Q&A Hero

Q: The January effect refers to the fact that A) most stock market crashes have occurred in January. B) stock prices tend to fall in January. C) stock prices have historically experienced abnormal price increases in January. D) the football team winning the Super Bowl accurately predicts the behavior of the stock market for the next year.

Q: The small-firm effect refers to the A) negative returns earned by small firms. B) returns equal to large firms earned by small firms. C) abnormally high returns earned by small firms. D) low returns after adjusting for risk earned by small firms.

Q: Which of the following accurately summarize the empirical evidence about technical analysis? A) Technical analysts fare no better than other financial analysison average they do not outperform the market. B) Technical analysts tend to outperform other financial analysis, but on average they nevertheless under-perform the market. C) Technical analysts fare no better than other financial analysis, and like other financial analysts they outperform the market. D) Technical analysts fare no better than other financial analysis, and like other financial analysts they under-perform the market.

Q: Tests used to rate the performance of rules developed in technical analysis conclude that technical analysis A) outperforms the overall market. B) far outperforms the overall market, suggesting that stockbrokers provide valuable services. C) does not outperform the overall market. D) does not outperform the overall market, suggesting that stockbrokers do not provide services of any value.

Q: Rules used to predict movements in stock prices based on past patterns are, according to the efficient markets hypothesis, A) a waste of time. B) profitably employed by all financial analysts. C) the most efficient rules to employ. D) consistent with the random walk hypothesis.

Q: The efficient markets hypothesis predicts that stock prices follow a "random walk." The implication of this hypothesis for investing in stocks is A) a "churning strategy" of buying and selling often to catch market swings. B) turning over your stock portfolio each month, selecting stocks by throwing darts at the stock page. C) a "buy and hold strategy" of holding stocks to avoid brokerage commissions. D) following the advice of technical analysts.

Q: To say that stock prices follow a "random walk" is to argue that stock prices A) rise, then fall, then rise again. B) rise, then fall in a predictable fashion. C) tend to follow trends. D) cannot be predicted based on past trends.

Q: When Happy Feet Corporation announces that their fourth quarter earnings are up 10%, their stock price falls. This is consistent with the efficient markets hypothesis A) if earnings were not as high as expected. B) if earnings were not as low as expected. C) if a merger is anticipated. D) the company just invented a new bunion product.

Q: The number and availability of discount brokers has grown rapidly since the mid-1970s. The efficient markets hypothesis predicts that people who use discount brokers A) will likely earn lower returns than those who use full-service brokers. B) will likely earn about the same as those who use full-service brokers, but will net more after brokerage commissions. C) are going against evidence suggesting that full-service brokers can help outperform the market. D) are likely to outperform the market by a wide margin.

Q: Studies of mutual fund performance indicate that mutual funds that outperformed the market in one time period usually A) beat the market in the next time period. B) beat the market in the next two subsequent time periods. C) beat the market in the next three subsequent time periods. D) do not beat the market in the next time period.

Q: If a mutual fund outperforms the market in one period, evidence suggests that this fund is A) highly likely to consistently outperform the market in subsequent periods due to its superior investment strategy. B) likely to under-perform the market in subsequent periods to average its overall returns. C) not likely to consistently outperform the market in subsequent periods. D) not likely to outperform the market in any subsequent period.

Q: ________ and ________ may provide an explanation for stock market bubbles. A) Overconfidence; social contagion B) Underconfidence; social contagion C) Overconfidence; social isolationism D) Underconfidence; social isolationism

Q: Psychologists have found that people tend to be ________ in their own judgments. A) underconfident B) overconfident C) indecisive D) insecure

Q: Loss aversion can explain why very little ________ actually takes place in the securities market. A) short selling B) bargaining C) bartering D) negotiating

Q: ________ means people are more unhappy when they suffer losses than they are happy when they achieve gains. A) Loss fundamentals B) Loss aversion C) Loss leader D) Loss cycle

Q: 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 A) short selling. B) double dealing. C) undermining. D) long marketing.

