Question 1

The proper study of the risk of a stock considers how the stock price varies with the rest of the market.

Accepted Answer

The study of the risk of a stock includes analyzing its correlation with the market and how the stock price fluctuates in relation to the broader market.

Question 2

Diversification is the only strategy that leads to a higher-than- market-average return.

Accepted Answer

Diversification is one strategy that can potentially reduce risk and volatility in an investment portfolio, but it does not guarantee a higher-than-market-average return. Other strategies such as active management, market timing, and selecting individual stocks can also potentially lead to higher returns, but come with higher risks and costs. Ultimately, the best strategy depends on the individual investor's goals, risk tolerance, and investment horizon.

Question 3

A buy-and-hold strategy only works for stocks that are very volatile.

Accepted Answer

A buy-and-hold strategy can work for any type of stock, not just those that are very volatile. In fact, it is often recommended for long-term investors to hold a diversified portfolio of stable, blue-chip stocks.

Question 4

Paying an expert to help pick stocks will likely yield better returns than most alternative strategies for stock selection.

Accepted Answer

Research has shown that paying experts to pick stocks does not consistently lead to better returns than other investment strategies such as passive index funds or robo-advising. Additionally, the fees paid to these experts can significantly eat into any potential profits. Therefore, it is not inherently true that paying an expert is the best strategy for stock selection.

Question 5

Active mutual funds historically outperform passive mutual funds.

Accepted Answer

Studies have shown that on average, actively managed mutual funds underperform passive index funds over the long term, and also charge higher fees. However, there may be some active mutual funds that do outperform some passive ones in certain market conditions.

Question 6

According to the efficient markets hypothesis, the prices of traded assets, such as stocks and bonds, reflect all publicly traded information.

Accepted Answer

The efficient markets hypothesis suggests that the price of an asset incorporates all publicly available information, implying that it is difficult to achieve excess returns by exploiting that information.

Question 7

According to the evidence, very few mutual fund managers can beat the market averages.

Accepted Answer

Many studies have shown that over the long term, the majority of mutual fund managers underperform the market averages after accounting for fees and expenses. While there are some exceptions, it is generally difficult for active managers to consistently beat the market.

Question 8

Since for every buyer of a stock there is a seller of that stock, someone can likely become very rich acting on public information.

Accepted Answer

Acting on public information can lead to insider trading and is illegal. Therefore, someone cannot become very rich solely based on public information.

Question 9

The number of senior citizens will double by 2020, so investing in medical care and retirement homes is likely to generate above-normal market returns.

Accepted Answer

The statement is not necessarily true as it depends on various factors such as competition, government regulations, and quality of care provided by the medical care and retirement homes. The projected increase in senior citizens does indicate potential demand for these services, but it does not necessarily guarantee above-normal market returns.

Question 10

Which statement is NOT true?
A) Portfolio managers should diversify investments.
B) The promise of higher returns is accompanied by higher risk.
C) A single investor can consistently beat the market over the long term.
D) Active stock markets are an important part of the economy.

Accepted Answer

The statement that a single investor can consistently beat the market over the long term is not true. It is widely acknowledged that beating the market consistently over the long term is difficult, if not impossible. Most investors, including professional portfolio managers, diversify their investments in order to reduce risk and increase their chances of achieving their investment objectives. The promise of higher returns is typically accompanied by higher risk, and active stock markets play an important role in the economy by providing a platform for companies to raise capital and for investors to buy and sell securities.

Question 11

The efficient markets hypothesis suggests that reading the Wall Street Journal will help you pick top-performing stocks.

Accepted Answer

The efficient markets hypothesis suggests that all available information is already reflected in a stock's price, making it difficult to consistently outperform the market by simply reading the news.

Question 12

If the efficient markets hypothesis holds, then only investors with inside information can earn a return higher than the stock market average return.

Accepted Answer

According to the efficient markets hypothesis, all publicly available information is already reflected in the stock prices, and therefore, it is impossible to consistently earn a return higher than the market average return without having insider information.

Question 13

Mutual funds primarily offer the service of diversification of investments.

Accepted Answer

Mutual funds pool money from multiple investors and invest in a variety of assets such as stocks, bonds, and securities. This diversifies the investments and helps to reduce the overall risk associated with investing in a single asset or security.

Question 14

The only way someone can take advantage of information that other people don't have is to start buying or selling large numbers of shares.

Accepted Answer

The answer of The only way someone can take advantage...

Question 15

Diversification means buying a stock at a low price and then selling it later at a higher price.

Accepted Answer

Diversification refers to investing in a variety of different stocks or assets in order to reduce risk and spread out potential gains and losses. It does not guarantee buying low and selling high for any individual stock.

Question 16

Bursting stock market bubbles have which of the following effects? I. decreased wealth II. decreased production in those industries whose stocks have collapsed III. unemployment in those industries whose stocks have collapsed
A) I only
B) I and II only
C) II and III only
D) I, II, and III

Accepted Answer

Bursting stock market bubbles lead to decreased wealth for investors who lose money. It also leads to decreased production in the industries whose stocks have collapsed as they may have to cut back on their production due to lack of funds. This leads to unemployment in those industries as well. Therefore, all three options - I, II, and III - are correct.

Question 17

One of the exceptions to the efficient markets hypothesis is that experts can get better returns than others.

Accepted Answer

The answer of One of the exceptions to the efficient...

Question 18

Warren Buffett will likely continue to beat the market, as he has done for the past few decades.

Accepted Answer

While Warren Buffett has had great success in the past, there is no guarantee that he will continue to outperform the market in the future. Factors such as market conditions, economic changes, and shifts in investment strategies could all affect his performance. Additionally, as Buffett ages, there may be questions about who will take over his investment management responsibilities at Berkshire Hathaway.

Question 19

According to the efficient markets hypothesis, investors who trade stocks actively earn higher than average returns.

Accepted Answer

The efficient markets hypothesis suggests that it is impossible to consistently beat the market by trading actively, as all publicly available information is already reflected in stock prices. Therefore, investors who trade stocks actively are not expected to earn higher than average returns in the long run.

Question 20

Stock market bubbles have real effects in the economy because:
A) overvalued stocks cause inflationary effects in the economy.
B) overvalued stocks violate the efficient markets hypothesis.
C) overvalued stocks divert capital to less-productive uses.
D) when these bubbles burst, they raise the value of capital in those industries.

Accepted Answer

When investors put too much money into a specific sector or a few popular companies, this can lead to overvalued stocks and a bubble forming in the market. This diversion of capital to less-productive uses means that there is less money available for investment in other areas, potentially leading to slower economic growth. When the bubble bursts, there is often a sharp decline in stock prices, which can have negative effects on investors and the wider economy.

Quiz 22: Managing Incentives