Chapter 40
The Stock Market and Crashes
1. From 1982 until 2000, stock prices rose dramatically. As measured by the Dow Jones
Industrial Average, stocks went from under _____ to above _______ during this period.
A) 1000, 11000
B) 200, 1400
C) 400, 5000
D) 10,000, 200,000
2. From 1982 until 2000, stock prices rose dramatically. As measured by the NASDAQ
composite, stocks went from under _____ to above _______ during this period.
A) 1000, 11000
B) 200, 1400
C) 400, 5000
D) 10,000, 200,000
3. From 1982 until 2000, stock prices rose dramatically. As measured by the Standard and
Poor’s 500 composite, stocks went from under _____ to above _______ during this period.
A) 1000, 11000.
B) 200, 1400
C) 400, 5000
D) 10,000, 200,000
4. The stock index that includes the stock prices of a disproportionate number of technology
companies (sometimes referred to as “tech-heavy” or “tech-laden” is the
A) Dow Jones Industrial Average.
B) Standard and Poor’s 500.
C) NASDAQ.
D) Russell 2000.
5. Which of the following is considered by economists as a fundamental determinant of stock
prices?
A) Interest rates
B) CEO desires
C) Board of Directors mandates on stock prices
D) Securities and Exchange Commission officers
6. Which of the following is by considered economists as a fundamental determinant of stock
prices?
A) Earnings projections
B) CEO desires
C) Board of Directors mandates on stock prices
D) Securities and Exchange Commission officers
7. Fundamentally a stock price is the _______ future earnings per share.
A) sum of expected
B) present value of expected
C) future value of expected
D) present value of only known
8. If interest rates rise and all else is equal, the price of a stock will
A) fall.
B) rise.
C) remain unchanged.
D) adjust to reflect a higher ratio of price to earnings.
9. If expected earnings of a company are revised upward and all else is equal, the price of a
stock will
A) fall.
B) rise.
C) remain unchanged.
D) adjust to reflect a lower ratio of price to (current) earnings.
10. If the expected future price of a stock is revised upward and all else is equal, today’s price of
the stock
A) will fall.
B) will rise.
C) will remain unchanged.
D) will adjust to reflect a lower ratio of price to earnings.
11. If interest rates fall and all else is equal, the price of a stock will
A) fall.
B) rise.
C) remain unchanged.
D) adjust to reflect a lower ratio of price to earnings.
12. If the expected earnings of a company are revised downward and all else is equal, the price of
a stock will
A) fall.
B) rise.
C) remain unchanged.
D) adjust to reflect a higher ratio of price to (current) earnings.
13. If the expected future price of a stock is revised downward and all else is equal, today’s price
of the stock
A) will fall.
B) will rise.
C) will remain unchanged.
D) will adjust to reflect a higher ratio of price to earnings.
14. An important factor in stock prices that is separate from interest rates and profit expectations
is
A) the expected price of the stock in the near future.
B) CEO desires.
C) Board of Directors mandates on stock prices.
D) Securities and Exchange Commission mandates on stock prices.
15. When a company sells stock for the first time to raise money for a business expansion this is
called a(n)
A) IPO (Initial Public Offering).
B) FTO (First Time Offering).
C) PPO (Preferred Public Offering).
D) FSS (First Sale of Stock).
16. An S-corporation is designed
A) for large new incorporations.
B) to allow stock sales to other corporate entities.
C) to allow for unlimited numbers of shareholders.
D) for small businesses to incorporate.
17. An important function of stock sales after the IPO is to equalize
A) profits across industries.
B) profits across firms within industries.
C) risk-unadjusted rates of return.
D) risk-adjusted rates of return.
18. If a company is expected to earn $1 per share this year and 2% more per share each
subsequent year, the stock price in an efficient market will reflect
A) the $1 per share, but ignore the 2% annual growth.
B) neither of these pieces of information.
C) the 2% annual growth but not the starting point of $1 per share.
D) both of these pieces of information.