Q: ________ is the field of study that applies concepts from social sciences such as psychology and sociology to help understand the behavior of securities prices. A) Behavioral finance B) Strategical finance C) Methodical finance D) Procedural finance

Q: The efficient markets hypothesis implies that prices in the stock market A) follow a definite pattern. B) are more likely to go up than down. C) always undervalue the true assets of a corporation. D) are unpredictable.

Q: If in an efficient market all prices are correct and reflect market fundamentals, which of the following is a false statement? A) A stock that has done poorly in the past is more likely to do well in the future. B) One investment is as good as any other because the securities' prices are correct. C) A security's price reflects all available information about the intrinsic value of the security. D) Security prices can be used by managers to assess their cost of capital accurately.

Q: Your best friend calls and gives you the latest stock market "hot tip" that he heard at the health club. Should you act on this information? Why or why not?

Q: If a corporation announces that it expects quarterly earnings to increase by 25% and it actually sees an increase of 22%, what should happen to the price of the corporation's stock if the efficient markets hypothesis holds, everything else held constant?

Q: For small investors, the best way to pursue a "buy and hold" strategy is to A) buy and sell individual stocks frequently. B) buy no-load mutual funds with high management fees. C) buy no-load mutual funds with low management fees. D) buy load mutual funds.

Q: The advantage of a "buy-and-hold strategy" is that A) net profits will tend to be higher because there will be fewer brokerage commissions. B) losses will eventually be eliminated. C) the longer a stock is held, the higher will be its price. D) profits are guaranteed.

Q: The efficient markets hypothesis suggests that investors A) should purchase no-load mutual funds which have low management fees. B) can use the advice of technical analysts to outperform the market. C) let too many unexploited profit opportunities go by if they adopt a "buy and hold" strategy. D) act on all "hot tips" they hear.

Q: The efficient markets hypothesis indicates that investors A) can use the advice of technical analysts to outperform the market. B) do better on average if they adopt a "buy and hold" strategy. C) let too many unexploited profit opportunities go by if they adopt a "buy and hold" strategy. D) do better if they purchase loaded mutual funds.

Q: 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 A) above average returns since you will share in the higher profits. B) above average returns since your stock price will definitely appreciate as higher profits are earned. C) below average returns since computer makers have low profit rates. D) a normal return since stock prices adjust to reflect expected changes in profitability almost immediately.

Q: Sometimes one observes that the price of a company's stock falls after the announcement of favorable earnings. This phenomenon is A) clearly inconsistent with the efficient markets hypothesis. B) consistent with the efficient markets hypothesis if the earnings were not as high as anticipated. C) consistent with the efficient markets hypothesis if the earnings were not as low as anticipated. D) consistent with the efficient markets hypothesis if the favorable earnings were expected.

Q: Which of the following types of information most likely allows the exploitation of a profit opportunity? A) Financial analysts' published recommendations B) Technical analysis C) Hot tips from a stockbroker D) Insider information

Q: If a higher inflation is expected, what would you expect to happen to the shape of the yield curve? Why?

Q: A ________ yield curve predicts a future increase in inflation. A) steeply upward sloping B) slight upward sloping C) flat D) downward sloping

Q: When the yield curve is flat or downward-sloping, it suggest that the economy is more likely to enter A) a recession. B) an expansion. C) a boom time. D) a period of increasing output.

Q: If investors expect interest rates to fall significantly in the future, the yield curve will be inverted. This means that the yield curve has a ________ slope. A) steep upward B) slight upward C) flat D) downward

Q: When short-term interest rates are expected to fall sharply in the future, the yield curve will A) slope up. B) be flat. C) be inverted. D) be an inverted U shape.

Q: An inverted yield curve predicts that short-term interest rates A) are expected to rise in the future. B) will rise and then fall in the future. C) will remain unchanged in the future. D) will fall in the future.

