7.4 The Efficient Market Hypothesis: Rational Expectations in Financial Markets
1) The theory of rational expectations, when applied to financial markets, is known as A) monetarism.
B) the efficient markets hypothesis. C) the theory of strict liability. D) the theory of impossibility. Answer: B
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2) According to the efficient markets hypothesis, the current price of a financial security A) is the discounted net present value of future interest payments. B) is determined by the lowest successful bidder. C) fully reflects all available relevant information. D) is a result of none of the above. Answer: C
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3) If the optimal forecast of the return on a security exceeds the equilibrium return, then A) the market is inefficient.
B) no unexploited profit opportunities exist. C) the market is in equilibrium. D) the market is myopic. Answer: A
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4) Another way to state the efficient markets hypothesis is: in an efficient market A) unexploited profit opportunities will be quickly eliminated. B) unexploited profit opportunities will never exist. C) all prices can be accurately predicted.
D) every financial market participant must be well informed about securities. Answer: A
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5) ________ occurs when market participants observe returns on a security that are larger than what is justified by the characteristics of that security and take action to quickly eliminate the unexploited profit opportunity. A) Arbitrage B) Mediation
C) Asset capitalization D) Market intercession Answer: A
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6) The efficient markets hypothesis suggests that if an unexploited profit opportunity arises in an efficient market
A) it will tend to go unnoticed for some time. B) it will be quickly eliminated.
C) financial analysts are your best source of this information. D) all profits will be eliminated through taxation. Answer: B
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7) Financial markets quickly eliminate unexploited profit opportunities through changes in A) dividend payments. B) tax laws. C) asset prices. D) monetary policy. Answer: C
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8) The elimination of unexploited profit opportunities requires that ________ market participants be well informed. A) all B) a few C) zero D) many Answer: B
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9) If future changes in stock prices are unpredictable, then we say that the stock prices follow a A) random walk.
B) straight and narrow path. C) meandering path. D) generalized walk. Answer: A
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10) When we describe stock prices as following a random walk, we mean that future changes in stock prices are A) unpredictable. B) increasing. C) decreasing. D) constant. Answer: A
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11) The efficient markets hypothesis implies that future changes in exchange rates should for all practical purposes be A) unpredictable.
B) set by each country. C) increasing.
D) pegged to a standard such as the U.S. dollar or the Euro. Answer: A
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12) According to the efficient markets hypothesis, purchasing the reports of financial analysts A) is likely to increase one's returns by an average of 10%. B) is likely to increase one's returns by about 3 to 5%.
C) is not likely to be an effective strategy for increasing financial returns. D) is likely to increase one's returns by an average of about 2 to 3%. Answer: C
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13) You have observed that the forecasts of an investment advisor consistently outperform the other reported forecasts. The efficient markets hypothesis says that future forecasts by this advisor
A) may or may not be better than the other forecasts. Past performance is no guarantee of the future.
B) will always be the best of the group.
C) will definitely be worse in the future. What goes up must come down. D) will be worse in the near future, but improve over time. Answer: A
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14) Which of the following types of information most likely allows the exploitation of a profit opportunity?
A) financial analysts' published recommendations B) technical analysis
C) hot tips from a stockbroker D) insider information Answer: D
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15) Sometimes one observes that the price of a company's stock falls after the announcement of favorable earnings. This phenomenon is
A) clearly inconsistent with the efficient markets hypothesis.
B) consistent with the efficient markets hypothesis if the earnings were not as high as anticipated.
C) consistent with the efficient markets hypothesis if the earnings were not as low as anticipated. D) consistent with the efficient markets hypothesis if the favorable earnings were expected. Answer: B
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16) You read a story in the newspaper announcing the proposed merger of Dell Computer and Gateway. The merger is expected to greatly increase Gateway's profitability. If you decide to
invest in Gateway stock, you can expect to earn
A) above average returns since you will share in the higher profits.
B) above average returns since your stock price will definitely appreciate as higher profits are earned.
C) below average returns since computer makers have low profit rates.
D) a normal return since stock prices adjust to reflect expected changes in profitability almost immediately. Answer: D
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17) The efficient markets hypothesis indicates that investors
A) can use the advice of technical analysts to outperform the market. B) do better on average if they adopt a \
C) let too many unexploited profit opportunities go by if they adopt a \D) do better if they purchase loaded mutual funds. Answer: B
AACSB: Reflective Thinking
18) The efficient markets hypothesis suggests that investors
A) should purchase no-load mutual funds which have low management fees. B) can use the advice of technical analysts to outperform the market.
C) let too many unexploited profit opportunities go by if they adopt a \D) act on all \Answer: A
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19) The advantage of a \
A) net profits will tend to be higher because there will be fewer brokerage commissions. B) losses will eventually be eliminated.
C) the longer a stock is held, the higher will be its price. D) profits are guaranteed. Answer: A
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20) For small investors, the best way to pursue a \A) buy and sell individual stocks frequently.
B) buy no-load mutual funds with high management fees. C) buy no-load mutual funds with low management fees. D) buy load mutual funds. Answer: C
AACSB: Application of Knowledge
21) If a corporation announces that it expects quarterly earnings to increase by 25% and it
actually sees an increase of 22%, what should happen to the price of the corporation's stock if the efficient markets hypothesis holds, everything else held constant?
Answer: The stock's price should fall. The price had adjusted based on the statement of
expected earnings. When the actual number turned out to be lower than expected, the stock price changes to reflect the additional information. AACSB: Reflective Thinking
22) Your best friend calls and gives you the latest stock market \health club. Should you act on this information? Why or why not?
Answer: No, if this information is readily available, it will already be reflected in the stock price.
AACSB: Reflective Thinking
7.5 Why the Efficient Market Hypothesis Does Not Imply That Financial Markets are Efficient
1) If in an efficient market all prices are correct and reflect market fundamentals, which of the following is a FALSE statement?
A) A stock that has done poorly in the past is more likely to do well in the future. B) One investment is as good as any other because the securities' prices are correct.
C) A security's price reflects all available information about the intrinsic value of the security. D) Security prices can be used by managers to assess their cost of capital accurately. Answer: A
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2) The efficient markets hypothesis implies that prices in the stock market A) follow a definite pattern.
B) are more likely to go up than down.
C) always undervalue the true assets of a corporation. D) are unpredictable. Answer: D
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3) Stock market crashes lead us to believe that
A) factors other than market fundamentals have an effect on asset prices. B) unexploited profit opportunities never exist.
C) crashes are always predictable when market participants behave rationally. D) bubbles are a natural outcome of an efficient market. Answer: A
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米什金 货币金融学 英文版习题答案chapter 7英文习题