19. If a stock market is utilizing all of the available information on earnings projections, interest
rates, risk, etc., economists refer to the market as
A) proper.
B) attentive.
C) efficient.
D) fully engaged.
20. Suppose you hear an investor say “I just don’t have time to research the companies of the
stock I buy, so I trust that the market has taken everything into account in setting current
prices and just buy a well-diversified portfolio.” You would understand that person to believe
in
A) efficient markets.
B) prayer.
C) guesswork.
D) technical investing.
21. Suppose you hear an investor say “I can’t out guess the maker.” You would understand that
person to believe in
A) efficient markets.
B) prayer.
C) the ABC approach.
D) technical investing.
22. Suppose an efficient market has been operating with regard to stock in a particular company
and that company announces that its profits were up 50% from the previous period but the
stock price falls after getting the news on a day when all of the other stocks are barely
moving. This is
A) absolutely illogical.
B) at least potentially consistent with the efficient market hypothesis because investors may
have been anticipating 75% gains.
C) at least potentially consistent with the efficient market hypothesis because investors may
have been anticipating 25% gains.
D) at least potentially consistent with the efficient market hypothesis because investors may
have been anticipating those 50% gains.
23. Suppose an efficient market has been operating with regard to stock in a particular company
and that company announces that its profits were down 50% from the previous period but the
stock price rises after getting the news on a day when all of the other stocks are barely
moving. This is
A) absolutely illogical.
B) at least potentially consistent with the efficient market hypothesis because investors may
have been anticipating a 75% drop.
C) at least potentially consistent with the efficient market hypothesis because investors may
have been anticipating a 25% drop.
D) at least potentially consistent with the efficient market hypothesis because investors may
have been anticipating those 50% drop.
24. Suppose an efficient market has been operating with regard to stock in a particular company
and that company announces that its profits were up 50% from the previous period but the
stock price was unchanged after getting the news on a day when all of the other stocks are
barely moving. This is
A) absolutely illogical.
B) at least potentially consistent with the efficient market hypothesis because investors may
have been anticipating a 75% drop.
C) at least potentially consistent with the efficient market hypothesis because investors may
have been anticipating a 25% drop.
D) at least potentially consistent with the efficient market hypothesis because investors may
have been anticipating those 50% drop.
25. Suppose an efficient market has been operating with regard to stock in a particular company
and that company announces that its profits were down 50% from the previous period but the
stock price was unchanged after getting the news on a day when all of the other stocks are
barely moving. This is
A) absolutely illogical.
B) at least potentially consistent with the efficient market hypothesis because investors may
have been anticipating a 75% drop.
C) at least potentially consistent with the efficient market hypothesis because investors may
have been anticipating a 25% drop.
D) at least potentially consistent with the efficient market hypothesis because investors may
have been anticipating those 50% drop.
26. In an efficient market, an average investor who is outside Wall Street
A) must be constantly vigilant by analyzing and adjusting their portfolio to get average
returns.
B) cannot expect to get average returns.
C) will get average returns in a well-diversified portfolio even without analyzing or
managing it.
D) will habitually exceed average returns.
27. The NASDAQ collapse of the year 2000 finally bottomed out in October, 2002, after
A) losing 23% of its value in 31 months.
B) its merger with the New York Stock Exchange.
C) moving its headquarters to London.
D) losing 78% of its value in 31 months.
28. When stock markets crash because of changes in the expected future sale price of an asset
rather than changes in fundamental stock price determinants, economists refer to the situation
as
A) God’s will.
B) just desserts.
C) a ghost.
D) a bubble.
29. Economic bubbles are created because of inflated (and in the short-term self-fulfilling)
expectations of
A) interest rates.
B) future asset prices.
C) overall economic growth.
D) earnings.
30. The creation and deflation of economic bubbles impacts the sale of homes, cars and other
expensive goods because
A) higher stock prices make people feel poorer so they buy fewer of these things.
B) higher stock prices make people feel richer so they buy more of these things.
C) higher interest rates make people more able to borrow money to buy these things.
