40. An asset market is said to experience a speculative bubble when
a.
the price of the asset rises above what appears to be its fundamental value.
b.
the price of the asset appears to follow a random walk.
c.
the market cannot establish an equilibrium price for the asset.
d.
the asset is a natural resource and its supply is manipulated by foreign nations and foreign firms.
41. The possibility of speculative bubbles in the stock market arises in part because
a.
stock prices may not depend at all on psychological factors.
b.
fundamental analysis may be the correct way to evaluate the value of stocks.
c.
future streams of dividend payments are very hard to estimate.
d.
the value of shares of stock depends not only on the future stream of dividend payments but also on the price
at which the stock will be sold.
42. If asset markets are driven by the “animal spirits” of investors, then
a.
b.
c.
d.
43. Diversification
a.
increases the likely fluctuation in a portfolio’s return. Thus, the likely standard deviation of the portfolio’s
return is higher.
b.
increases the likely fluctuation in a portfolio’s return. Thus, the likely standard deviation of the portfolio’s
return is lower.
c.
reduces the likely fluctuation in a portfolio’s return. Thus, the likely standard deviation of the portfolio’s
return is higher.
d.
reduces the likely fluctuation in a portfolio’s return. Thus, the likely standard deviation of the portfolio’s
return is lower.
44. The value of a stock is based on the
a.
present values of the dividend stream and final price. As a result, the value of a stock rises when interest rates
rise.
b.
present values of the dividend stream and final price. As a result, the value of a stock falls when interest rates
rise.
c.
future values of the dividend stream and final price. As a result, the value of a stock rises when interest rates
rises.
d.
future values of the dividend stream and final price. As a result, the value of a stock falls when interest rates
rise.
45. Suppose that an increased risk of mortgage defaults lowers the expected profitability of banks. Then we would expect
to see
a.
the demand for bank stocks rise which would raise the prices of bank stocks.
b.
the demand for bank stocks rise which would reduce the prices of bank stocks.
c.
the demand for bank stocks fall which would raise the prices of bank stocks.
d.
the demand for bank stocks fall which would reduce the prices of bank stocks.
46. An automobile manufacturer unexpectedly announces that it has hired a new chief executive officer. It is widely
believed that the presence of this individual will raise the profitability of the corporation. At the same time interest rates
unexpectedly rise. Which of the above would tend to make the price of the stock rise?
a.
the announcement and the rise in interest rates
b.
the announcement but not the rise in interest rates
c.
the rise in interest rates, but not the announcement
d.
neither the announcement nor the rise in interest rates
47. The efficient markets hypothesis implies
a.
that all stocks are fairly valued all the time and that no stock is a better buy than any other.
b.
that all stocks are fairly valued all the time, but that some stocks may be better buys than other.
c.
that some stocks may be better buys than others and stock experts can determine which ones.
d.
that no stock is efficiently valued.
48. The efficient markets hypothesis implies that
a.
building a portfolio based on a published list of the “most respected” companies is likely to produce a better-
than-average return.
b.
if a stock rose in price last year, it is likely to rise in price this year.
c.
managed mutual funds should generally outperform indexed mutual funds.
d.
None of the above are correct.
49. The efficient markets hypothesis says that beating the market consistently is
a.
impossible. Many studies find that beating the market is, at best, extremely difficult.
b.
impossible. Many studies find that beating the market is relatively easy.
c.
relatively easy. Many studies find that beating the market is, at best, extremely difficult.
d.
relatively easy. Many studies find that beating the market is relatively easy.
50. If you are convinced that stock prices are impossible to predict from available information, then you probably also
believe that
a.
the efficient markets hypothesis is not a correct hypothesis.
b.
the stock market is informationally efficient.
c.
the stock market is informationally inefficient.
d.
there is no reason to establish a diversified portfolio of stocks.
