Question 1

What is the risk-return trade-off?

Accepted Answer

A)  Assets with the least risk tend to outperform the market. 
B)  To invest in less risky assets means higher returns. 
C)  Bonds earn higher returns than stocks because bonds are riskier. 
D)  To earn higher rates of return, a person must accept higher risk. 
A)  Assets with the least risk tend to outperform the market. 
B)  To invest in less risky assets means higher returns. 
C)  Bonds earn higher returns than stocks because bonds are riskier. 
D)  To earn higher rates of return, a person must accept higher risk.

Question 2

Why would stock for a high-end store with expensive clothing be considered risky in a recession?

Accepted Answer

A)  Consumers demand cheaper clothes in times of recession, and that company would be expected to make lower profits. 
B)  Consumers do not buy stock when recessions occur. 
C)  High-end clothing store stocks have low covariance with the market. 
D)  Stocks from such companies depend heavily on oil prices. 
A)  Consumers demand cheaper clothes in times of recession, and that company would be expected to make lower profits. 
B)  Consumers do not buy stock when recessions occur. 
C)  High-end clothing store stocks have low covariance with the market. 
D)  Stocks from such companies depend heavily on oil prices.

Question 3

Financial returns on houses are _______ over long periods of time because part of the return on housing is from ________.

Accepted Answer

A)  close to zero; the joys of ownership 
B)  about 7% per year; home owner improvements 
C)  about 12% per year; paying low property taxes 
D)  negative; depreciation 
A)  close to zero; the joys of ownership 
B)  about 7% per year; home owner improvements 
C)  about 12% per year; paying low property taxes 
D)  negative; depreciation

Question 4

The NASDAQ:

Accepted Answer

A)  weights individual stocks equally. 
B)  gives greater weight to low-tech stocks than does the Dow. 
C)  gives greater weight to small stocks than does the Dow. 
D)  has 500 stocks. 
A)  weights individual stocks equally. 
B)  gives greater weight to low-tech stocks than does the Dow. 
C)  gives greater weight to small stocks than does the Dow. 
D)  has 500 stocks.

Question 5

The risk-return trade-off means that a stock with a high risk tends to have a lower return.

Accepted Answer

A) True 
 B)False

Question 6

In the Alfred Hitchcock Presents episode "Mail Order Prophet," a man receives mysterious letters that accurately predict the movements of certain stocks. After being correct several times in a row, the man, upon the letter's request, sends money to the market prophet in exchange for his latest stock tip. At the end of the episode we learn the "prophet" is actually a con man who sends a letter to many people with half the letters predicting a stock will increase and the other half predicting it will decrease. How does this Hitchcock episode illustrate one particular theory of Warren Buffet's wealth?

Accepted Answer

A)  It was very difficult to send out all those letters; hard work pays off. 
B)  Like the letters in the story, Buffet happened to be right several times in a row. 
C)  Buffet conned his way to the top, using insider information to become wealthy. 
D)  Diversification is an important way to protect investments and build wealth. 
A)  It was very difficult to send out all those letters; hard work pays off. 
B)  Like the letters in the story, Buffet happened to be right several times in a row. 
C)  Buffet conned his way to the top, using insider information to become wealthy. 
D)  Diversification is an important way to protect investments and build wealth.

Question 7

The first secret to picking stocks is to pick many of them!

Accepted Answer

A) True 
 B)False

Question 8

When Chernobyl melted down in the Soviet Union, the:

Accepted Answer

A)  price of U.S. basketballs increased. 
B)  prices of assets reacted slowly to the information. 
C)  price of U.S. potatoes increased. 
D)  stock prices of U.S. nuclear plants increased. 
A)  price of U.S. basketballs increased. 
B)  prices of assets reacted slowly to the information. 
C)  price of U.S. potatoes increased. 
D)  stock prices of U.S. nuclear plants increased.

Question 9

Since for every buyer of a stock there is a seller of that stock, someone can likely become very rich acting on public information.

Accepted Answer

A) True 
 B)False

Question 10

A stock market bubble is a rise in stock prices that is not reflective of the underlying fundamentals of the company.

Accepted Answer

A) True 
 B)False

Question 11

What most likely happened to the stock for Apple because of the iPhone and iPad? Explain using a demand and supply graph.

Accepted Answer

The demand for the Apple stock

Question 12

One's best trading strategy according to the efficient markets hypothesis is summarized as:

Accepted Answer

A)  buy and sell. 
B)  sell and hold. 
C)  buy and hold. 
D)  buy, sell, and hold. 
A)  buy and sell. 
B)  sell and hold. 
C)  buy and hold. 
D)  buy, sell, and hold.

