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1. When a person engages in detailed analysis of a company to determine its value, he or she is engaging in
a.
standard deviation analysis.
b.
informational analysis.
c.
fundamental analysis.
d.
efficiency analysis.
2. By purchasing shares in a mutual fund that holds a portfolio of stocks, a person can
a.
benefit from fundamental analysis, since the mutual fund requires its shareholders to perform fundamental
analysis on their own.
b.
benefit from fundamental analysis, since the mutual fund hires one or more individuals to perform
fundamental analysis for the fund.
c.
eliminate market risk.
d.
reduce the standard deviation of his or her portfolio to zero.
3. If the efficient markets hypothesis is correct, then
a.
the number of shares of stock offered for sale exceeds the number of shares of stock that people want to buy.
b.
the stock market is informationally efficient.
c.
stock prices never follow a random walk.
d.
All of the above are correct.
4. If you believe that stock prices follow a random walk, then probably you
a.
do not believe that there is positive relationship between risk and return.
b.
do not believe that stock prices reflect all available information.
c.
believe in the validity of the efficient markets hypothesis.
d.
believe that it is a good idea to engage in fundamental analysis.
5. The performance of index funds
a.
usually falls short of the performance of actively-managed funds.
b.
provides evidence in support of the notion that stock prices do not depend upon supply and demand.
c.
provides evidence in support of the efficient markets hypothesis.
d.
provides evidence in support of the notion that stock-market participants are irrational.
6. Which of the following is correct concerning diversification?
a.
It only reduces firm-specific risk, but most of the reduction comes from increasing the number of stocks in a
portfolio to well above 30.
b.
It only reduces firm-specific risk; much of the reduction comes from increasing the number of stocks in a
portfolio from 1 to 30.
c.
It only reduces market risk, but most of the reduction comes from increasing the number of stocks in a
portfolio to well above 30.
d.
None of the above is correct.
7. Which of the following is correct?
a.
Risk-averse people will not hold stock.
b.
Diversification cannot reduce firm-specific risk.
c.
The larger the percentage of stock in a portfolio, the greater the risk, but the greater the average return.
d.
Stock prices are determined by fundamental analysis rather than by supply and demand.
8. Dividends
a.
are the rates of return on mutual funds.
b.
are cash payments that companies make to shareholders.
c.
are the difference between the price and present value per share of a stock.
d.
are the rates of return on a company’s capital stock.
9. Cash payments that companies make to shareholders are called
a.
annuities.
b.
dividends.
c.
premiums.
d.
favorables.
10. A high-ranking corporate official of a well-known company is unexpectedly sentenced to prison for criminal activity
in trading stocks. This should
a.
raise the price and raise the present value of the corporation’s stock.
b.
raise the price and lower the present value of the corporation’s stock.
c.
lower the price and raise the present value of the corporation’s stock.
d.
lower the price and lower the present value of the corporation’s stock.
11. Fundamental analysis is
a.
the study of the relation between risk and return of stock portfolios.
b.
the determination of the allocation of savings between stocks and bonds based on a person’s degree of risk
aversion.
c.
the study of a company’s accounting statements and future prospects to determine its value.
d.
a method used to determine how adding stocks to a portfolio will change the risk of the portfolio.
12. According to fundamental analysis, a saver should prefer to buy stocks that are
a.
undervalued. This means the price of the stock is low given the value of the corporation.
b.
undervalued. This means the value of the corporation is low given the price of stock.
c.
overvalued. This means the price of the stock is high given the value of the corporation.
d.
overvalued. This means the value of the corporation is high given the price of stock.
13. Suppose that fundamental analysis indicates a particular company’s stock is overvalued.
a.
This means its present value is less than its price. You should consider adding the stock to your portfolio.
b.
This means its present value is less than its price. You shouldn’t consider adding the stock to your portfolio.
c.
This means its present value is more than its price. You should consider adding the stock to your portfolio.
d.
This means its present value is more than its price. You shouldn’t consider adding the stock to your portfolio.
14. Suppose fundamental analysis indicates that XYZ Corporation’s stock is undervalued.
a.
This means its present value is less than its price. You should consider adding the stock to your portfolio.
b.
This means its present value is less than its price. You shouldn’t consider adding the stock to your portfolio.
c.
This means its present value is more than its price. You should consider adding the stock to your portfolio.
d.
