Question 1

The theory of efficient markets means

Accepted Answer

A) professional fund managers should be able to consistently beat the market average. 
B) a professional fund manager should really not expect to beat the market average consistently. 
C) a professional fund manager who beats the market average one year should be expected to beat the market average the next year. 
D) a professional fund manager who beats the market average one year should be expected to not beat the market average the next year.

Question 2

The dividend-discount model of stock valuation:

Accepted Answer

A) is an application of the net present value formula. 
B) takes the net present value of expected dividends and add it to the future sale price of the stock. 
C) takes the net present value of the expected future price of the stock and adds the annual dividend. 
D) takes the annual dividend, adds it to the expected future selling price and divides by the number of years to get the current price.

Question 3

What possibilities exist to explain the claim made by many professional portfolio managers that they can exceed the average stock market return year after year?

Accepted Answer

The answer of What possibilities exist to explain the claim...

Question 4

Professor Jeremy Siegel, of the University of Pennsylvania, did research showing that:

Accepted Answer

A) owning stocks over the long run produces returns below the risk-free return. 
B) if an investor owns stocks for a very short time the risk is greater than if the stocks are held for a long time. 
C) the return on the S&P 500 for a 25-year period often produces returns below zero. 
D) bonds really are less risky to hold over the long-term.

Question 5

An index number is valuable because:

Accepted Answer

A) the level of every index number itself provides critical information. 
B) it is more stable than the data it reflects. 
C) it provides a meaningful measurement scale to calculate percentage changes. 
D) it does not require any calculations to compute percentage changes.

Question 6

Companies whose stocks increase the most during a stock market bubble will:

Accepted Answer

A) have a difficult time raising investment capital. 
B) tend to under-invest. 
C) usually rebound faster once the bubble bursts. 
D) find it difficult to put their capital to profitable use after the bubble bursts.

Question 7

People differ on the method by which stock should be valued.Some people are chartists, others behaviorists.The basic difference between these groups is:

Accepted Answer

A) chartists rely on astrological charts to predict stock values, behaviorists rely on psychology. 
B) behaviorists are finance based, chartists study charts of investor psychology. 
C) chartists study charts of stock prices; behaviorists focus on investor psychology and behavior. 
D) chartists and behaviorists are the same in their approach; essentially there aren't any differences.

Question 8

Management fees for mutual funds are:

Accepted Answer

A) fixed by regulation. 
B) fixed by regulation and can vary by the size of the fund. 
C) usually a percentage of the gains the fund achieves. 
D) usually a percentage of the funds under management.

Question 9

Index funds are often preferred to other mutual funds because:

Accepted Answer

A) they offer greater diversification. 
B) they are managed better. 
C) they have greater liquidity. 
D) on average they have lower management fees.

Question 10

Considering the S&P 500 Index, if each company's stock price increased by 10%:

Accepted Answer

A) the weights in the index would remain the same. 
B) the companies with the most shares outstanding would have even greater weight after the increase. 
C) the companies with fewer shares would gain more weight at the expense of the companies with greater shares. 
D) the weights in the index would change to reflect the percentage changes in the prices of the various stocks.

Question 11

XYZ Inc.announces plans to finance the expansion of the firm by issuing hundreds of millions of dollars of bonds.Discuss how the current stockholders of XYZ Inc.will feel about this plan.

Accepted Answer

The answer of XYZ Inc.announces plans to finance the expansion...

Question 12

From the perspective of the theory of efficient markets, explain why it may be difficult for professional portfolio managers who have an exceptional year to continuously outperform the market average.

Accepted Answer

The answer of From the perspective of the theory of...

Question 13

The stock market bubble of the late 1990s and early 2000s:

Accepted Answer

A) saw internet and computer technology companies over-invest. 
B) saw an efficient allocation of resources toward the high-growth computer/internet sector. 
C) was a good example of the theory of efficient markets. 
D) was an example that not all bubbles burst.

Question 14

What price would an individual be willing to pay today for a stock he/she expects can be sold for $200 one year from now, if the individual has a discount rate of 6% (.06) and the stock pays an annual dividend of $7.50?

Accepted Answer

The answer of What price would an individual be willing...

Question 15

Compare/contrast the Nasdaq Composite Index with the Dow Jones Industrial Average.

Accepted Answer

The answer of Compare/contrast the Nasdaq Composite Index with the...

Question 16

The most broadly based stock index in use is the:

Accepted Answer

A) Nasdaq Composite Index. 
B) Wilshire 5000. 
C) Dow Jones Industrial Average. 
D) Standard and Poor's 500 Index.

Question 17

Use the five issues an investor should consider when purchasing stock to explain the popularity of mutual funds.

Accepted Answer

The answer of Use the five issues an investor should...

Question 18

Some good did come from the internet bubble of the late 1990s.One good thing was that:

Accepted Answer

A) people learned they should not invest in dotcom companies. 
B) start-up companies found they could bypass venture capitalists and raise funds directly from the capital markets. 
C) stock market bubbles do not have to result in an inefficient allocation of resources. 
D) the theory of efficient markets doesn't always hold and consistently better-than-market returns are achievable.

Question 19

What do bondholders and stockholders have in common?

Accepted Answer

A) Both are claimants. 
B) Both have voting rights. 
C) Both are shareholders in the company. 
D) Both receive fixed payments on their securities each year.

Question 20

Considering the return an investor requires from a stock, what are the two components that make up that return? Briefly explain each of these components.

Accepted Answer

The answer of Considering the return an investor requires from...

Exam 8: Stocks, Stock Markets, and Market Efficiency