Question 13

In a stock market, a riskier stock typically has:

Accepted Answer

A)  a higher covariance with the market as a whole. 
B)  a lower covariance with the market as a whole. 
C)  a higher correlation with some stocks and a lower correlation with other stocks. 
D)  a lower correlation with the market as a whole. 
A)  a higher covariance with the market as a whole. 
B)  a lower covariance with the market as a whole. 
C)  a higher correlation with some stocks and a lower correlation with other stocks. 
D)  a lower correlation with the market as a whole.

Question 14

In the stock market, profiting from inside information:

Accepted Answer

A)  is nearly impossible because of the efficient markets hypothesis. 
B)  can lead to above-normal market returns for a long period. 
C)  requires the investor to keep the information secret and not act for a long period. 
D)  requires purchasing or selling large quantities of the stock very quickly. 
A)  is nearly impossible because of the efficient markets hypothesis. 
B)  can lead to above-normal market returns for a long period. 
C)  requires the investor to keep the information secret and not act for a long period. 
D)  requires purchasing or selling large quantities of the stock very quickly.

Question 15

What does the efficient markets hypothesis tell us about the movement in a stock price?

Accepted Answer

A)  It tells what happens to the stock price in the past but not in the future. 
B)  It reflects only what the buyers, not the sellers, think about the future movement of the stock price. 
C)  It reflects all public information that leads to its movement. 
D)  It always predicts how the stock price will move in the future. 
A)  It tells what happens to the stock price in the past but not in the future. 
B)  It reflects only what the buyers, not the sellers, think about the future movement of the stock price. 
C)  It reflects all public information that leads to its movement. 
D)  It always predicts how the stock price will move in the future.

Question 16

Suppose there is a rumor that Company X is about to merge with another very profitable company. Now suppose that a major broker spreads this rumor, and people take that broker seriously. Could this broker cause the company to "appear" to be a profitable stock to hold?

Accepted Answer

Yes, if enough people react to a predict

Question 17

In a market of 2,000 investors who each year flip a coin to predict market success or failure, how many investors will have been consistently right after 5 years? (Assume the coin tosses yield heads exactly 50% of the time.)

Accepted Answer

A)  31 
B)  62 
C)  500 
D)  1,000 
A)  31 
B)  62 
C)  500 
D)  1,000

Question 18

A real return of 10% per year means that a $10,000 investment will grow to $20,000 in:

Accepted Answer

A)  10 years. 
B)  7 years. 
C)  15 years. 
D)  20 years. 
A)  10 years. 
B)  7 years. 
C)  15 years. 
D)  20 years.

Question 19

The efficient markets hypothesis implies that in the stock market:

Accepted Answer

A)  everyone can earn more than everyone else some of the time. 
B)  no one can systematically earn more than the average market return. 
C)  people with more funds earn higher returns. 
D)  people can use technical analysis to systematically earn high returns. 
A)  everyone can earn more than everyone else some of the time. 
B)  no one can systematically earn more than the average market return. 
C)  people with more funds earn higher returns. 
D)  people can use technical analysis to systematically earn high returns.

Question 20

Which of the following statements is TRUE?
I. Technical analysis has been found to outperform most investing strategies.
II. Technical analysis looks for patterns in stock price movements to best determine when to buy and sell.
III. Technical analysis is the use of insider information to help determine when to buy and sell.

Accepted Answer

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

Exam 23: Stock Markets and Personal Finance

What is the risk-return trade-off?

Why would stock for a high-end store with expensive clothing be considered risky in a recession?

Financial returns on houses are _______ over long periods of time because part of the return on housing is from ________.

The NASDAQ:

The risk-return trade-off means that a stock with a high risk tends to have a lower return.

The first secret to picking stocks is to pick many of them!

When Chernobyl melted down in the Soviet Union, the:

Since for every buyer of a stock there is a seller of that stock, someone can likely become very rich acting on public information.

A stock market bubble is a rise in stock prices that is not reflective of the underlying fundamentals of the company.

What most likely happened to the stock for Apple because of the iPhone and iPad? Explain using a demand and supply graph.

One's best trading strategy according to the efficient markets hypothesis is summarized as:

In a stock market, a riskier stock typically has:

In the stock market, profiting from inside information:

What does the efficient markets hypothesis tell us about the movement in a stock price?

Suppose there is a rumor that Company X is about to merge with another very profitable company. Now suppose that a major broker spreads this rumor, and people take that broker seriously. Could this broker cause the company to "appear" to be a profitable stock to hold?

In a market of 2,000 investors who each year flip a coin to predict market success or failure, how many investors will have been consistently right after 5 years? (Assume the coin tosses yield heads exactly 50% of the time.)

A real return of 10% per year means that a $10,000 investment will grow to $20,000 in:

The efficient markets hypothesis implies that in the stock market:

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

Financial returns on houses are _ over long periods of time because part of the return on housing is from __.