51. A person who believes strongly in the use of fundamental analysis to choose a portfolio of stocks
a.
has a better chance of outperforming the market if stock prices follow a random walk than if they do not
follow a random walk.
b.
almost always chooses to hold index funds in his or her portfolio rather than actively-managed funds.
c.
is spending his or her time wisely if the efficient markets hypothesis is correct.
d.
is interested in the likely ability of a corporation to pay dividends in the future.
52. Which of the following methods of picking stocks is not consistent with fundamental analysis?
a.
doing research such as thoroughly reading and analyzing companies’ annual reports
b.
choosing mutual funds that are managed by individuals with good reputations
c.
viewing individual stock prices as unpredictable
d.
relying upon the advice of Wall Street analysts
53. The available evidence indicates that
a.
about one-half of all managers of active mutual funds consistently outperform index funds.
b.
outperforming the market on a consistent basis is extremely difficult to do.
c.
there is little truth to the notion that there is a trade-off between risk and return.
d.
there is little truth to the efficient markets hypothesis.
54. The word “efficient” in the term “efficient markets hypothesis” refers to the idea that
a.
fundamental analysis is an efficient way to go about choosing which stocks to buy or sell.
b.
stock prices move upward and downward “efficiently,” rather than following a “random walk.”
c.
the stock market is “informationally efficient.”
d.
companies employ officers and managers who are well-qualified to perform their jobs.
55. A pharmaceutical company unexpectedly announces that it just developed an important new drug. This news should
a.
raise the price of the corporation’s stock; if it does not the stock is overvalued.
b.
raise the price of the corporation’s stock; if it does not the stock is undervalued.
c.
reduce the price of the corporation’s stock; if it does not the stock is overvalued.
d.
reduce the price of the corporation’s stock; if it does not the stock is undervalued.
56. If your research leads you to believe that the present value of a stock’s dividend stream and future price is less than its
price then you believe the stock is
a.
overvalued so you should consider buying it.
b.
overvalued so you should not consider buying it.
c.
undervalued so you should consider buying it.
d.
undervalued so you should not consider buying it.
57. If unexpected news raised people’s expectations of a corporation’s future dividends and price, then before the price
changes this corporation’s stock would be
a.
overvalued, so its price would rise.
b.
overvalued, so its price would fall.
c.
undervalued, so its price would rise.
d.
undervalued, so its price would fall.
58. If more people think a corporation’s stock is overvalued than think it is undervalued then there is a
a.
surplus, so its price will rise.
b.
surplus, so its price will fall.
c.
shortage, so its price will rise.
d.
shortage, so its price will fall.
59. According to the efficient market hypothesis
a.
changes in the prices of stocks are predictable. Evidence shows that managed funds typically do better than
indexed funds.
b.
changes in the prices of stocks are predictable. Evidence shows that indexed funds typically do better than
managed funds.
c.
changes in the prices of stocks are not predictable. Evidence shows that managed funds typically do better than
indexed funds.
d.
changes in the prices of stocks are not predictable. Evidence shows that indexed funds typically do better than
managed funds.
60. During a financial crisis the possibility of bank failures rises. An increase in the likelihood of a bank failing shifts
demand for its stock
a.
right, so the price rises.
b.
right, so the price falls.
c.
left, so the price rises.
d.
left, so the price falls.
61. After the 1982 recession, the U.S. and world economies entered into a long period
a.
of high unemployment rates.
b.
high inflation rates.
c.
that has become known as the “Great Moderation.”
d.
that has become known as the “Great Recession.”
62. Writing in the Wall Street Journal in 2009, economist Jeremy Siegel argued that, in the years leading up to the
financial crisis of 2008–2009,
a.
financial firms acted in too risky a fashion.
b.
the Federal Reserves’s efforts to rein in the risky behavior of certain financial firms were inadequate.
c.
falling house prices “crashed the banks and the economy.”
d.
All of the above are correct.
63. Writing in The Wall Street Journal in 2009, economist Jeremy Siegel pointed out that the efficient markets hypothesis
a.
was responsible for the financial crisis of 2008-2009.
b.
was responsible for the Great Depression of the 1930s.
c.
claims that prices observed in financial markets are always “right.”
d.
claims that prices observed in financial markets are mostly “wrong.”