Q: A particularly attractive feature of the ________ is that it tells you what the market is predicting about future short-term interest rates by just looking at the slope of the yield curve. A) segmented markets theory B) expectations theory C) liquidity premium theory D) separable markets theory

Q: The ________ of the term structure states the following: the interest rate on a long-term bond will equal an average of short-term interest rates expected to occur over the life of the long-term bond plus a term premium that responds to supply and demand conditions for that bond. A) segmented markets theory B) expectations theory C) liquidity premium theory D) separable markets theory

Q: In actual practice, short-term interest rates and long-term interest rates usually move together; this is the major shortcoming of the A) segmented markets theory. B) expectations theory. C) liquidity premium theory. D) separable markets theory.

Q: According to this theory of the term structure, bonds of different maturities are not substitutes for one another. A) Segmented markets theory B) Expectations theory C) Liquidity premium theory D) Separable markets theory

Q: The ________ of the term structure of interest rates states that the interest rate on a long-term bond will equal the average of short-term interest rates that individuals expect to occur over the life of the long-term bond, and investors have no preference for short-term bonds relative to long-term bonds. A) segmented markets theory B) expectations theory C) liquidity premium theory D) separable markets theory

Q: The expectations theory and the segmented markets theory do not explain the facts very well, but they provide the groundwork for the most widely accepted theory of the term structure of interest rates, A) the Keynesian theory. B) separable markets theory. C) liquidity premium theory. D) the asset market approach.

Q: The preferred habitat theory of the term structure is closely related to the A) expectations theory of the term structure. B) segmented markets theory of the term structure. C) liquidity premium theory of the term structure. D) the inverted yield curve theory of the term structure.

Q: If the yield curve has a mild upward slope, the liquidity premium theory (assuming a mild preference for shorter-term bonds) indicates that the market is predicting A) a rise in short-term interest rates in the near future and a decline further out in the future. B) constant short-term interest rates in the near future and further out in the future. C) a decline in short-term interest rates in the near future and a rise further out in the future. D) a decline in short-term interest rates in the near future and an even steeper decline further out in the future.

Q: If the yield curve slope is flat for short maturities and then slopes steeply upward for longer maturities, the liquidity premium theory (assuming a mild preference for shorter-term bonds) indicates that the market is predicting A) a rise in short-term interest rates in the near future and a decline further out in the future. B) constant short-term interest rates in the near future and further out in the future. C) a decline in short-term interest rates in the near future and a rise further out in the future. D) constant short-term interest rates in the near future and a decline further out in the future.

Q: If the yield curve is flat for short maturities and then slopes downward for longer maturities, the liquidity premium theory (assuming a mild preference for shorter-term bonds) indicates that the market is predicting. A) a rise in short-term interest rates in the near future and a decline further out in the future. B) constant short-term interest rates in the near future and a decline further out in the future. C) a decline in short-term interest rates in the near future and a rise further out in the future. D) a decline in short-term interest rates in the near future and an even steeper decline further out in the future.

Q: According to the liquidity premium theory, a yield curve that is flat means that A) bond purchasers expect interest rates to rise in the future. B) bond purchasers expect interest rates to stay the same. C) bond purchasers expect interest rates to fall in the future. D) the yield curve has nothing to do with expectations of bond purchasers.

Q: According to the liquidity premium theory of the term structure, a downward sloping yield curve indicates that short-term interest rates are expected to A) rise in the future. B) remain unchanged in the future. C) decline moderately in the future. D) decline sharply in the future.

Q: According to the liquidity premium theory of the term structure, a flat yield curve indicates that short-term interest rates are expected to A) rise in the future. B) remain unchanged in the future. C) decline moderately in the future. D) decline sharply in the future.

Q: According to the liquidity premium theory of the term structure, a slightly upward sloping yield curve indicates that short-term interest rates are expected to A) rise in the future. B) remain unchanged in the future. C) decline moderately in the future. D) decline sharply in the future.

Q: According to the liquidity premium theory of the term structure, a steeply upward sloping yield curve indicates that short-term interest rates are expected to A) rise in the future. B) remain unchanged in the future. C) decline moderately in the future. D) decline sharply in the future.

