Q&A Hero

Q: How would proponents of the efficient markets hypothesis use the Gordon-Growth model to explain the movement of stock prices during the Financial Crisis of 2007-2009?

Q: Interest rate volatility is a problem because: A. it adds to uncertainty, thereby diminishing the investment.B. it decreases risk.C. it can impact productivity in a positive way.D. financial decisions become less difficult when interest rates are more volatile.

Q: What factors do some who promote the profitability of elaborate trading strategies leave out? A) the effect of trading costs and taxes B) the difficulty of calculating the return on investment C) ignoring the effect of dividends D) not accounting for both capital gains and dividends

Q: Keeping interest rates stable is: A. the most important goal for a central bank.B. a key goal, because stable interest rates will result in all other goals being achieved.C. a secondary goal for central banks.D. not a goal of the central bank.

Q: Stocks of small firms have a higher annual average return than stocks in general. Some economists attribute this to: A) compensation for the higher risk of small firms B) lower liquidity of stocks of small firms C) higher information costs of stocks of small firms D) all of the above

Q: Since the Federal Reserve was created, it has: A. averted all financial panics that could have plagued the U.S. economy.B. averted a few financial panics but not most.C. improved its skill at securing financial stability.D. proved to be much better at preventing international panics than domestic ones.

Q: The efficient markets hypothesis implies that stock investments should have the same expected return after adjusting for A) risk. B) information costs. C) liquidity. D) all of the above.

Q: At a growth rate of 6% an economy will double in size in: A. 7 years.B. 14 years.C. 12 years.D. 6 years.

Q: How can the Gordon Growth model help explain the major decline in stock indexes during 2007-2009? A) There was an increase in the required return on equities and a decrease in the expected growth rate of dividends. B) There was a decrease in the required return on equities and an increase in the expected growth rate of dividends. C) There was an increase in the required return on equities and an increase in the expected growth rate of dividends. D) There was a decrease in the required return on equities and a decrease in the expected growth rate of dividends.

Q: Which of the following statements regarding growth was brought out from the material in Chapter 15? A. Stability results in higher output growth rates.B. Inflation volatility results in higher output growth rates.C. There is no correlation between the volatility in growth rates and annual output growth.D. The more volatile the growth rate, the higher is the annual output growth.

Q: Excess volatility refers to A) the unwillingness of financial analysts to consistently recommend the same stocks. B) the greater volatility of futures prices compared to the volatility of prices of the underlying assets. C) the tendency for stocks with high rates of returns also to have quite variable returns. D) the larger movements in market prices of stock than in their fundamental values.

Q: All of the following are consequences of an economy operating above its potential level except: A. high rates of inflation.B. high interest rates.C. low unemployment.D. stable prices.

Q: Momentum investing can be described as A) consistent with the efficient markets hypothesis. B) similar to mean reversion. C) follow the picks of investors who have been successful in the past. D) the trend is your friend.

Q: Which of the following statements is not true? A. The potential growth rate in the U.S. economy may have fallen following the financial crisis of 2007-2009.B. Periods of growth below the potential level are periods of low unemployment.C. Periods of growth above the potential level are periods of low employment.D. Periods of growth below the potential level are periods of high unemployment.

Q: Mean reversion refers to the tendency for A) futures prices to revert to the prices of the underlying securities. B) the long-run mean return on stocks to equal the long-run mean return on bonds. C) stocks with high returns today to experience low returns in the future and for stocks with low returns today to experience high returns in the future. D) financial analysts whose stock picks have earned above-normal returns in the past to be unable to pick stocks that will perform as well in the future.

Q: Everything else equal, if the growth rate of a country exceeds its sustainable rate, the central bank: A. will keep interest rates low to keep the momentum.B. will now identify this new rate as the sustainable rate and try to maintain it.C. is likely to raise interest rates to slow the rate of growth.D. is likely to lower the interest rate thinking a slowdown is coming to offset this boom.

Q: The January effect A) largely disappeared after receiving attention in the 1980s. B) refers to the gap between futures prices and the prices of the underlying securities that occurs each January. C) was stronger during the 1980s than during previous decades. D) is the observation that stocks tend to be sold off in January.

Q: Over very long periods, U.S. real economic growth averaged around: A. 3 percent per year.B. 1 percent per year.C. 5 percent per year.D. 7 percent per year.

Q: The small-firm effect A) shows that investments in the stocks of small firms would have earned a below-normal return during the period beginning in the mid-1920s. B) may be the result of the low liquidity and high information costs of small-firm stock. C) was stronger during the 1980s than in previous decades. D) is the tendency for stocks of large firms to outperform those of small firms.

