Question 1

Which of the following is true?
A)Most stockholders own stock because they want to participate in the daily decision making of the firms that they own.
B)The shareholders of a large well-established firm can be reasonably sure that they will earn a real rate of return of about 7 percent in the future.
C)The potential losses of shareholders are limited to the amount of their investment.
D)Ownership of a corporate bond provides the bondholder with an ownership right to a fraction of the firm's future profits.

Accepted Answer

C

Question 2

The market for new issues of stock is called the
A)primary market.
B)secondary market.
C)The New York Stock Exchange (NYSE).
D)The Chicago Board of Trade.

Accepted Answer

The primary market is where new issues of stock are sold for the first time by the issuing company. This is different from the secondary market, where previously issued stocks are traded between investors. The New York Stock Exchange and the Chicago Board of Trade are specific exchanges within the broader stock market, but they are not the market for new stock issues themselves.

Question 3

During the last two centuries, after adjustment for inflation,
A)corporate bonds have yielded a real return of approximately 7 percent annually, compared to a real return of about 3 percent for corporate stocks.
B)corporate stocks have yielded a real return of approximately 7 percent annually, compared to a real return of about 3 percent for bonds.
C)both corporate stocks and bonds have yielded a real rate of return of about 3 percent.
D)both corporate stocks and bonds have yielded a real rate of return of about 7 percent.

Accepted Answer

According to the statement, corporate stocks have yielded a real return of approximately 7 percent annually, compared to a real return of about 3 percent for bonds after adjustment for inflation during the last two centuries. Therefore, option B is the correct choice.

Question 4

Which of the following is true?
A)The buyer of a firm's stock is purchasing a fractional share in the firm's future net revenues.
B)When investors believe that a business decision by the management of a firm will increase the firm's future earnings, the price of the firm's stock will tend to rise.
C)Changing stock prices provide the board of directors and managers of a firm with a strong incentive to make good decisions and undertake productive projects.
D)All of the above are true.

Accepted Answer

A) The ownership of stock represents an ownership interest in the firm's assets and future cash flows, not just its net revenues.
B) This is generally true. When investors perceive that a firm's future earnings will increase due to a particular decision or action taken by management, they may be more willing to buy shares of the company at a higher price.
C) This is also true. Firm managers and directors often hold significant equity stakes in the company, and they are incentivized to make decisions and investments that will increase the value of their own holdings. Additionally, firms may use stock options or other forms of equity compensation to align the interests of management with those of shareholders.

Therefore, all of the statements are true.

Question 5

Since 1802, the average annual compound return for stock holdings, adjusted for inflation, has been approximately
A)2 percent.
B)7 percent.
C)15 percent.
D)30 percent.

Accepted Answer

The average annual compound return for stock holdings, adjusted for inflation, has been approximately 7 percent since 1802, according to historical data.

Question 6

Currently, about ____ of U.S. households own stock, either directly or through an equity mutual fund.
A)10 percent
B)20 percent
C)50 percent
D)80 percent

Accepted Answer

According to a Gallup poll conducted in 2021, roughly 55% of U.S. households own stock, either directly or through an equity mutual fund. This percentage has remained relatively steady over the past few years. Therefore, option C, 50 percent, is the closest estimate.

Question 7

Which of the following is true?
A)An increase in the interest rate will tend to increase stock prices.
B)A reduction in the interest rate will tend to increase stock prices.
C)An increase in the inflation rate will tend to increase stock prices.
D)There is no reason to believe that changes in interest rates will influence stock prices.

Accepted Answer

When interest rates are reduced, it becomes cheaper for companies to borrow money, which can increase their profits and boost stock prices. On the other hand, an increase in interest rates makes borrowing more expensive, which can reduce profits and lower stock prices. Inflation can also impact interest rates and stock prices, but the relationship is more complex and not always predictable. Choice A is incorrect because an increase in interest rates would have the opposite effect on stock prices. Choice C is incorrect because while inflation can potentially lead to higher stock prices in certain situations, it is not a reliable predictor on its own. Choice D is incorrect because as explained above, changes in interest rates can certainly influence stock prices.

Question 8

Compared to other investments such as bonds, historically a diverse set of stocks held over a lengthy time period (for example, 30 or 40 years) has yielded a
A)low average real rate of return, and the variation in that return has been extremely high.
B)high average real rate of return, and the variation in that return has been relatively small.
C)low average real rate of return, and the variation in that return has been relatively small.
D)high average real rate of return, and the variation in that return has been extremely high.

