Question 1

A mutual fund pools money from many customers and invests the money in many firms. The fees charged by fund managers are:

Accepted Answer

Passive funds simply track a market index or benchmark and require less active management, resulting in lower fees for investors. Bond funds may require more active management due to the constantly changing market for bonds, resulting in higher fees.

Question 2

Which of the following are advantages of saving your money in a mutual fund? I. You have professional fund management. II. Mutual funds have always outperformed the S&P 500. III. People with smaller amounts of money can diversify risk.

Accepted Answer

Option I is correct because mutual funds are managed by professional fund managers. Option II is incorrect as mutual funds may not always outperform the S&P 500. Option III is correct because mutual funds allow people with smaller amounts of money to diversify their risk by investing in a variety of stocks, bonds, and other assets.

Question 3

The fact that the majority of stock mutual funds cannot outperform the stock market averages is consistent with:

Accepted Answer

The efficient markets hypothesis suggests that all available information is already reflected in stock prices, making it nearly impossible for investors to consistently outperform the market averages through stock picking or market timing. This is consistent with the fact that the majority of stock mutual funds cannot outperform the market averages.

Question 4

John Stossel's dart-throwing experiment showed that:

Accepted Answer

John Stossel's dart-throwing experiment involved randomly selecting stocks by throwing darts at a stock chart. The results of the experiment showed that the randomly selected stocks outperformed the stock picks of major Wall Street experts. Therefore, the experiment suggested that picking stocks at random can outperform the stock picks of experts, supporting choice A.

Question 5

The text argues that which of the following is TRUE about Warren Buffett?

Accepted Answer

The text states that Buffett's ability to beat the market has become more difficult over time due to increased competition and market factors. The other choices are false statements.

Question 6

According to the efficient markets hypothesis, the person who most likely earns the highest return for holding the stock of Company ABC on a single day is:

Accepted Answer

The answer of According to the efficient markets hypothesis, the...

Question 7

Some skeptical economists say that successful brokers like Warren Buffett are:

Accepted Answer

Skeptical economists believe that successful brokers like Warren Buffett are just lucky and that their success is not necessarily due to their intelligence or ability to predict the future. They argue that there are many factors that can influence stock prices, and it is unlikely that any one person can consistently pick winning stocks over time. Therefore, they believe that a lot of it comes down to chance rather than skill.

Question 8

Which of the following refers to a mutual fund for which its manager buys and sells stocks regularly in order to maximize the fund's returns?

Accepted Answer

An "active fund" is a mutual fund where the manager buys and sells stocks regularly in order to maximize returns.

Question 9

(Figure: Mutual Funds) Refer to the figure. From this Mutual Funds figure, John Stossel dart-throwing experiment we can say that:

Accepted Answer

The answer of (Figure: Mutual Funds) Refer to the figure....

Question 10

Which of the following are helpful in stock investment strategies?

Accepted Answer

Buying undervalued stocks and holding them for a long period of time are both helpful in stock investment strategies.

Question 11

Over a long period of time which investment strategy is typically more profitable?

Accepted Answer

Over a long period of time, passive investment strategies such as index funds have been shown to outperform active strategies due to lower fees and the ability to capture market returns rather than attempting to beat the market. Introversive and subversive are not commonly used investment strategies.

Question 12

According to the efficient markets hypothesis, stock prices:

Accepted Answer

According to the efficient markets hypothesis, stock prices reflect all publicly available information about the stock market. This means that any new information about a stock will be reflected in its price almost immediately, making it difficult for investors to consistently outperform the market.

Question 13

The efficient markets hypothesis implies that in the stock market:

Accepted Answer

The efficient markets hypothesis suggests that stocks are always priced at their true intrinsic value, meaning it is impossible to consistently earn returns higher than the average market return through either fundamental analysis or technical analysis. Therefore, option B is the correct answer. Options A and C are incorrect because they imply that some individuals can earn higher returns than others, which contradicts the efficient markets hypothesis. Option D is also incorrect as technical analysis is not deemed useful in consistently earning high returns.

Question 14

Which of the following statements is TRUE? I. A mutual fund pools money from many different investors and uses that money to invest in many different firms. II. Mutual funds that are run by managers who try to pick the best performing stocks usually outperform the S&P 500. III. Passive mutual funds do not try to select winning stocks; they mimic broader markets like the S&P 500.

Accepted Answer

Statement I is true, as this is the basic concept of a mutual fund - pooling money from various investors to invest in a variety of firms. Statement II is false, as numerous studies and statistics have shown that actively managed funds do not consistently outperform the S&P 500. Statement III is true, as passive funds simply track a broader index or market, such as the S&P 500, without trying to select individual winning stocks.

Question 15

The major difference between active and passive mutual funds is that:

Accepted Answer

The major difference between active and passive mutual funds is that active funds involve stock picks by managers, while passive funds match the movements of a broad market index. Therefore, Option D is the correct answer. Option A and B are incorrect as passive funds are also considered mutual funds, and investors do not pick individual stocks in passive funds. Option C is not necessarily true as the risk level of mutual funds (both active and passive) depends on various factors including asset allocation, diversification, and investment strategy.

Question 16

Suppose 1,000 experts flip a coin once each year and half say the market will go up, while the other half say the market will go down. After six years how many experts would have been correct every year?

Accepted Answer

There is a 50% chance of guessing correctly each year, so the probability of guessing correctly all six years is (1/2)^6 = 1/64. Therefore, out of 1,000 experts, 1,000 * (1/64) = 15.625 experts would have been correct every year. Since we cannot have a fraction of an expert, the closest integer is 15.

Question 17

In a market of 2,000 investors who each year flip a coin to predict market success or failure, how many investors will have been consistently right after five years? Assume the coin tosses yield heads exactly 50 percent of the time.

Accepted Answer

The answer of In a market of 2,000 investors who...

Question 18

Which of the following is TRUE of mutual funds? I. Active funds generally give higher returns than passive funds. II. Most mutual funds generally give higher returns than broad stock indexes.

Accepted Answer

Neither I nor II is true. The performance of mutual funds, active or passive, can vary greatly and may not necessarily result in higher returns than broad stock indexes. It ultimately depends on the specific fund's management and investment strategy. In general, passive funds tend to have lower fees and may outperform active funds in the long run due to their simpler investment approach. As for whether most mutual funds give higher returns than broad stock indexes, this is also not necessarily true, as there are many factors that can affect a fund's performance.

Question 19

John Stossel picked Wall Street stocks at random, and his portfolio outperformed what proportion of expert stockbrokers and fund managers?

Accepted Answer

The answer of John Stossel picked Wall Street stocks at...

Question 20

If each of the approximately 320,000 securities and financial service agents in the United States bet on whether the market would go up or down for each of the next 10 years by flipping a coin, we would expect that approximately 312 agents would have been right 10 years in a row. This example suggests that:

Accepted Answer

The example shows that even if a large number of people make bets on the stock market, a few of them would predict the trend correctly each year for ten years in a row by sheer chance. This suggests that it is not easy to beat the market averages by relying on random guesses or luck. Therefore, option A and C are incorrect. Choice D is also incorrect as it is not mentioned in the example whether famous investors like Warren Buffett were lucky or not.

Quiz 22: Managing Incentives