Q: Potential output depends on all of the following except: A. technology.B. the number of firms in the economy.C. the size of the capital stock.D. the number of people who can work.

Q: Suppose that research shows that by buying stocks issued by companies whose names begin with the letter G investors can earn above-normal returns in even-numbered years. From the perspective of the efficient markets hypothesis, A) this is further evidence that the hypothesis is correct. B) this would be considered a pricing anomaly. C) investors must have insider information on these companies. D) purchasers of these stocks must have been noise traders.

Q: The primary objective of most central banks in industrialized economies is: A. high securities prices.B. low unemployment.C. price stability.D. a strong domestic currency.

Q: The economist known for his early empirical work supporting the efficient markets hypothesis is A) Milton Friedman. B) John Muth. C) Eugene Fama. D) Glenn Hubbard.

Q: Central banks often find: A. they can efficiently pursue all of their goals simultaneously.B. there are tradeoffs that make pursuing all of their goals simultaneously impossible.C. the goal(s) they pursue will be determined by their profitability.D. they must keep their goals secret or else they cannot be attained.

Q: In the context of the evaluation of the efficient markets hypothesis, pricing anomalies refer to A) the existence of trading strategies that appear to have offered above-normal returns. B) the gap between actual and expected prices. C) the spread between the price at which a broker will purchase stock from an investor and the price at which the broker will sell stock to an investor. D) the difficulty in practice of computing stock prices on the basis of expectations of future dividends.

Q: A primary goal of central banks is to: A. reduce the idiosyncratic risk that impacts specific investments.B. reduce systematic risk.C. keep stock and bond prices high.D. keep inflation rates high.

Q: What should affect the fundamental value of a stock according to the efficient markets hypothesis?

Q: The specific goals of central banks include each of the following, except: A. high and stable real growth.B. low and stable inflation.C. high levels of exports.D. low and stable unemployment.

Q: What is the difference between adaptive expectations and rational expectations?

Q: The specific goals of central banks include all of the following except: A. high stock prices.B. low and stable inflation.C. high and stable real growth.D. a stable exchange rate.

Q: In a competition of financial analysts vs. throwing a dart to choose stocks, according Burton Malkiel, financial analysts came out ahead due to all of the following reasons EXCEPT: A) it considered only stock prices, not dividends B) investors that followed the contest were influenced to purchase the stocks recommended by the analysts C) failure of the Efficient Markets Hypothesis D) part of the return for the analysts resulted from compensation for the higher risk of the stocks chosen

Q: The rationale for the existence of central banks is mainly that: A. financial markets lack transparency.B. they are needed for the supervision of banks.C. financial intermediation cannot occur without a central bank.D. financial systems are prone to periods of extreme volatility.

Q: Which of the following bonds will have the highest yield-to-maturity if all three bonds appear identical to investors in terms of risk, liquidity, information costs, tax treatment? A) one with a coupon of $50 B) one with a coupon of $100 C) one with a coupon of $200 D) none of the above

Q: Which is a function of modern central banks? A. To control securities marketsB. To control the government's budgetC. To control the availability of money and creditD. To manage fiscal policy

Q: Which type of stock should result in the best return according to the Efficient Markets Hypothesis? A) a firm that is expected to be highly profitable in the future B) a firm that is considered to be undervalued C) a firm expected to earn little profit in the future D) none of the above

Q: The Federal Reserve's Fedwire system is used mainly to provide: A. a means for foreign banks to transfer funds to U.S. banks.B. an inexpensive and reliable way for financial institutions to transfer funds to one another.C. an inexpensive way for individuals to pay their bills on-line.D. a means for the Treasury to collect tax payments.

Q: Which type of analyst should generally outperform market index according to the Efficient Markets Hypothesis? A) technical analysts B) fundamental analysts C) those that follow the random walk D) none of the above

Q: In 2012, the average daily volume on the Federal Reserve's Fedwire system was: A. $24 billion.B. $240 billion.C. $2.4 trillion.D. $240 million.

Q: Employees of brokerage firms that rely on forecasting future profits of firms in order to forecast future stock prices are called A) rational analysts B) adaptive analysts C) technical analysts D) fundamental analysts

Q: The stability of the financial system is enhanced by the ability of central banks to: A. be a lender of last resort.B. provide loans to insolvent banks.C. provide deposit insurance.D. convert poorly run banks into branches of the central bank.

Q: An investor will generally find that hiring an investment firm to actively manage his or her portfolio will A) result in a higher return than would be received from an index mutual fund. B) be less expensive than simply placing money in an index mutual fund. C) result in a higher return, but will be more expensive than placing money in an index mutual fund. D) result in about the same return, but be more expensive than placing money in an index mutual fund.