This means its present value is more than its price. You shouldn’t consider adding the stock to your portfolio.
15. Fundamental analysis shows that stock in Garske Software Corporation has a present value that is higher than its price.
a.
This stock is overvalued; you should consider adding it to your portfolio.
b.
This stock is overvalued; you shouldn't consider adding it to your portfolio.
c.
This stock is undervalued; you should consider adding it to your portfolio.
d.
This stock is undervalued; you shouldn't consider adding it to your portfolio.
16. Fundamental analysis shows that stock in Cedar Valley Furniture Corporation has a price that exceeds its present
value.
a.
This stock is overvalued; you should consider adding it to your portfolio.
b.
This stock is overvalued; you shouldn't consider adding it to your portfolio.
c.
This stock is undervalued; you should consider adding it to your portfolio.
d.
This stock is undervalued; you shouldn't consider adding it to your portfolio.
17. Fundamental analysis shows that stock in Stainless Appliance Company has a present value below its price.
a.
This stock is overvalued; you should consider adding it to your portfolio.
b.
This stock is overvalued; you shouldn't consider adding it to your portfolio.
c.
This stock is undervalued; you should consider adding it to your portfolio.
d.
This stock is undervalued; you shouldn't consider adding it to your portfolio.
18. Fundamental analysis shows that stock in Widgets-R-Us has a present value that is lower than its price.
a.
This stock is overvalued; you should consider adding it to your portfolio.
b.
This stock is overvalued; you shouldn't consider adding it to your portfolio.
c.
This stock is undervalued; you should consider adding it to your portfolio.
d.
This stock is undervalued; you shouldn't consider adding it to your portfolio.
19. Fundamental analysis shows that stock in Johnson’s Lumber Company has a price that is less than its present value.
a.
This stock is overvalued; you should consider adding it to your portfolio.
b.
This stock is overvalued; you shouldn't consider adding it to your portfolio.
c.
This stock is undervalued; you should consider adding it to your portfolio.
d.
This stock is undervalued; you shouldn't consider adding it to your portfolio.
20. Fundamental analysis determines the value of a stock based on
a.
dividends.
b.
the expected final sale price.
c.
the ability of the corporation to earn profits.
d.
All of the above are correct.
21. If stock prices follow a random walk, it means
a.
long periods of declining prices are followed by long periods of rising prices.
b.
the greater the number of consecutive days of price declines, the greater the probability prices will increase the
following day.
c.
stock prices are unrelated to random events that shock the economy.
d.
stock prices are just as likely to rise as to fall at any given time.
22. Some people claim that stocks follow a random walk. What does this mean?
a.
The price of stock one day is about what it was on the previous day.
b.
Changes in stock prices cannot be predicted from available information.
c.
Stock prices are not determined by market fundamentals such as supply and demand.
d.
Prices of stocks of different firms in the same industry show no or little tendency to move together.
23. If stock prices follow a random walk, then stock investors can make large profits by
a.
buying stocks whose prices have been falling for several days.
b.
buying stocks whose prices have been rising for several days.
c.
performing fundamental analysis of stocks using data contained in annual reports.
d.
using inside information.
24. The efficient markets hypothesis says that
a.
only individual investors can make money in the stock market.
b.
it should be easy to find stocks whose price differs from their fundamental value.
c.
stock prices follow a random walk.
d.
All of the above are correct.
25. According to the efficient market hypothesis, which of the following statements is not correct?
a.
Stock market prices tend to rise today if they rose yesterday.
b.
As judged by the typical person in the market, all stocks are fairly valued all the time.
c.
At the market price, the number of shares being offered for sale matches the number of shares people want to
buy.
d.
All of the above statements are incorrect.
26. According to the efficient markets hypothesis, worse-than-expected news about a corporation will
a.
have no effect on its stock price.
b.
raise the price of the stock.
c.
lower the price of the stock.
d.
change the price of the stock in a random direction.
27. An index fund
a.
holds only stocks and bonds that are indexed to inflation.
b.
holds all the stocks in a given stock index.
c.
guarantees a return that follows the index of leading economic indicators.
d.
typically has a lower return than a managed fund.
28. If the efficient market hypothesis is correct, then
a.
index funds should typically beat managed funds, and usually do.
b.
index fund should typically beat managed funds, but usually do not.
c.
mutual funds should typically beat index funds, and usually do.
d.
mutual funds should typically beat index funds, but usually do not.