Q: If 1-year interest rates for the next five years are expected to be 4, 2, 5, 4, and 5 percent, and the 5-year term premium is 1 percent, than the 5-year bond rate will be A) 2 percent. B) 3 percent. C) 4 percent. D) 5 percent.

Q: If 1-year interest rates for the next three years are expected to be 4, 2, and 3 percent, and the 3-year term premium is 1 percent, than the 3-year bond rate will be A) 1 percent. B) 2 percent. C) 3 percent. D) 4 percent.

Q: The additional incentive that the purchaser of a Treasury security requires to buy a long-term security rather than a short-term security is called the A) risk premium. B) term premium. C) tax premium. D) market premium.

Q: According to the liquidity premium theory of the term structure A) bonds of different maturities are not substitutes. B) if yield curves are downward sloping, then short-term interest rates are expected to fall by so much that, even when the positive term premium is added, long-term rates fall below short-term rates. C) yield curves should never slope downward. D) interest rates on bonds of different maturities do not move together over time.

Q: According to the liquidity premium theory of the term structure A) because buyers of bonds may prefer bonds of one maturity over another, interest rates on bonds of different maturities do not move together over time. B) the interest rate on long-term bonds will equal an average of short-term interest rates that people expect to occur over the life of the long-term bonds plus a term premium. C) because of the positive term premium, the yield curve will not be observed to be downward sloping. D) the interest rate for each maturity bond is determined by supply and demand for that maturity bond.

Q: The segmented markets theory can explain A) why yield curves usually tend to slope upward. B) why interest rates on bonds of different maturities tend to move together. C) why yield curves tend to slope upward when short-term interest rates are low and to be inverted when short-term interest rates are high. D) why yield curves have been used to forecast business cycles.

Q: A key assumption in the segmented markets theory is that bonds of different maturities A) are not substitutes at all. B) are perfect substitutes. C) are substitutes only if the investor is given a premium incentive. D) are substitutes but not perfect substitutes.

Q: According to the segmented markets theory of the term structure A) the interest rate on long-term bonds will equal an average of short-term interest rates that people expect to occur over the life of the long-term bonds. B) buyers of bonds do not prefer bonds of one maturity over another. C) interest rates on bonds of different maturities do not move together over time. D) buyers require an additional incentive to hold long-term bonds.

Q: According to the segmented markets theory of the term structure A) bonds of one maturity are close substitutes for bonds of other maturities, therefore, interest rates on bonds of different maturities move together over time. B) the interest rate for each maturity bond is determined by supply and demand for that maturity bond. C) investors' strong preferences for short-term relative to long-term bonds explains why yield curves typically slope downward. D) because of the positive term premium, the yield curve will not be observed to be downward-sloping.

Q: According to the expectations theory of the term structure A) when the yield curve is steeply upward sloping, short-term interest rates are expected to remain relatively stable in the future. B) when the yield curve is downward sloping, short-term interest rates are expected to remain relatively stable in the future. C) investors have strong preferences for short-term relative to long-term bonds, explaining why yield curves typically slope upward. D) yield curves should be equally likely to slope downward as slope upward.

Q: According to the expectations theory of the term structure A) the interest rate on long-term bonds will exceed the average of short-term interest rates that people expect to occur over the life of the long-term bonds, because of their preference for short-term securities. B) interest rates on bonds of different maturities move together over time. C) buyers of bonds prefer short-term to long-term bonds. D) buyers require an additional incentive to hold long-term bonds.

Q: Over the next three years, the expected path of 1-year interest rates is 4, 1, and 1 percent. The expectations theory of the term structure predicts that the current interest rate on 3-year bond is A) 1 percent. B) 2 percent. C) 3 percent. D) 4 percent.

Q: If the expected path of 1-year interest rates over the next five years is 2 percent, 4 percent, 1 percent, 4 percent, and 3 percent, the expectations theory predicts that the bond with the lowest interest rate today is the one with a maturity of A) one year. B) two years. C) three years. D) four years.

