds typically outperform the S&P 500. 
B)  mutual fund managers are no smarter than monkeys. 
C)  knowledge of stock market behavior does not guarantee its predictability. 
D)  mutual funds can never outperform the stock market.

Question 20

Which statement is TRUE?

Accepted Answer

A)  One should avoid investing in bonds because they give lower returns than do stocks. 
B)  If you need your money for something in 2 years, avoid putting it in stocks. 
C)  Retirees should allocate more of their investments to stocks. 
D)  Recent college graduates should allocate more of their money to bonds than to stocks. 
A)  One should avoid investing in bonds because they give lower returns than do stocks. 
B)  If you need your money for something in 2 years, avoid putting it in stocks. 
C)  Retirees should allocate more of their investments to stocks. 
D)  Recent college graduates should allocate more of their money to bonds than to stocks.

Exam 23: Stock Markets and Personal Finance

Based on the efficient markets hypothesis, which of the following mutual funds has the better chance of beating the market in the long run?

One reason why stock picking cannot work well in the long run is that:

If stock prices rise at a very fast rate, this may be indicative of:

Suppose you have two individuals, one of whom is very risk-averse and the other loves risk. What kind of financial instruments would you advise these individuals to purchase based solely on their risk tolerance levels?

The benefits of stock markets for the economy include: I. serving as an intermediary between savers and investors. II. revealing information about firm performance. III. increasing the efficiency of resource allocation among firms.

Suppose the benefit of owning a painting, in terms of your personal enjoyment, is worth 5% of the value of the painting. If the expected rate of return on stocks is 7%, then the painting should grow in value by _________ per year.

The major difference between active and passive mutual funds is that active funds:

Which investment strategy is typically more profitable over a long period of time?

Stocks typically earn a higher average rate of return than bonds because:

Speculative bubbles can make some people very rich and other people very poor. Explain why these bubbles are bad for the economy as a whole. What role does price as a conveyor of information play? Explain.

Diversification is the only strategy that leads to a higher-than-market-average return.

If your investment money is evenly divided among stocks in your investment portfolio, which of these four stock portfolios would suffer the most from an Adobe Systems bankruptcy?

Briefly discuss the four pieces of advice on financial investment given in the text.

The benefit of a stock market to the economy is that it makes some people rich without making other people poor.

High fees:

Which refers to a mutual fund for which its manager buys and sells stocks regularly in order to maximize the fund's returns?

In a typical year, passive infesting in the S&P 500 Index does not beat about 60% of all mutual funds.

The efficient markets hypothesis implies that active investing strategies can outperform passive investing strategies.

Figure: Mutual Funds Refer to the figure. From this Mutual Funds figure (John Stossel dart-throwing experiment) we can say that:

Which statement is TRUE?

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

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