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7)
Review of attempt 2
Started on Tuesday, February 22, 2011, 11:08 AM
Marks 31/50
Question1
Marks: 1
If in an efficient market all prices are correct and reflect market fundamentals,
which of the following is a false statement?
Choose one answer.
Question2
Marks: 1
According to the Gordon-Growth model, what will be the percentage change
in the value of the stock of a company whose current dividend is $10.00 and
whose dividends had been expected to grow by 3% per year but now are
expected to grow by 1% per year?
Choose one answer.
a. -4.0%
b. -66.0%
c. -31.1%
d. -23.7%
Incorrect
Marks for this submission: 0/1.
Question3
Marks: 1
If expectations of the future inflation rate are formed solely on the basis of a
weighted average of past inflation rates, then economics would say that
expectation formation is
Choose one answer.
a. irrational.
b. rational.
c. reasonable.
d. adaptive.
Correct
Marks for this submission: 1/1.
Question4
Marks: 1
According to the efficient markets hypothesis, purchasing the reports of
financial analysts
Choose one answer.
a. is not likely to be an effective strategy for increasing fin
Correct
Marks for this submission: 1/1.
Question5
Marks: 1
In the Gordon Growth Model, the growth rate is assumed to be ________ the
required return on equity.
Choose one answer.
a. less than
b. equal to
c. greater than
d. proportional to
Correct
Marks for this submission: 1/1.
Question6
Marks: 1
If a market participant believes that a stock price is irrationally high, they may
try to borrow stock from brokers to sell in the market and then make a profit by
buying the stock back again after the stock falls in price. This practice is called
Choose one answer.
a. undermining.
b. short selling.
c. long marketing.
d. double dealing.
Correct
Marks for this submission: 1/1.
Question7
Marks: 1
In the one-period valuation model, the current stock price increases if
Choose one answer.
Correct
Marks for this submission: 1/1.
Question8
Marks: 1
Using the Gordon growth model, a stock's price will increase if
Choose one answer.
Correct
Marks for this submission: 1/1.
Question9
Marks: 1
A stock's price will fall if there is
Choose one answer.
Correct
Marks for this submission: 1/1.
Question10
Marks: 1
According to the Gordon-Growth model, what is the value of a stock with a
dividend of $1, required return on equity of 10% and expected growth rate of
dividends of 5%?
Choose one answer.
a. $21
b. $20
c. $2
d. $10
Incorrect
Marks for this submission: 0/1.
Question11
Marks: 1
If a forecast is made using all available information, then economists say that
the expectation formation is
Choose one answer.
a. irrational.
b. adaptive.
c. reasonable.
d. rational.
Correct
Marks for this submission: 1/1.
Question12
Marks: 1
Suppose Apple announces that its earnings for the fourth quarter of 2011 rose
to $2 billion. As a result of this announcement the price of Apple's stock does
not change. The best explanation of this is
Choose one answer.
Incorrect
Marks for this submission: 0/1.
Question13
Marks: 1
According to rational expectations theory, forecast errors of expectations
Choose one answer.
c. are unpredictable.
Correct
Marks for this submission: 1/1.
Question14
Marks: 1
You read a story in the newspaper announcing the proposed merger of Dell
Computer and Gateway. The merger is expected to greatly increase
Gateway's profitability. If you decide to invest in Gateway stock, you can
expect to earn
Choose one answer.
a. above average returns since you will share in the higher pro
Question15
Marks: 1
The efficient markets hypothesis predicts that an investor
Choose one answer.
a. will be able consistently to earn above-normal profits from bu
long as he or she makes use of rational expectations.
Incorrect
Marks for this submission: 0/1.
Question16
Marks: 1
In comparing actively managed mutual funds with those funds that simply buy
and hold a large market portfolio (index funds), we would expect that
Choose one answer.
a. the index funds provide a higher return after expenses than the
b. actively managed funds and index funds provide the same retu
Correct
Marks for this submission: 1/1.
Question17
Marks: 1
Which of the following expressions gives the present value of future dividends
for a company whose current dividend is $5.00 and whose future dividends
are expected to grow at rate g?
Choose one answer.
a. [$5.00(1 - g)]/(i - g)
b. [$5.00(1 + g)]/(i + g)
c. [$5.00(1 + g)]/(i - g)
d. [$5.00(1 - g)]/(i + g)
Correct
Marks for this submission: 1/1.
Question18
Marks: 1
Tests used to rate the performance of rules developed in technical analysis
conclude that technical analysis
Choose one answer.
Question19
Marks: 1
If major traders believe the price of a stock should be higher than its current
market price,
Choose one answer.
Incorrect
Marks for this submission: 0/1.
Question20
Marks: 1
Rules used to predict movements in stock prices based on past patterns are,
according to the efficient markets hypothesis,
Choose one answer.
b. a waste of time.
Correct
Marks for this submission: 1/1.
Question21
Marks: 1
The rate of return of a stock held for one year equals
Choose one answer.
Correct
Marks for this submission: 1/1.
Question22
Marks: 10
What is the difference between adaptive expectations and rational
expectations in terms of stock valuation? write your answer concisely.