Q: If the expected path of 1-year interest rates over the next five years is 1 percent, 2 percent, 3 percent, 4 percent, and 5 percent, the expectations theory predicts that the bond with the highest interest rate today is the one with a maturity of A) two years. B) three years. C) four years. D) five years.

Q: If the expected path of 1-year interest rates over the next four years is 5 percent, 4 percent, 2 percent, and 1 percent, then the expectations theory predicts that today's interest rate on the four-year bond is A) 1 percent. B) 2 percent. C) 3 percent. D) 4 percent.

Q: If the expected path of one-year interest rates over the next five years is 4 percent, 5 percent, 7 percent, 8 percent, and 6 percent, then the expectations theory predicts that today's interest rate on the five-year bond is A) 4 percent. B) 5 percent. C) 6 percent. D) 7 percent.

Q: If bonds with different maturities are perfect substitutes, then the ________ on these bonds must be equal. A) expected return B) surprise return C) surplus return D) excess return

Q: According to the expectations theory of the term structure, the interest rate on a long-term bond will equal the ________ of the short-term interest rates that people expect to occur over the life of the long-term bond. A) average B) sum C) difference D) multiple

Q: Economists' attempts to explain the term structure of interest rates A) illustrate how economists modify theories to improve them when they are inconsistent with the empirical evidence. B) illustrate how economists continue to accept theories that fail to explain observed behavior of interest rate movements. C) prove that the real world is a special case that tends to get short shrift in theoretical models. D) have proved entirely unsatisfactory to date.

Q: An inverted yield curve A) slopes up. B) is flat. C) slopes down. D) has a U shape.

Q: When yield curves are downward sloping, A) long-term interest rates are above short-term interest rates. B) short-term interest rates are above long-term interest rates. C) short-term interest rates are about the same as long-term interest rates. D) medium-term interest rates are above both short-term and long-term interest rates.

Q: When yield curves are flat, A) long-term interest rates are above short-term interest rates. B) short-term interest rates are above long-term interest rates. C) short-term interest rates are about the same as long-term interest rates. D) medium-term interest rates are above both short-term and long-term interest rates.

Q: When yield curves are steeply upward sloping, A) long-term interest rates are above short-term interest rates. B) short-term interest rates are above long-term interest rates. C) short-term interest rates are about the same as long-term interest rates. D) medium-term interest rates are above both short-term and long-term interest rates.

Q: Typically, yield curves are A) gently upward sloping. B) mound shaped. C) flat. D) bowl shaped.

Q: Differences in ________ explain why interest rates on Treasury securities are not all the same. A) risk B) liquidity C) time to maturity D) tax characteristics

Q: A plot of the interest rates on default-free government bonds with different terms to maturity is called A) a risk-structure curve. B) a default-free curve. C) a yield curve. D) an interest-rate curve.

Q: The term structure of interest rates is A) the relationship among interest rates of different bonds with the same maturity. B) the structure of how interest rates move over time. C) the relationship among the term to maturity of different bonds. D) the relationship among interest rates on bonds with different maturities.

Q: If the federal government where to raise the income tax rates, would this have any impact on a state's cost of borrowing funds? Explain.

Q: The spread between the interest rates on Baa corporate bonds and U.S. government bonds is very large during the Great Depression years 1930-1933. Explain this difference using the bond supply and demand analysis.

Q: Three factors explain the risk structure of interest rates: A) liquidity, default risk, and the income tax treatment of a security. B) maturity, default risk, and the income tax treatment of a security. C) maturity, liquidity, and the income tax treatment of a security. D) maturity, default risk, and the liquidity of a security.

Q: The Bush tax cut reduced the top income tax bracket from 39% to 35% over a ten-year period. Supply and demand analysis predicts the impact of this change was a ________ interest rate on municipal bonds and a ________ interest rate on Treasury bonds. A) higher; lower B) lower; lower C) higher; higher D) lower; higher