Question 1

Transparency laws are intended to reduce

Accepted Answer

Transparency laws are designed to reduce asymmetric information by ensuring that all parties have access to the same information, thereby making markets more efficient and fair.

Question 2

Forecasting stock prices using trends of past data should not be an effective method for making trading decisions if asset markets are

Accepted Answer

In efficient markets, all available information is already reflected in stock prices. In weakly efficient markets, all past trading information is reflected; in semi-strongly efficient markets, all publicly available information is reflected; and in strongly efficient markets, all information, including insider information, is reflected. Therefore, using past trends for forecasting in any of these scenarios should not be effective for making trading decisions.

Question 3

The earnings for a company are $10 and they are expected to grow at 5% annually. According to the Gordon Growth Model, if the required rate of return is 9%, then the price of the company's stock should be

Accepted Answer

The Gordon Growth Model formula is P = D / (r - g), where P is the price, D is the dividend, r is the required rate of return, and g is the growth rate. Assuming the entire earnings are paid as dividends, D = $10, r = 0.09, and g = 0.05. Thus, P = 10 / (0.09 - 0.05) = $250.

Question 4

Earnings for a corporation are $20, its stock price is $525, and the growth rate of dividends is 5%. What is the required rate of return implied by the Gordon Growth Model?

Accepted Answer

The Gordon Growth Model formula is: Required Rate of Return = (Dividend/Price) + Growth Rate. Assuming the dividend is equal to earnings, the dividend yield is $20/$525 = 0.0381 or 3.81%. Adding the growth rate of 5%, the required rate of return is 3.81% + 5% = 8.81%, which rounds to 9%.

Question 5

Behavioral finance uses insights from

Accepted Answer

Behavioral finance integrates insights from psychology, the neurosciences, and sociology to understand financial decision-making by individuals and institutions.

Question 6

Laws that require companies to fully inform investors about debts and loans on their balance sheets are intended to increase

Accepted Answer

These laws aim to make a company's financial situation clearer to investors, thereby increasing transparency. They do not directly aim to increase efficiency or volatility.

Question 7

The earnings for a company are $10 and they are expected to grow at 2% annually. According to the Gordon Growth Model, if the required rate of return is 5%, then the price of the company's stock should be

Accepted Answer

The answer of The earnings for a company are $10...

Question 8

While most investors' valuations are incorrect, the market's value is, given the information available at that moment, is always _____, though in a circular way only.

Accepted Answer

The market's value is considered correct given the information available at that moment because it reflects the collective judgment of all participants, even though this judgment might be based on a circular reasoning process where prices influence perceptions and perceptions influence prices.

Question 9

Increased transparency should lead to increased

Accepted Answer

Increased transparency in markets or organizations typically leads to increased efficiency because it reduces information asymmetry, allowing all parties to make more informed decisions. This can improve market operations and reduce the chances of market manipulation or unfair advantages.

Question 10

If the annual earnings for a company are $10, the expected future price of its stock is $100, and the required rate of return is 8%, then the current price of the stock should be

Accepted Answer

The current price of the stock can be calculated using the dividend discount model (DDM) for a stock with no growth, which is P = D / (r - g), where P is the price, D is the dividend (or earnings, in this case, if we assume all earnings are paid out as dividends), r is the required rate of return, and g is the growth rate. Since no growth rate is given, we can simplify this to P = D / r. However, the information provided does not directly fit this model because it mentions an expected future price rather than a dividend. The correct calculation should consider the expected future price and the required rate of return, but the given options do not match the expected outcome of such a calculation, leading to the conclusion that the correct answer is not provided among the options.

Question 11

If the annual earnings for a company are $12, the expected future price of its stock is $110, and the current price is $90, then the required rate of return on the stock is

Accepted Answer

The answer of If the annual earnings for a company...

Question 12

If the Gordon Growth Model took the uncertainty about future dividends into account, the price of a stock would be _____, ceteris paribus.