Q: The central bank has the ability to create money; this means it: A. can control the availability of money but not the availability of credit in the economy.B. can make loans only when other institutions can.C. can impact the rate of inflation.D. has an objective to maximize its profit.

Q: One implication of the efficient markets hypothesis is that investors should A) concentrate their investments in just a few well-chosen assets. B) hold a diversified portfolio of assets. C) buy stocks rather than bonds. D) buy bonds rather than stocks.

Q: In its role as the bankers' bank, a central bank performs each of the following, except: A. providing loans during times of financial distress.B. providing deposit insurance.C. overseeing commercial banks and the financial system.D. managing the payments system.

Q: Above-normal returns on stock investments can be expected by investors who A) possess insider information. B) are wealthy enough to hold the stock of many different companies in their portfolios. C) are risk seeking. D) concentrate their investments in one or two stocks.

Q: Many governments give their central bank control over issuing currency because: A. printing currency can be profitable for a government so government officials may have a strong incentive to print too much.B. having large amounts of currency can lead to lower rates of inflation.C. central banks use the profits from issuing currency to finance their operations.D. the only way to distribute currency to banks is through the central bank.

Q: An implication of the efficient markets hypothesis is that A) only sophisticated investors will be able to earn above-normal profits from financial investments. B) above-normal profits are available only to major traders. C) above-normal profits will be eliminated in the trading process. D) unless he or she acts recklessly, the average investor should be able to make above-normal profits.

Q: Which of the following statement is true? A. Printing currency can be a profitable venture for a government.B. Printing currency, while necessary, is a losing venture for a government.C. Too much money printed usually leads to lower prices.D. In the modern economy the amount of money created has no effect on prices.

Q: Under the efficient markets hypothesis, for news about a company's prospects to have a large impact on the price of the company's stock the news must A) have an impact on the company's profitability in the short term. B) have an impact on the company's profitability in the long term. C) significantly increase the likelihood that the company will go bankrupt. D) significantly reduce the liquidity of the company's stock.

Q: The ability to create money means the central bank can control: A. the availability of money and credit in a country's economy.B. tax revenue.C. the unemployment rate.D. government expenditures.

Q: According to the efficient markets hypothesis, who is most likely to benefit from frequently moving funds from one asset to another? A) your broker B) small investors C) big investors D) only those who consistently beat the market

Q: Monetary policy in the United States is under the control of: A. the U.S. Treasury.B. the President.C. the Federal Reserve.D. the U.S. Senate.

Q: According to the efficient markets hypothesis, A) common stock prices should be constant. B) the price of a corporation's stock is likely to fluctuate substantially in response to news about changes in the company's short-term prospects. C) the price of a corporation's stock will fluctuate significantly only in response to news about changes in the company's long-term prospects. D) price fluctuations in common stock are a response to fads and are only infrequently the result of changes in the expected profitability of the companies involved.

Q: In the U.S. the authority to issue currency is held by: A. the Federal Reserve.B. the U.S. Treasury.C. the Office of the Comptroller of the Currency.D. the U.S. Mint.

Q: Under the efficient markets hypothesis, what would be the price per share of a company whose current dividend is $10.00 and whose dividends are expected to grow by 3% per year (assume the risk-adjusted interest rate is 10%)? A) $74.62 B) $79.23 C) $142.86 D) $147.14

Q: One monopoly that modern central banks have is in: A. regulating other banks.B. making loans to banks.C. issuing U.S. Treasury securities.D. issuing currency.

Q: According to the Efficient Markets Hypothesis, prices of securities A) change infrequently. B) change frequently to reflect news about changes in the fundamental values of the securities. C) change frequently as evaluations of existing information about the securities change. D) are not allowed, under federal securities laws, to change more frequently than once a month.

Q: The number of central banks that exist in the world today is: A. less than 10.B. about 250.C. over 170.D. over 50 but less than 100.

Q: According to the efficient markets hypothesis, A) the equilibrium price of an asset equals the optimal forecast of fundamental value based on available information. B) the actual and expected prices of an asset will be equal. C) the actual price of an asset reflects only information on past returns on the asset. D) the expected price of an asset incorporates only information on past returns on the asset.

Q: The central bank in the United States is: A. the Bank of America.B. the Federal Reserve.C. the U.S. Treasury.D. the Bank of the United States.

Q: The efficient markets hypothesis A) assumes that market participants form their expectations adaptively. B) applies rational expectations to the pricing of assets. C) applies to the stock market, but not to the bond market. D) indicates that the stock market is efficient, but not rational.

Q: Banking regulations prevent banks from: A. holding more than 10 percent of their assets in common stock of companies.B. owning corporate jets.C. owning common stocks of corporations.D. building big office buildings.

