Question 1

In a rational bubble, investors can have ________ expectations that a bubble is occurring but continue to hold the asset anyway.
A) irrational
B) adaptive
C) rational
D) myopic

Accepted Answer

In a rational bubble, investors have rational expectations that a bubble is occurring but continue to hold the asset anyway. They believe that even though the price of the asset has exceeded its fundamental value, they can still sell it at an even higher price in the future. This behavior is rational because other investors are also holding onto the asset, driving up its price and reinforcing the belief that it will continue to rise.

Question 2

A situation when an asset price differs from its fundamental value is ________.
A) a random walk
B) an inflation
C) a deflation
D) a bubble

Accepted Answer

A situation when an asset price differs from its fundamental value is commonly referred to as a bubble. This occurs when the price of an asset continues to rise due to positive feedback, causing it to become overvalued and disconnected from its intrinsic worth. Eventually, when investors realize the price is unsustainable, the bubble bursts and the asset price plummets.

Question 3

If a market participant believes that a stock price is irrationally high, they may try to borrow stock from brokers to sell in the market and then make a profit by buying the stock back again after the stock falls in price. This practice is called ________.
A) short selling
B) double dealing
C) undermining
D) long marketing

Accepted Answer

Short selling is the practice of borrowing stock from brokers to sell in the market and then buying the stock back at a lower price to make a profit. This is done when the market participant believes that the stock price is irrationally high and will eventually fall. It is a common practice in the financial markets. Double dealing, undermining, and long marketing are not terms commonly used in finance.

Question 4

________ means people are more unhappy when they suffer losses than they are happy when they achieve gains.
A) Loss fundamentals
B) Loss aversion
C) Loss leader
D) Loss cycle

Accepted Answer

Loss aversion is a well-documented behavioral phenomenon in which people feel the pain of a loss more acutely than the pleasure of a gain. In other words, losing $100 feels worse than gaining $100 feels good. This concept has important implications for decision making and risk taking.

Question 5

For small investors, the best way to pursue a "buy and hold" strategy is to ________.
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

Accepted Answer

No-load mutual funds generally have lower fees than load mutual funds, so the investor can hold onto the mutual fund for a longer period of time without being charged excessive fees. Additionally, mutual funds provide diversification which aligns with a "buy and hold" strategy.

Question 6

________ is the field of study that applies concepts from social sciences such as psychology and sociology to help understand the behavior of securities prices.
A) Behavioral finance
B) Strategical finance
C) Methodical finance
D) Procedural finance

Accepted Answer

Behavioral finance is the field of study that applies concepts from social sciences such as psychology and sociology to help understand the behavior of securities prices. This field aims to identify psychological biases and other factors that may cause investors to make irrational decisions, leading to market inefficiencies.

Question 7

What is a recommended strategy for a small investor and how it is associated with the efficient market hypothesis?

Accepted Answer

The answer of What is a recommended strategy for a...

Question 8

________ and ________ may provide an explanation for stock market bubbles.
A) Overconfidence; social contagion
B) Underconfidence; social contagion
C) Overconfidence; social isolationism
D) Underconfidence; social isolationism

Accepted Answer

Overconfidence can cause investors to overestimate their skills and the potential for profit, leading them to engage in risky behavior and pursue unrealistic returns. Social contagion refers to the spread of emotions, beliefs, and behavior within a group, which can create a herd mentality and cause investors to follow the crowd rather than making independent decisions based on rational analysis. Together, overconfidence and social contagion can contribute to the formation of stock market bubbles.

Question 9

Your best friend calls and gives you the latest stock market "hot tip" that he heard at the health club. Should you act on this information? Why or why not?

Accepted Answer

The answer of Your best friend calls and gives you...

Question 10

If you your stock broker tells you that you should buy stock in Ford as it has devised a new hybrid engine system that will reduce consumption of fuel by 90 percent, would you follow this advice and buy Ford's stock?

Accepted Answer

The answer of If you your stock broker tells you...

Question 11

Psychologists have found that people tend to be ________ in their own judgments.
A) underconfident
B) overconfident
C) indecisive
D) insecure

Accepted Answer

Research has consistently shown that people tend to be overconfident in their own judgments and abilities. This overconfidence can lead to errors in decision-making and can potentially be harmful in some situations.

Question 12

If a corporation announces that it expects quarterly earnings to increase by 25 percent and it actually sees an increase of 22 percent, what should happen to the price of the corporation's stock if the efficient markets hypothesis holds, everything else held constant?

Accepted Answer

The answer of If a corporation announces that it expects...

Question 13

Loss aversion can explain why very little ________ actually takes place in the securities market.
A) short selling
B) bargaining
C) bartering
D) negotiating

Accepted Answer

Loss aversion refers to the tendency of individuals to strongly prefer avoiding losses over acquiring gains. In the securities market, short selling involves selling borrowed securities in anticipation of a price decline, which can result in a potential loss if the price goes up instead. Because of loss aversion, many investors may be reluctant to engage in short selling, as the potential losses can be overwhelming. Thus, very little short selling takes place in the securities market.

Quiz 7: The Stock Market, the Theory of Rational Expectations, and the Efficient Market Hypothesis

In a rational bubble, investors can have ________ expectations that a bubble is occurring but continue to hold the asset anyway.

A situation when an asset price differs from its fundamental value is ________.

If a market participant believes that a stock price is irrationally high, they may try to borrow stock from brokers to sell in the market and then make a profit by buying the stock back again after the stock falls in price. This practice is called ________.

________ means people are more unhappy when they suffer losses than they are happy when they achieve gains.

For small investors, the best way to pursue a "buy and hold" strategy is to ________.

________ is the field of study that applies concepts from social sciences such as psychology and sociology to help understand the behavior of securities prices.

What is a recommended strategy for a small investor and how it is associated with the efficient market hypothesis?

and may provide an explanation for stock market bubbles.

Your best friend calls and gives you the latest stock market "hot tip" that he heard at the health club. Should you act on this information? Why or why not?

If you your stock broker tells you that you should buy stock in Ford as it has devised a new hybrid engine system that will reduce consumption of fuel by 90 percent, would you follow this advice and buy Ford's stock?

Psychologists have found that people tend to be ________ in their own judgments.

If a corporation announces that it expects quarterly earnings to increase by 25 percent and it actually sees an increase of 22 percent, what should happen to the price of the corporation's stock if the efficient markets hypothesis holds, everything else held constant?

Loss aversion can explain why very little ________ actually takes place in the securities market.