Accepted Answer

The Gordon Growth Model (GGM) assumes a constant growth rate in dividends per share. If it were to account for uncertainty about future dividends, it would likely lead to a higher required rate of return by investors to compensate for the increased risk, which in turn would lower the stock price, ceteris paribus.

Question 13

If the _____ for a stock rise(s), the current price of the stock rises.

Accepted Answer

When the earnings for a stock increase, it generally indicates that the company is performing well, which can lead to an increase in the stock's price as investors perceive the stock to be more valuable.

Question 14

Earnings for a corporation are $10, its stock price is $550 and the required rate of return is 12%. What is the growth rate of dividends implied by the Gordon Growth Model?

Accepted Answer

The answer of Earnings for a corporation are $10, its...

Question 15

If the annual earnings for a company are $10, the expected future price of its stock is $110, and the current price is $100, then the required rate of return on the stock is

Accepted Answer

The answer of If the annual earnings for a company...

Question 16

If the _____ for a stock rises, the current price of the stock rises.

Accepted Answer

When the expected future price of a stock rises, investors are willing to pay more for the stock now, leading to an increase in its current price.

Question 17

Which of the following is evidence of irrationality in financial markets?

Accepted Answer

The answer of Which of the following is evidence of...

Question 18

Which of the following could be examples of inefficiencies in financial markets data?

Accepted Answer

Bubbles are considered inefficiencies in financial markets as they represent prices that deviate significantly from intrinsic values due to speculative trading.

Question 19

Which of the following could be examples of inefficiencies in financial markets data?

Accepted Answer

All the options listed (January effect, small firms effect, and bubbles) can be considered examples of inefficiencies in financial markets data, as they represent anomalies or deviations from the expected efficient market behavior.

Question 20

If the _____ for a stock fall(s), the current price of the stock rises.

Accepted Answer

When the required rate of return for a stock falls, investors are willing to accept a lower return for holding the stock, which typically results in the current price of the stock rising. This is because the stock's value is inversely related to the required rate of return in valuation models.

Quiz 7: Rational Expectations, Efficient Markets, and the Valuation of Corporate Equities

Transparency laws are intended to reduce

Forecasting stock prices using trends of past data should not be an effective method for making trading decisions if asset markets are

The earnings for a company are $10 and they are expected to grow at 5% annually. According to the Gordon Growth Model, if the required rate of return is 9%, then the price of the company's stock should be

Earnings for a corporation are $20, its stock price is $525, and the growth rate of dividends is 5%. What is the required rate of return implied by the Gordon Growth Model?

Behavioral finance uses insights from

Laws that require companies to fully inform investors about debts and loans on their balance sheets are intended to increase

The earnings for a company are $10 and they are expected to grow at 2% annually. According to the Gordon Growth Model, if the required rate of return is 5%, then the price of the company's stock should be

While most investors' valuations are incorrect, the market's value is, given the information available at that moment, is always _____, though in a circular way only.

Increased transparency should lead to increased

If the annual earnings for a company are $10, the expected future price of its stock is $100, and the required rate of return is 8%, then the current price of the stock should be

If the annual earnings for a company are $12, the expected future price of its stock is $110, and the current price is $90, then the required rate of return on the stock is

If the Gordon Growth Model took the uncertainty about future dividends into account, the price of a stock would be _____, ceteris paribus.

If the _____ for a stock rise(s) , the current price of the stock rises.

Earnings for a corporation are $10, its stock price is $550 and the required rate of return is 12%. What is the growth rate of dividends implied by the Gordon Growth Model?

If the annual earnings for a company are $10, the expected future price of its stock is $110, and the current price is $100, then the required rate of return on the stock is

If the _____ for a stock rises, the current price of the stock rises.

Which of the following is evidence of irrationality in financial markets?

Which of the following could be examples of inefficiencies in financial markets data?

Which of the following could be examples of inefficiencies in financial markets data?

If the _____ for a stock fall(s) , the current price of the stock rises.