Question 1

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 ________.

Accepted Answer

The practice described is short selling, where an investor borrows a stock from a broker and sells it in the market, hoping to profit from buying it back at a lower price when the stock falls in price.

Question 2

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

Accepted Answer

Loss aversion is a psychological concept that states people feel more pain or negativity from losing something than the satisfaction or positivity they feel from gaining something of equal value. This means that people have a strong preference to avoid losses rather than trying to seek gains.

Question 3

If a mutual fund outperforms the market in one period,evidence suggests that this fund is ________.

Accepted Answer

Studies have found that past performance is not a reliable indicator of future performance in mutual funds. Therefore, it is not likely that a mutual fund will consistently outperform the market in subsequent periods just because it did so in one period.

Question 4

When Happy Feet Corporation announces that their fourth quarter earnings are up 10 percent,their stock price falls.This is consistent with the efficient markets hypothesis ________.

Accepted Answer

According to the efficient markets hypothesis, stock prices already reflect all available information about a company, including its earnings. Therefore, if the market was expecting higher earnings than what was announced, the stock price may fall despite the positive news because the market was expecting even better news.

Question 5

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

Accepted Answer

In a rational bubble, investors can hold onto an asset even when they have rational expectations that a bubble is occurring. They may do so because they believe that other investors will continue to buy, causing prices to rise further.

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.

Accepted Answer

Behavioral finance is the specific field of study that applies social science concepts to understand securities prices. Strategical finance, methodical finance, and procedural finance are not valid terms in the finance and economics field.

Question 7

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 8

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

Accepted Answer

Research has shown that people tend to be overconfident in their own judgments, leading them to overestimate their abilities, knowledge, and performance. This is known as the "overconfidence bias."

Question 9

Rules used to predict movements in stock prices based on past patterns are,according to the efficient markets hypothesis,________.

Accepted Answer

According to the efficient markets hypothesis, stock prices already incorporate all available information, including past patterns. Therefore, it is impossible to predict movements in stock prices based on past patterns, and attempting to do so would be a waste of time.

Question 10

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

Accepted Answer

Buying no-load mutual funds with low management fees is the best option for small investors pursuing a "buy and hold" strategy. These funds provide diversification through a portfolio of stocks, bonds, or other investments, and have lower costs compared to load funds or individual stock transactions. By holding onto these funds for the long term, investors can benefit from compound interest and potential market growth.

Question 11

Studies of mutual fund performance indicate that mutual funds that outperformed the market in one time period usually ________.

Accepted Answer

Studies have shown that mutual funds that outperformed the market in one time period do not necessarily beat the market in the next time period. This is due to a variety of factors, including market volatility and changing market conditions. Past performance is not a reliable indicator of future performance, and investors should consider a variety of factors when choosing mutual funds.

Question 12

________ and ________ may provide an explanation for stock market bubbles.

Accepted Answer

Overconfidence can lead investors to make irrational decisions and create a bubble, while social contagion can cause investors to follow each other and contribute to the growth of the bubble.

Question 13

The efficient markets hypothesis predicts that stock prices follow a "random walk." The implication of this hypothesis for investing in stocks is ________.

Accepted Answer

The efficient markets hypothesis suggests that stock prices follow a random walk, meaning that they cannot be predicted or timed. Therefore, a buy and hold strategy is the most appropriate approach for investing in stocks. This involves selecting a diversified portfolio of stocks and holding onto them for the long term, rather than constantly buying and selling in an attempt to beat the market. Turning over your stock portfolio each month or following the advice of technical analysts are not effective strategies based on the efficient markets hypothesis, and selecting stocks by throwing darts is purely random and not based on any fundamental or technical analysis.

Question 14

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

Accepted Answer

Loss aversion is the tendency for people to prefer avoiding losses to acquiring gains. In the securities market, investors may avoid short selling due to the potential risks and losses involved, as they may lose more than their initial investment if the market moves against them. Therefore, loss aversion can explain why very little short selling takes place in the securities market.

Question 15

To say that stock prices follow a "random walk" is to argue that stock prices ________.

Accepted Answer

A random walk suggests that future stock prices cannot be predicted based on past trends or patterns. Instead, prices fluctuate randomly in response to various economic and market factors.

Question 16

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 17

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 18

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 19

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

Accepted Answer

A bubble occurs when the price of an asset is significantly higher than its intrinsic/fundamental value due to hype, speculation, and over-optimism. This can lead to an eventual correction, resulting in a sharp decrease in asset prices.

Question 20

The number and availability of discount brokers has grown rapidly since the mid-1970s.The efficient markets hypothesis predicts that people who use discount brokers ________.

Accepted Answer

The efficient markets hypothesis suggests that all available information is already reflected in stock prices, so the services of a full-service broker are unlikely to provide an advantage over a discount broker. Therefore, people who use discount brokers are likely to earn about the same returns as those who use full-service brokers, but they will net more due to lower brokerage commissions.

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