Question 1

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

Buying no-load mutual funds with low management fees is the best option for small investors pursuing a "buy and hold" strategy. This allows for diversification, professional management, and lower costs compared to individual stock trading or high management fee mutual funds. Load mutual funds also come with additional fees, which can eat into returns.

Question 2

________ 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 applies concepts from social sciences such as psychology and sociology to help understand the behavior of securities prices. It aims to explain why people make certain financial decisions and how their behavior affects securities prices.

Question 3

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 ________.
A)will likely earn lower returns than those who use full-service brokers
B)will likely earn about the same as those who use full-service brokers, but will net more after brokerage commissions
C)are going against evidence suggesting that full-service brokers can help outperform the market
D)are likely to outperform the market by a wide margin

Accepted Answer

The efficient markets hypothesis suggests that all available information is reflected in stock prices, making it difficult to consistently outperform the market. Therefore, it is likely that people who use discount brokers will earn about the same returns as those who use full-service brokers, but will net more after brokerage commissions, since discount brokers charge lower fees.

Question 4

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

This is the definition of short selling, where an investor borrows stock from a broker to sell in the market with the expectation of buying it back at a lower price to make a profit.

Question 5

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 6

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 7

The efficient markets hypothesis predicts that stock prices follow a "random walk." The implication of this hypothesis for investing in stocks is ________.
A)a "churning strategy" of buying and selling often to catch market swings
B)turning over your stock portfolio each month, selecting stocks by throwing darts at the stock page
C)a "buy and hold strategy" of holding stocks to avoid brokerage commissions
D)following the advice of technical analysts

Accepted Answer

The efficient markets hypothesis suggests that stock prices already reflect all available information, making it difficult for an investor to consistently beat the market. Therefore, a buy and hold strategy would be the most appropriate as it minimizes transaction costs such as brokerage commissions and allows the investor to benefit from the long-term growth potential of the stock market. A churning strategy or relying on technical analysis are not recommended as they both involve trying to time the market and make short-term trades, which the efficient markets hypothesis suggests is unlikely to be successful. Selecting stocks by throwing darts at the stock page is not a viable investment strategy at all.

Question 8

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 ________.
A)if earnings were not as high as expected
B)if earnings were not as low as expected
C)if a merger is anticipated
D)the company just invented a new bunion product

Accepted Answer

According to the efficient markets hypothesis, all available information is already reflected in stock prices. Therefore, if the earnings increase was not as high as expected, it means that the market had already priced in a higher increase in earnings, and the actual increase was perceived as a disappointment, causing the stock price to fall.

Question 9

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 bubble occurs when an asset price greatly exceeds its intrinsic value or fundamental value. This causes a high degree of speculation and buying pressure, resulting in an unsustainable increase in prices. Eventually, the bubble bursts and prices rapidly decline.

Question 10

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 for people to feel the pain of losses more strongly than the pleasure of gains. In the securities market, this can lead to a reluctance to engage in short selling, where an investor profits from a decline in the value of a security. Because investors may be more focused on avoiding losses than on potential gains, they may be reluctant to take on the risks associated with short selling.

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 shown that people tend to be overconfident in their own judgments, meaning they believe their abilities, knowledge, and opinions are better than they actually are. This overconfidence bias can lead to poor decision-making and errors in judgment.

Question 12

________ 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 the tendency of people to prefer avoiding losses to acquiring equivalent gains. This means that people are more emotionally affected by losses than by gains. It is an important concept in behavioral economics and affects decision-making in various areas, including personal finance and investments.

Question 13

To say that stock prices follow a "random walk" is to argue that stock prices ________.
A)rise, then fall, then rise again
B)rise, then fall in a predictable fashion
C)tend to follow trends
D)cannot be predicted based on past trends

Accepted Answer

The concept of a random walk suggests that stock prices cannot be predicted based on past trends, meaning they are unpredictable and do not follow any discernible pattern or trend.

Question 14

________ 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, in which individuals believe in their ability to predict market trends and make sound investment decisions, can lead to irrational exuberance and inflated stock prices. Social contagion, in which individuals are influenced by the actions and opinions of others, can result in a herd mentality and further exacerbate the bubble.

Question 15

Studies of mutual fund performance indicate that mutual funds that outperformed the market in one time period usually ________.
A)beat the market in the next time period
B)beat the market in the next two subsequent time periods
C)beat the market in the next three subsequent time periods
D)do not beat the market in the next time period

Accepted Answer

Studies have found that mutual funds that outperformed the market in one time period do not usually continue to beat the market in the next period. This is known as the "persistence of performance" problem, and it suggests that past performance is not a reliable indicator of future results. Therefore, option D is the best choice.

Question 16

Rules used to predict movements in stock prices based on past patterns are, according to the efficient markets hypothesis, ________.
A)a waste of time
B)profitably employed by all financial analysts
C)the most efficient rules to employ
D)consistent with the random walk hypothesis

Accepted Answer

According to the efficient markets hypothesis, past patterns are already reflected in current stock prices, so trying to predict future movements based on past patterns is a waste of time.

Question 17

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 18

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 19

If a mutual fund outperforms the market in one period, evidence suggests that this fund is ________.
A)highly likely to consistently outperform the market in subsequent periods due to its superior investment strategy
B)likely to under-perform the market in subsequent periods to average its overall returns
C)not likely to consistently outperform the market in subsequent periods
D)not likely to outperform the market in any subsequent period

Accepted Answer

While it is possible that a mutual fund could consistently outperform the market due to a superior investment strategy, evidence suggests that this is not likely. Therefore, it is not safe to assume that a mutual fund that outperforms the market in one period will continue to do so in subsequent periods.

Question 20

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 believe that there is a bubble but continue to hold the asset because they believe they will be able to sell it for a higher price in the future. This behavior is rational because they are basing their decision on the expectation of future gains, despite the recognition of the current overpricing of the asset.

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

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.

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 ________.

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 ________.

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 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?

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

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 ________.

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

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

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

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

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

and may provide an explanation for stock market bubbles.

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

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

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?

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

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

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