D) the creation of bubbles lowers the prices of these things and their deflation stimulates
purchases.
31. During the Asian Financial Crisis, stocks in
A) the US fell by 50%.
B) Asia rose 150%.
C) Europe fell by 50%.
D) Asia fell by 50%.
32. During 1999, the NASDAQ increased
A) 84 fold.
B) 84%.
C) 8%.
D) 4%.
33. During 2000, NASDAQ peaked above _____ but ended the year below _________.
A) 10,000; 1,000
B) 5,000; 1,000
C) 5,000; 2500
D) 100,000; 5,000
34. If stock prices are in-line with their fundamental determinants and profit expectations do not
change, then a change in the interest rate by one percentage point from 10% to 11%
A) will change the stock price by exactly ten percent regardless of the expected distribution
of the earnings over time.
B) will change the stock price by less than ten percent regardless of the expected distribution
of the earnings over time.
C) will change the stock price by more than ten percent regardless of the expected
distribution of the earnings over time.
D) will change the stock price by more or less than ten percent depending on the expected
distribution of the earnings over time.
35. If stock prices are in-line with their fundamental determinants and interest rates do not
change, then a change in the profit expectations by 20%
A) will change the stock price by exactly 20% regardless of the expected distribution of the
earnings over time.
B) will change the stock price by less then 20% regardless of the expected distribution of the
earnings over time.
C) will change the stock price by more than 20% regardless of the expected distribution of
the earnings over time.
D) will change the stock price by more or less than 20% depending on the expected
distribution of the earnings over time.
36. Economists view corporate bankruptcy as
A) a necessary aspect of a capitalist economy.
B) a socialist intrusion into a capitalist economy.
C) a means by which the rich get richer.
D) a means by which the poor get poorer.
37. Most cases of corporate bankruptcy are part of the Chapter _____ variety
A) 7
B) 11
C) 13
D) 15
38. Without some form of bankruptcy protection, it certainly would be in the general interest of
all creditors as a group to let a company reorganize so that it could ultimately repay its debts,
A) and it certainly would be in every individual creditor’s interest as well.
B) it would be in the interest of each individual creditor to seek immediate payment.
C) it would be easier for companies to repay their debts.
D) it would be easier for creditors who most need their money to be repaid first.
39. Enron’s bankruptcy is much more troubling than Kmart’s or Global Crossing’s because
A) Enron was much bigger.
B) Enron had more employees.
C) Enron had more stockholders.
D) Enron’s trouble resulted from corrupt accounting practices.
40. The impact of accounting scandals of 2001 and 2002 was especially important because
A) it increased investor uncertainty about corporate fundamentals.
B) the accounting industry had so many employees.
C) the major accounting companies both consult and audit their clients, leading to a conflict
of interest.
D) it increased investor uncertainty about corporate fundamentals and the major accounting
companies both consult and audit their clients, leading to a conflict of interest.
41. The principal-agent problem exists when
A) owners of an asset and the managers of that asset are the same.
B) owners of an asset and the managers of that asset are the not the same.
C) owners have an interest in making a profit.
D) managers are dedicated to making owners a profit.
42. The 2006-2007 recovery of stock prices from their 2000-2001 collapse was largely a
reflection of
A) the Democrat sweep of Congress.
B) the Enron scandals.
C) increased earnings forecasts and low long-term interest rates.
D) reduced earnings forecasts and high long-term interest rates.
43. The use of the “common” logarithm in stock data graph is done to
A) confuse the issue.
B) show the up and down swings in the early years because without it, it just looks like an
upward sloping line.
C) show the up and down swings in the later years because without it, it just looks like an
upward sloping line.
D) show the up and down swings in the middle years because without it, it just looks like an
upward sloping line.
44. A “common” logarithm is the logarithm of the
A) base “e”
B) base 2
C) base 10
D) power of two
45. Swings in stock prices in a graph covering seventy years can be
A) imperceptible in the logarithmic scale but obvious in the level scale.
B) imperceptible in the level scale but obvious in the logarithmic scale.