Answer:
Adaptive Expectations: agents form expectations about the future values of variables using the previou
same variable i.e., regardless of new information available, agents rely on past information, updating th
moving average. The adaptive-expectations approach dominated work on inflation and macroeconomi
intuitively plausible, tractable both mathematically and empirically, and successful in terms of yielding s
of models. In the 1970s, however, this hypothesis fell into disfavor following the work of John Muth , wh
optimality of using adaptive expectations (in the sense of delivering unbiased and efficient estimates o
limited class of variables.
Rational Expectations: John Muth introduced and applied the concept of rational expectations. Econom
influenced by the behavior of actors acting on their expectations of these variables. The stock market i
expectations of an increase in the value of equities will lead to buying, which in turn increases the price
expectations require that actors take all of these interactions into account, so that their actions are bas
in turn, realized as a result of their actions. The rational expectations model assumes that economic ag
the economy and that they can compute optimal forecasts that represent their expectations, much like
of all available and relevant information. In the extreme, when information is complete and there is no u
expectations hypothesis becomes a model of perfect foresight. Indeed, in games of strategic interactio
there is only one rational-expectations equilibrium, so that applying a rational-expectation assumption
a unique prediction.
The most basic criticism of rational-expectation models is that they make implausible demands on the
economic agents. Moreover, forecasting is a costly activity. The structure of the economy constantly ch
able to deal with these changes in statistical terms; and changes may occur faster than the speed at w
economy. In all cases, their forecasts will diverge from optimal forecasts. Even if it were plausible that
expectations, such learning would proceed very slowly given the complexity of the economy and the la
need to sift through. This criticism is perhaps more valid for rational-expectations models in the macro
are highly complex. For interaction among a few firms or individuals, it is more plausible that actions ca
Question23
Marks: 1
The efficient markets hypothesis suggests that investors
Choose one answer.
Correct
Marks for this submission: 1/1.
Question24
Marks: 1
The major criticism of the view that expectations are formed adaptively is that
Choose one answer.
b. people are irrational and therefore never learn from past mist
d. this view ignores that people use more information than just p
expectations.
Correct
Marks for this submission: 1/1.
Question25
Marks: 1
In the generalized dividend model, the current stock price is the sum of
Choose one answer.
Correct
Marks for this submission: 1/1.
Question26
Marks: 1
In the one-period valuation model, an increase in the required return on
investments in equity
Choose one answer.
Correct
Marks for this submission: 1/1.
Question27
Marks: 1
To say that stock prices follow a "random walk" is to argue that stock prices
Choose one answer.
Correct
Marks for this submission: 1/1.
Question28
Marks: 1
A key point made by the Gordon-Growth model is that the
Choose one answer.
a. past trends in a stock's behavior indicate future price trends
Correct
Marks for this submission: 1/1.
Question29
Marks: 1
According to the efficient markets hypothesis, the difference between today's
price for a share of stock and tomorrow's price is
Choose one answer.
b. zero.
d. unforecastable.
Incorrect
Marks for this submission: 0/1.
Question30
Marks: 1
Which of the following types of information most likely allows the exploitation
of a profit opportunity?
Choose one answer.
a. Insider information
b. Technical analysis
Correct
Marks for this submission: 1/1.
Question31
Marks: 1
Which of the following statements is true of rational expectations?
Choose one answer.
Question32
Marks: 1
Excessive volatility refers to the fact that
Choose one answer.
Correct
Marks for this submission: 1/1.
Question33
Marks: 1
Increased uncertainty resulting from the subprime crisis ________ the
required return on investment in equity.
Choose one answer.
a. decreased
b. lowered
c. had no impact on
d. raised
Correct
Marks for this submission: 1/1.
Question34
Marks: 1
According to the Gordon-Growth model, what is the value of a stock with a
dividend of $2, required return on equity of 8% and expected growth rate of
dividends of 4%?
Choose one answer.
a. $50
b. $25
c. $52
d. $26
Incorrect
Marks for this submission: 0/1.
Question35
Marks: 1
You have observed that the forecasts of an investment advisor consistently
outperform the other reported forecasts. The efficient markets hypothesis says
that future forecasts by this advisor
Choose one answer.
c. may or may not be better than the other forecasts. Past perf
of the future.
d. will be worse in the near future, but improve over time.
Correct
Marks for this submission: 1/1.
Question36
Marks: 1
Psychologists have found that people tend to be ________ in their own
judgments.
Choose one answer.
a. underconfident
b. insecure
c. indecisive
d. overconfident
Correct
Marks for this submission: 1/1.
Question37
Marks: 1
If market participants rely only past stock prices to forecast future stock prices,
Choose one answer.
Incorrect
Marks for this submission: 0/1.
Question38
Marks: 1
Which of the following accurately summarize the empirical evidence about
technical analysis?
Choose one answer.
Question39
Marks: 1
An implication of the efficient markets hypothesis is that
Choose one answer.
a. unless he or she acts recklessly, the average investor should
normal profits.
Correct
Marks for this submission: 1/1.
Question40
Marks: 1
Another way to state the efficient markets condition is: in an efficient market,
Choose one answer.
Correct
Marks for this submission: 1/1.
Question41
Marks: 1
Suppose that Google announces that its profits for the third quarter of 2011
were $1.6 billion. As a result of this announcement the price of Google's stock
declines. The best explanation of this is
Choose one answer.
Incorrect
Marks for this submission: 0/1.