Question 1

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

Accepted Answer

Earnings play a significant role in determining the stock price. As earnings increase, the company becomes more profitable, which attracts investors and causes an increase in demand for the stock, resulting in a higher stock price. Conversely, if a company's earnings are lower than expected, the stock price may fall.

Question 2

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 3

Behavioral finance uses insights from

Accepted Answer

Behavioral finance uses insights from psychology to understand how individual investors make decisions, from the neurosciences to understand how the brain processes information related to financial decision making, and from sociology to understand how group behavior affects financial markets. Therefore, option D – all of the above – is the correct answer.

Question 4

If the annual earnings for a company are $25, the expected future price of its stock is $100, and the required rate of return is 5%, then the current price of the stock should be

Accepted Answer

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

Question 5

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

Accepted Answer

The answer of Which of the following could be examples...

Question 6

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

Accepted Answer

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

Question 7

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 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, given the information available at that moment, is always correct. This is because the market reflects the collective knowledge and opinions of all participants, including institutional investors, retail investors, analysts, and other market participants. While individual investors' valuations may be incorrect, the collective wisdom of the market tends to be more accurate over the long term. However, it's important to note that the market can still be volatile and experience fluctuations due to various factors such as news events, economic data releases, or geopolitical events.

Question 9

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

Accepted Answer

The expected future price of a stock is directly related to the current price of the stock. If investors expect the future price of the stock to rise, they will be willing to pay more for it now, causing the current price to rise. Volatility and the required rate of return may also impact the price of a stock, but they are not directly related to its current price.

Question 10

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

Accepted Answer

All of the above options could be examples of inefficiencies in financial markets data. The January effect is the phenomenon where the stock market tends to perform better in January compared to other months. This suggests that there may be some predictable patterns in the market that can be exploited for profit, which is an example of an inefficiency. The small firms effect refers to the tendency of small firms to outperform large firms in the stock market, again suggesting that there may be predictable patterns that are not fully reflected in market prices. Bubbles occur when asset prices become inflated beyond their intrinsic value, which can lead to market crashes and other inefficiencies. Therefore, all three options are examples of inefficiencies in financial markets data.

Question 11

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 assumes a constant growth rate of dividends, which may not hold true in uncertain times. Therefore, if uncertainty about future dividends is taken into account, the price of a stock would be lower due to the increased risk and uncertainty.

Question 12

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 13

Transparency laws are intended to reduce

Accepted Answer

Transparency laws are intended to reduce asymmetric information, meaning that all parties involved have access to the same information, reducing the likelihood of one party having an advantage over the other. This can lead to greater efficiency and earnings in the long run.

Question 14

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

We can use the Gordon Growth Model to calculate the required rate of return:

Stock Price = Annual Dividend / (Required Rate of Return - Dividend Growth Rate)

Since the company's earnings are given and not its dividend, we can assume that the earnings are paid out as dividends. Therefore, the Annual Dividend is $10.

We are also given that the expected future price of the stock is $110, which means that the dividend growth rate can be calculated as:

Dividend Growth Rate = (Expected Future Stock Price - Current Stock Price) / Current Stock Price

Dividend Growth Rate = ($110 - $100) / $100 = 0.1 or 10%

Now we can plug in the values we know into the model and solve for the required rate of return:

$100 = $10 / (R - 0.1)
R - 0.1 = 1
R = 1.1 or 110%

However, this answer seems too high as a required rate of return. It is likely that we made an assumption, such as assuming that the company pays out all of its earnings as dividends. Therefore, the correct answer is B) 20%, as there is not enough information to accurately calculate the required rate of return.

Question 15

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 16

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

Accepted Answer

Laws that require companies to fully inform investors about debts and loans on their balance sheets are intended to increase transparency, which means the information disclosed to investors becomes more accessible and clear. These laws do not directly aim to increase efficiency or volatility.

Question 17

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 18

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

Gordon Growth Model formula is V₀ = D₁/(r-g), where
V₀: stock price today (given: $525)
D₁: expected dividend next year (given: 20*(1+5%) = $21)
g: growth rate of dividends (given: 5%)
r: required rate of return (to be found)
Putting these values in the formula, we get: 525 = 21/(r-5%)
Solving for r, we get r = 9%. Therefore, the required rate of return implied by the Gordon Growth Model is 9%.

Question 19

Increased transparency should lead to increased

Accepted Answer

Increased transparency should lead to increased efficiency as it allows for better decision-making and reduces uncertainty. It may also reduce volatility by revealing information that was previously hidden, but it does not necessarily lead to asymmetric information.

Question 20

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

Accepted Answer

According to the inverse relationship between required return and stock price, if the required rate of return (or the expected return) for a stock falls, investors are willing to pay more for it, leading to an increase in the current stock price. The earnings or expected price may have an impact on the stock price, but they are not the direct cause of the stock price increase.

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

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

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

Behavioral finance uses insights from

If the annual earnings for a company are $25, the expected future price of its stock is $100, and the required rate of return is 5%, then the current price of the stock should be

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

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

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?

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.

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

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

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

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

Transparency laws are intended to reduce

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

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

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

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

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?

Increased transparency should lead to increased

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