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171. If stock prices follow a random walk,
a.
speculation in the stock market destabilizes prices.
b.
a stock's past performance is not a good indicator of its future performance.
c.
rumors, news, and other "signals" have no effect on stock prices.
d.
the stock market does not participate in channeling resources toward firms with high stock prices.
172. Predictions of stock prices by stock market analysts
a.
usually improve on simple extrapolation of past trends.
b.
are good in both the short term and in the long term.
c.
are poor since Wall Street does not pay enough to attract the best analysts.
d.
are poor because of randomness.
173. The concept of "random walk" applies most closely to predictions of
a.
consumer demand for a product after a price increase.
b.
the effects of a tax on the supply of oil.
c.
the effects of transfer payments on labor supply.
d.
the price of a particular stock one year from now.
174. Composites of stock prices
a.
are completely random and unpredictable.
b.
fluctuate randomly around a rising trend.
c.
are destabilized by speculations.
d.
show no trend, but fluctuate widely.
175. Random walk theory says
a.
throwing darts will pick winners.
b.
random selection of stocks will do as well as other methods of stock choice.
c.
speculation can't lose if you wait long enough.
d.
investment in stocks can't be profitable.
Figure 9-1
176. Which of the graphs in Figure 9-1 best illustrates the path of a composite of common stock prices over the long term?
a.
(1)
b.
(2)
c.
(3)
d.
(4)
177. If a team from the NFC wins the Superbowl, we can accurately predict
a.
the stock market will end the year higher than it started.
b.
the stock market will end the year lower than it started.
c.
the stock market will rise, then fall, and end the year unchanged.
d.
nothing about future stock prices.
178. What most frightens investors in the stock market is:
a.
the possibility of losing their investments
b.
the possibility of gaining too much from their investments, and the resultant tax consequences
c.
the possibility that the prices of many investments may collapse simultaneously
d.
the possibility that a company that they have invested in will go bankrupt
179. Derivatives:
a.
can be used to reduce risk
b.
can be a source of risk
c.
made the financial crisis of 2007-2009 not as bad as it would otherwise have been
d.
a and b only
e.
all of these
180. Define the following terms and explain their importance to the study of economics.
a.
common stock
b.
corporation
c.
limited liability
d.
plowback
181. Define the following terms briefly and concisely.
a.
stock
b.
bond
c.
portfolio diversification
d.
speculation
e.
random walk
182. If stocks are more risky than bonds, why would a rational investor ever buy stocks?
183. Why are bonds risky to a corporation?
184. Corporate income is taxed twice-once in the form of corporate income tax and the second time when the owner must
pay income tax on dividends. What are the effects of this double taxation?
185. How is it possible to have a separation between ownership and control of a major corporation? What specific type of
market imperfection can cause this?
186. Explain why bond prices and interest rates are inversely related.
187. As an investor, would you agree to the statement "put all your eggs in one basket?" Substantiate your answer.
188. Explain why using leverage to purchase risky securities is so popular.
189. Would a corporation seeking to raise capital sell its new shares on the stock market? If not, why not?
190. Explain how derivates were used to increase risk making the financial crisis of 2007-2009 more severe.
191. Why is plowback the overwhelming favorite among choices of sources of funds for financing corporate investment?
192. Explain how "herd behavior" affects the stock market, and contributes to recession.
193. Assume Jean-Claude purchased real estate for $500,000 using $50,000 of which is his own money and $450,000
which he borrowed at an 8% interest rate. If the value increased by 10% in one year and he sold the property, what was
Joe's rate of return on his investment? If the value of the property had declined by 2%, what would have been the rate of
return on his investment?
194. An investor is trying to decide whether to put his funds into stocks or bonds. He expects rising interest rates over the
next year and higher inflation. Your advice?
195. From the viewpoint of the individual investor, are stocks or bonds riskier? Explain.
196. Explain how mutual funds are advantageous to small investors.
197. Why is diversification recommended for investors?
198. Explain how a diversified portfolio can reduce fluctuations in returns even when the economy as a whole is
experiencing contractions and expansions.
199. Write a short note on the regulation of the U.S. securities markets.
200. What is the stock market's role in achieving efficient use of resources?
201. What are the two critically important functions for corporate financing performed by stock exchanges?
202. Should stock market speculation be encouraged or discouraged?
203. Several writers have helped to popularize the notion that stock prices follow no discernible pattern. What is meant by
a random walk, and how can you explain why people continue to invest in stocks if the random walk theory is correct?