C) understandable in the level scale but mystifying in the logarithmic scale.
D) understandable in the logarithmic scale but mystifying in the level scale.
46. If the price of a company’s stock truly reflects the value of a share in the company, then
A) it is impossible for the stock price to change by 20% in a single day, as in 1987.
B) it is impossible for the stock price to increase by 84% within a single year, as in 1999.
C) stock prices can only change abruptly when accounting scandals are uncovered, as in
2002.
D) abrupt stock price changes reflect abrupt changes in the public’s perception of
fundamentals and risk.
47. The collapse of stock prices in the September of 2008 was
A) largely due to the sharply increased uncertainty regarding the strategically critical
financial sector.
B) totally irrational and unjustified by any fundamental determinants of stock values.
C) the result of an elaborate conspiracy by greedy manipulators to ruin the Big Three
automakers.
D) an inescapable consequence of the rebound of 2006-2007.
48. The increase in stock prices in 2009 and 2010 was
A) largely due to the sharply increased uncertainty regarding the strategically critical
financial sector.
B) totally irrational and unjustified by any fundamental determinants of stock values.
C) the result of an elaborate conspiracy by greedy manipulators to ruin the Big Three
automakers.
D) a consequence of the rebound of those years.
49. The increase in stock prices in 2009 and 2010 was
A) largely due to the sharply increased uncertainty regarding the strategically critical
financial sector.
B) totally irrational and unjustified by any fundamental determinants of stock values.
C) the result of an elaborate conspiracy by greedy manipulators to ruin the Big Three
automakers.
D) a consequence of the elimination of the threat of a wider global depression.
50. Stock market bubbles are
A) created when investors stray from the fundamental determinant of corporate earnings and
give too much attention to interest rates.
B) created when investors stray from the fundamental determinant of interest rates and give
too much attention to corporate earnings.
C) created when investors stray from the fundamental determinants of corporate earnings
and interest rates and give too much attention to what the stock will be worth next year.
D) created when investors pay too much attention to the fundamental determinants.
51. Stock market bubbles are
A) fiction.
B) occur every 3 to 5 years.
C) rare but do occur.
D) an everyday experience.
52. Which of the following stock market increases is best explained by the notion of a bubble?
A) The late 1982 rally in which the DJIA doubled in 4 months.
B) The decade of the 1980s.
C) The Japanese stock market in the late 1980s.
D) The U.S. stock market’s growth in 2009.
53. Which of the following stock market increases is best explained by the notion of a bubble?
A) The late 1982 rally in which the DJIA doubled in 4 months.
B) The decade of the 1980s.
C) The U.S. Stock market in the late 1920s.
D) The U.S. stock market’s growth in 2009.
54. Which of the following stock market increases is best explained by the notion of a bubble?
A) The late 1982 rally in which the DJIA doubled in 4 months.
B) The decade of the 1980s.
C) The U.S. Stock market in technology stocks the late 1990s.
D) The U.S. stock market’s growth in 2009.
55. Which of the following stock market decreases is best explained by the notion of a bubble
collapsing?
A) The early 1982 drop in the DJIA.
B) The decade of the 1970s.
C) The U.S. Stock market in technology stocks in 2000.
D) The U.S. stock market’s drop in late 2008.
56. Which of the following stock market decreases is best explained by the notion of a bubble
collapsing?
A) The early 1982 drop in the DJIA.
B) The decade of the 1970s.
C) The U.S. Stock market in late 1929.
D) The U.S. stock market’s drop in late 2008.
57. Which of the following stock market decreases is best explained by the notion of a bubble
collapsing?
A) The early 1982 drop in the DJIA.
B) The decade of the 1970s.
C) The Japanese Stock market in late 1990.
D) The U.S. stock market’s drop in late 2008.
True False
58. True or false? Under the efficient market hypothesis, it is advisable to spend at least an hour
a day altering your portfolio to take advantage of profit opportunities.
A) True
B) False
59. True or false? Economists see value in corporate bankruptcy laws.
A) True
B) False