Q: In an efficient market with rational expectations, the actual price of an asset A) will equal its expected price. B) will often be below its expected price. C) will often be above its expected price. D) equals its expected price plus a random error term.

Q: Which of the following statements is most correct? A. Financial regulators do everything possible to encourage competition in banking.B. Financial regulators work to prevent monopolies but also work to prevent strong competition in banking.C. Financial regulators discourage competition in banking.D. Financial regulators prefer banks to have monopoly power in their geographic markets.

Q: If major traders believe the price of a stock should be higher than its current market price, A) they have an incentive to sell the stock. B) their actions will result in the information they possess being incorporated into the price of the stock. C) there is little they can do because government regulation precludes their acting on what they know. D) they should petition the Securities and Exchange Commission to authorize an adjustment in the price of the stock.

Q: Bank mergers require government approval because banking officials want to make sure that: A. the merger will create a larger bank.B. the merger will not create a monopoly.C. the merged bank will be more profitable.D. the merger will not result in regulatory competition.

Q: If market participants have rational expectations, then the best forecast of the price of a stock in the next period is A) equal to an average of the prices of the stock in previous periods. B) equal to the price of the stock in the current period. C) dependent upon all information available in the current period, including, but not limited to, the price of the stock in the current period. D) dependent on information available in the previous period.

Q: Following the consolidation that resulted from the 2007-2009 financial crisis in the U.S., the 4 largest commercial banks share of total deposits was: A. 75%.B. 50%.C. 40%.D. 25%.

Q: If the prices of financial assets follow a random walk, then A) they should be easy to forecast, provided market participants have rational expectations. B) they should be easy to forecast, provided market participants have adaptive expectations. C) the change in price from one trading period to the next is not predictable. D) major traders in the market must not be making use of all available information about the assets.

Q: A long-standing goal of financial regulators has been to: A. prevent banks from growing too big and powerful.B. minimize the competition that banks face.C. encourage banks to grow as large as possible.D. discourage small rural banks.

Q: When market participants have rational expectations, the deviation of the expected price from the actual future price is A) zero. B) predictable, provided all relevant information is made use of. C) not predictable. D) predictable under certain circumstances, but not under others.

Q: You have savings accounts at two separately FDIC insured banks. At one of the banks your account has a balance of $200,000. At the other bank the account balance is $60,000. You find out the banks are going to merge. If you are concerned about the possibility of the new bank failing, you should: A. do nothing; you are still insured up $250,000 per account.B. consider moving $10,000 to another account at the same bank.C. consider moving $10,000 to another account at a different bank.D. do nothing; as an individual you are only insured up $250,000 no matter where the accounts are.

Q: Which of the following statements is true of rational expectations? A) Rational expectations forecasts are always correct. B) For a trader with rational expectations, the expectation of an asset's price equals the optimal price forecast. C) If traders have rational expectations, any announcement by a company will have an effect on its stock price, even if the market was already aware of the facts being announced. D) If a trader really has rational expectations, he or she was always earn a greater than normal return on his or her financial portfolio.

Q: You have savings accounts at two separately FDIC insured banks. At one of the banks your account has a balance of $200,000. At the other bank the account balance is $60,000. If both banks fail, you will receive: A. $250,000.B. $60,000.C. $260,000.D. $200,000.

Q: If traders in a market have rational expectations, then A) the price of an asset equals its fundamental value. B) prices of riskier assets are higher than prices of less risky assets. C) past prices of assets do not affect market participants' expectations of future asset prices. D) they make use of less information than they would if they had adaptive expectations.

Q: You have two savings accounts at an FDIC insured bank. You have $225,000 in one account and $40,000 in the other. If the bank fails, you will receive: A. $225,000.B. $40,000.C. $115,000.D. $250,000.

Q: An asset's fundamental value equals A) its face value. B) its maturity value. C) the market's best guess of the present value of the asset's expected future returns. D) the weighted sum of its market price over the recent past.

Q: You hold an FDIC insured savings account at your neighborhood bank. Your current balance is $275,000. If the bank fails you will receive: A. $275,000.B. $250,000.C. $100,000.D. $125,000.

Q: Rational expectations involve the assumption that A) market participants make use only of information on the past performance of an asset in determining what they believe its price should be. B) market participants rarely change their minds about the correct price of an asset. C) financial markets are good at increasing liquidity, but poor at transmitting information. D) market participants makes use of all available information.

Q: One negative consequence of regulatory competition is: A. it is expensive.B. financial institutions are over regulated at a cost to customers.C. financial institutions often seek out the most lenient regulator.D. it minimizes competition.