Accepted Answer

Historically, a diverse set of stocks held over a lengthy time period has yielded a high average real rate of return compared to other investments such as bonds. The variation in that return has been relatively small.

Question 9

Which of the following is a risk that investors undertake when purchasing stocks?
A)An individual stock can rise and fall unpredictably.
B)Nearly all stocks in the stock market may rise or fall together, when expectations about the entire economy change.
C)Both a and b are true.
D)Neither a nor b is true.

Accepted Answer

Both options A and B are true. The price of an individual stock can be unpredictable and can rise or fall unexpectedly based on company news, market trends, or other factors. Additionally, the stock market as a whole can experience volatility and fluctuations based on economic conditions and overall investor sentiment. Investors always face the risk of losses when investing in stocks, and they must be prepared for the possibility of both individual and market-wide declines.

Question 10

Which of the following is true?
A)Most stockholders own stock because they want to run the business.
B)The shareholders of a large well-established firm can be reasonably sure that they will earn a real rate of return of about 7 percent in the future.
C)Ownership of a corporate bond provides the bondholder with an ownership right to a fraction of the firm's future profits.
D)Stock ownership makes it possible for investors to own a fractional share of a firm's future profits even if they do not participate in the operation of the firm.

Accepted Answer

Stock ownership provides investors with a fractional share of a firm's future profits without requiring them to participate in the operation of the firm. A is incorrect because most stockholders invest in a company to earn a return on their investment, not to run the business. B is not necessarily true as future returns are uncertain and depend on many factors. C is incorrect because ownership of a corporate bond means the bondholder has a claim on the firm's future cash flows, but does not have an ownership right to the firm's profits.

Question 11

Which of the following is an advantage of an indexed equity mutual fund relative to a managed equity fund?
A)Indexed funds generally have better stock pickers.
B)Indexed funds engage in more detailed research.
C)Indexed funds have lower operating costs because they engage in less stock trading.
D)Indexed funds earn a significantly higher rate of return than a broad portfolio that represents the entire stock market.

Accepted Answer

Indexed funds have lower operating costs because they engage in less stock trading. This is because, unlike managed funds, they don't require active management and don't engage in frequent trading to try and beat the market. This lower cost advantage means more money can be invested in the fund, which can lead to a higher rate of return over time. The other choices are incorrect - indexed funds do not necessarily have better stock pickers, engage in more detailed research, or earn a significantly higher rate of return than a broad portfolio that represents the entire stock market.

Question 12

Which of the following is true of stocks?
A)Stock ownership is risky because the investor can never be sure what return they will earn or what the value of their stock holdings will be in the future.
B)The riskiness of stocks is one reason why their average rate of return has been higher than investments like bonds that guarantee a specified nominal amount in the future.
C)Both a and b are true.
D)Neither a nor b is true.

Accepted Answer

Both statement A and B are true. Stock ownership is risky because there is no guarantee of return on investment and the value of the stock can vary widely. However, this riskiness is also a reason why stocks have historically generated higher average rates of return compared to safer investments like bonds.

Question 13

A firm's stock price will be higher when the interest rate is ____ and the value of the firm's expected future profits are ____.
A)lower; larger
B)lower; smaller
C)higher; larger
D)higher; smaller

Accepted Answer

The answer of A firm's stock price will be higher...

Question 14

Stock market analysts often argue that lower interest rates are good for the stock market. Does this argument make sense?
A)No; lower interest rates will tend to slow down the economy, and this will be bad for the stock market.
B)Yes; the lower rates of interest will increase the value of future income (and capital gains), and stock prices will rise to reflect this factor.
C)No; the lower rates of interest will reduce the value of future income (and capital gains), and this will cause stock prices to fall.
D)Yes; the lower interest rates will cause inflation, and inflation is generally good for the stock market.

Accepted Answer

Lower interest rates reduce the cost of borrowing and can potentially increase consumer and business spending, which can boost corporate earnings and ultimately stock prices. Additionally, lower interest rates can increase the demand for stocks as investors seek higher returns than what they can get from bonds or savings accounts. Lower interest rates also make future cash flows from stocks more valuable, as it makes it easier for companies to finance their growth and expansion plans.