64. No particular stock is a better buy than any other stock if
a.
stock prices are driven by investors’ “animal spirits.”
b.
the random-walk theory of stock prices is incorrect.
c.
the efficient markets hypothesis is correct.
d.
actively managed mutual funds always outperform index funds.
65. Ron decides which stocks to purchase by throwing darts at the stock pages of The Wall Street Journal. Ron probably
believes that
a.
stock prices follow a random walk.
b.
the stock market is informationally efficient.
c.
it is better to own stock in 20 companies than it is to own stock in 2 companies.
d.
All of the above are correct.
66. Fundamental analysis shows that stock in “Night and Day” fitness centers has a price below its present value.
a.
This stock is undervalued; you should consider adding it to your portfolio.
b.
This stock is undervalued; you shouldn’t consider adding it to your portfolio.
c.
This stock is overvalued; you should consider adding it to your portfolio.
d.
This stock is overvalued; you shouldn’t consider adding it to your portfolio.
67. After much anticipation a company releases a new smartphone. The smartphone doesn’t work as well as expected and
lacks many of the features buyers had been expecting. The unexpectedly negative reaction to the smartphone would
a.
raise the present value and the price of the corporation’s stock.
b.
raise the present value and reduce the price of the corporation’s stock.
c.
reduce the present value and the price of the corporation’s stock.
d.
reduce the present value and raise the price of the corporation’s stock.
68. Some people argue that there are two advantages to holding mutual funds. The first is that mutual funds provide an
inexpensive way to hold a diversified portfolio. The second is that because of their expertise mutual fund managers should
be able to consistently beat the market. Which of the following does the evidence show?
a.
Diversification does reduce risk and mutual funds typically outperform the market.
b.
Diversification does reduce risk, but mutual funds do not typically outperform the market.
c.
Diversification does not reduce risk but mutual funds typically outperform the market.
d.
Diversification does not reduce risk and mutual funds do not typically outperform the market.
69. Diversification
a.
increases the likely fluctuation in a portfolio’s return, but reduces market risk.
b.
increases the likely fluctuation in a portfolio’s return, but reduces firm-specific risk..
c.
reduces the likely fluctuation in a portfolio’s return and reduces market risk.
d.
reduces the likely fluctuation in a portfolio’s return and reduces firm-specific risk.
70. A previously well-respected and trusted president of a corporation is accused of fraud. At the same time interest rates
unexpectedly fall. Which of the above would tend to make the price of the stock rise?
a.
the announcement and the fall in interest rates
b.
the announcement but not the fall in interest rates
c.
the fall in interest rates, but not the announcement
d.
neither the announcement nor the fall in interest rates
71. According to the efficient markets hypothesis, which of the following would decrease the price of stock in Veblen’s
Leisure Company?
a.
Veblen announces, just as everyone had expected, that it has fired its CEO who has been accused of ethics
violations.
b.
Veblen announces, as the market had expected, that its profits were low.
c.
Fundamental analysis published by KM Financial shows that Veblen’s stock is undervalued.
d.
A highly anticipated book is published by a Veblen insider which details Veblen’s innovative technology in
plain English, information that was previously unavailable to the public and which will now be used by
Veblen’s competitors.
72. A company unexpectedly announces a product recall due to safety concerns about its product. According to the
efficient markets hypothesis, this news should
a.
raise the price of the company’s stock.
b.
not affect the price of the company’s stock.
c.
reduce the price of the company’s stock.
d.
More information is needed to answer the question.
73. Which of the following approaches to investing does not rely on fundamental analysis to choose the stocks in your
portfolio?
a.
Choosing stocks based on research and analysis you do yourself
b.
Relying on advice from Wall Street analysts
c.
Buying shares of an actively managed mutual fund
d.
Buying shares of an index fund that purchases all stocks in a particular stock index