29. Which of the following is correct?
a.
Managed funds typically have a higher return than indexed funds. This tends to refute the efficient market
hypothesis.
b.
Managed funds typically have a higher return than indexed funds. This tends to support the efficient market
hypothesis.
c.
Index funds typically have a higher rate of return than managed funds. This tends to refute the efficient market
hypothesis.
d.
Index funds typically have a higher rate of return than managed funds. This tends to support the efficient
market hypothesis.
30. Which of the following is not consistent with the efficient market hypothesis?
a.
Stock prices should follow a random walk.
b.
Index funds should typically outperform highly managed funds.
c.
News has no effect on stock prices.
d.
There is little point in spending many hours studying the business pages looking for undervalued stocks.
31. According to the efficient markets hypothesis, which of the following would increase the price of stock in the Simpson
Corporation?
a.
Simpson announces, just as everyone had expected, that it has hired a new highly respected CEO.
b.
Simpson announces that its profits were low, but not as low as the market had expected.
c.
Analysis by a column in a business weekly indicates that Simpson is overvalued.
d.
All of the above would increase the price.
32. Suppose that interest rates unexpectedly rise and that FineLine Corporation announces that revenues from last quarter
were down but not as much as the public had anticipated they would be down. According to the efficient markets
hypothesis, which of the these things make the price of FineLine Corporation Stock fall?
a.
both the interest rate rising and the revenue announcement
b.
neither the interest rate rising nor the revenue announcement
c.
only the interest rate rising
d.
only the revenue announcement
33. Fundamental analysis shows that Quadrangle Company is fairly valued. Then Quadrangle Company unexpectedly
improves its production techniques and unexpectedly hires a new CEO away from another very successful competitor.
Suppose this has no effect on the price of the stock of Quadrangle Company.
a.
Fundamental analysis would now show the corporation is overvalued. The fact that the price was unchanged is
consistent with the efficient markets hypothesis.
b.
Fundamental analysis would now show the corporation is overvalued. The fact that the price was unchanged is
not consistent with the efficient markets hypothesis.
c.
Fundamental analysis would now show the corporation is undervalued. The fact that the price was unchanged
is consistent with the efficient markets hypothesis.
d.
Fundamental analysis would now show the corporation is undervalued. The fact that the price was unchanged
is not consistent with the efficient markets hypothesis.
34. In the 1990s, Fed Chairperson Alan Greenspan questioned whether the stock market
a.
boom at that time reflected “irrational exuberance.”
b.
decline at that time reflected “irrational funk.”
c.
boom at that time reflected “rational exuberance.”
d.
decline at that time reflected “rational funk.”
35. In the 1990s, Fed Chair Alan Greenspan believed that the market was
a.
undervalued, and evidence later showed that this was clearly correct.
b.
undervalued, but whether it was remains debatable.
c.
overvalued, and evidence later showed that this was clearly correct.
d.
overvalued, but whether it was remains debatable.
36. Which of the following is not correct?
a.
There is a greater reduction in risk by increasing the number of stocks in a portfolio from 1 to 10, than by
increasing it from 100 to 120 stocks.
b.
The historical rate of return on stocks has been about 5 percentage points higher than the historical rate of
return on bonds.
c.
Stock in an industry that is very sensitive to economic conditions is likely to have a higher average return than
stock in an industry that is not so sensitive to economic conditions.
d.
If you had information about a corporation that no one else had, you could earn a very high rate of return. This
contradicts the efficient market hypothesis.
37. Which of the following is correct concerning stock market irrationality?
a.
Bubbles could arise, in part, because the price that people pay for stock depends on what they think someone
else will pay for it in the future.
b.
Economists almost all agree that the evidence for stock market irrationality is convincing and the departures
from rational pricing are important.
c.
Some evidence for the existence of market irrationality is that informed and presumably rational managers of
mutual funds generally beat the market.
d.
All of the above are correct.
38. Whenever the price of an asset rises above what appears to be its fundamental value, the market is said to be
experiencing a
a.
conjectural mistake.
b.
fundamental mishap.
c.
speculative bubble.
d.
temporary inefficiency.
39. Which of the following terms is used to describe a situation in which the price of an asset rises above what appears to
be its fundamental value?
a.
“random walk”
b.
“random bubble”
c.
“speculative bubble”
d.
“speculative hedge”