Question 15

The random walk theory of stock prices indicates that
A)if they are willing to do a little research, even beginning investors will be able to pick the stocks that will increase most in price in the future.
B)managed mutual funds will persistently earn a higher rate of return than indexed funds.
C)current stock prices already reflect information about factors influencing future stock prices that can be forecast with any degree of accuracy.
D)stock market investors can expect to earn a steady real rate of return of about 7 percent annually.

Accepted Answer

The random walk theory asserts that stock prices already incorporate all available information about the stock's future prospects, making it impossible to predict their behavior with any degree of accuracy. Therefore, option C is the best answer. None of the choices suggest that stock prices follow a random walk model, which makes options A, B, and D incorrect.

Question 16

Historically, which of the following has had the highest average annual rate of return?
A)corporate bonds
B)money market mutual funds
C)corporate stocks
D)U.S. Treasury bonds

Accepted Answer

Historically, corporate stocks have had the highest average annual rate of return compared to the other options. However, this comes with higher risk and volatility.

Question 17

During the last sixty years, the broad stock market (Standard and Poor's 500 Index) yielded an average annual nominal rate of return of approximately ____ and real rate of return of approximately ____.
A)5 percent; 2 percent
B)10 percent; 7 percent
C)17 percent; 9 percent
D)9 percent; 17 percent

Accepted Answer

According to historical data, the broad stock market (Standard and Poor's 500 Index) yielded an average annual nominal rate of return of approximately 10 percent and a real rate of return of approximately 7 percent over the last sixty years.

Question 18

Which of the following would tend to increase the value of a future stream of income?
A)an increase in the rate of inflation
B)an increase in the interest rate
C)a reduction in the interest rate
D)a reduction in the size of the expected future income

Accepted Answer

The answer of Which of the following would tend to...

Question 19

Which of the following indicates why the role of vigilant investors and investment fund managers is important for the efficient operation of an economy?
A)These investors generally serve on the boards of directors of corporations.
B)These investors tend to buy and sell stocks in a way that rewards good management.
C)These investors help allocate capital efficiently among firms and among investment projects.
D)Both b and c are true.

Accepted Answer

Option B is true because when investors buy and sell stocks in a way that rewards good management, it encourages companies to improve their performance and operations. Option C is also true because vigilant investors and investment fund managers help in the efficient allocation of capital among different firms and projects, leading to economic growth and development. Therefore, both options B and C are correct, making option D the correct answer.

Question 20

Which of the following is true?
A)The stock market provides investors with an opportunity to own a fractional share of the firm's future profits.
B)A new stock issue is often an excellent way for a firm to raise funds for future expansion.
C)Changes in stock prices provide information about what investors think of various business decisions.
D)All of the above are true.

Accepted Answer

All of the statements are true. The stock market allows investors to buy shares in a company and benefit from its future profits. A new stock issue is a common way for a company to raise funds for future expansion. Changes in stock prices reflect the market's perception of a company's business decisions and can provide valuable information for investors.

Quiz 18: Appendix: the Stock Market: Its Function, Performance, and Potential As an Investment Opportunity

Which of the following is true?

The market for new issues of stock is called the

During the last two centuries, after adjustment for inflation,

Which of the following is true?

Since 1802, the average annual compound return for stock holdings, adjusted for inflation, has been approximately

Currently, about ____ of U.S. households own stock, either directly or through an equity mutual fund.

Which of the following is true?

Compared to other investments such as bonds, historically a diverse set of stocks held over a lengthy time period (for example, 30 or 40 years) has yielded a

Which of the following is a risk that investors undertake when purchasing stocks?

Which of the following is true?

Which of the following is an advantage of an indexed equity mutual fund relative to a managed equity fund?

Which of the following is true of stocks?

A firm's stock price will be higher when the interest rate is and the value of the firm's expected future profits are .

Stock market analysts often argue that lower interest rates are good for the stock market. Does this argument make sense?

The random walk theory of stock prices indicates that

Historically, which of the following has had the highest average annual rate of return?

During the last sixty years, the broad stock market (Standard and Poor's 500 Index) yielded an average annual nominal rate of return of approximately and real rate of return of approximately .

Which of the following would tend to increase the value of a future stream of income?

Which of the following indicates why the role of vigilant investors and investment fund managers is important for the efficient operation of an economy?

Which of the following is true?