6th Assignment

6th Assignment (CH.
7)
Review of attempt 2
Started on Tuesday, February 22, 2011, 11:08 AM
Completed on Tuesday, February 22, 2011, 01:20 PM
Time taken 2 hours 11 mins
Marks 31/50
Grade 3.1 out of a maximum of 5 (62%)
Question1
Marks: 1
If in an efficient market all prices are correct and reflect market fundamentals,
which of the following is a false statement?
Choose one answer.
a. A stock that has done poorly in the past is more likely to
b. A security's price reflects all available information about t

security.
c. One investment is as good as any other because the sec
correct.
d. Security prices can be used by managers to assess their
accurately.
Correct
Marks for this submission: 1/1.
Question2
Marks: 1
According to the Gordon-Growth model, what will be the percentage change
in the value of the stock of a company whose current dividend is $10.00 and
whose dividends had been expected to grow by 3% per year but now are
expected to grow by 1% per year?
Choose one answer.
a. -4.0%
b. -66.0%
c. -31.1%
d. -23.7%
Incorrect
Question3
Marks: 1
If expectations of the future inflation rate are formed solely on the basis of a
weighted average of past inflation rates, then economics would say that
expectation formation is
Choose one answer.
a. irrational.
b. rational.
c. reasonable.
d. adaptive.
Correct
Question4
Marks: 1
According to the efficient markets hypothesis, purchasing the reports of
financial analysts
Choose one answer.
a. is not likely to be an effective strategy for increasing fin
b. is likely to increase one's returns by an average of 10%
c. is likely to increase one's returns by about 3 to 5%.
d. is likely to increase one's returns by an average of abo
Correct
Question5
Marks: 1
In the Gordon Growth Model, the growth rate is assumed to be ________ the
required return on equity.
Choose one answer.
a. less than
b. equal to
c. greater than
d. proportional to
Correct
Question6
Marks: 1
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
Choose one answer.
a. undermining.
b. short selling.
c. long marketing.
d. double dealing.
Correct
Question7
Marks: 1
In the one-period valuation model, the current stock price increases if
Choose one answer.
a. dividends are cut.
b. the expected sales price falls.
c. the required return increases.
d. the expected sales price increases.
Correct
Question8
Marks: 1
Using the Gordon growth model, a stock's price will increase if
Choose one answer.
a. the expected sales price rises.
b. the dividend growth rate increases.
c. the required rate of return on equity rises.

d. the growth rate of dividends falls.
Correct
Question9
Marks: 1
A stock's price will fall if there is
Choose one answer.
a. an increase in the future sales price.
b. current dividends are high.
c. an increase in the required rate of return.
d. a decrease in perceived risk.
Correct
Question10
Marks: 1
According to the Gordon-Growth model, what is the value of a stock with a
dividend of $1, required return on equity of 10% and expected growth rate of
dividends of 5%?
Choose one answer.
a. $21
b. $20
c. $2
d. $10
Incorrect
Question11
Marks: 1
If a forecast is made using all available information, then economists say that
the expectation formation is
Choose one answer.
a. irrational.
b. adaptive.
c. reasonable.
d. rational.
Correct
Question12
Marks: 1
Suppose Apple announces that its earnings for the fourth quarter of 2011 rose
to $2 billion. As a result of this announcement the price of Apple's stock does
not change. The best explanation of this is
Choose one answer.
a. market participants expected Apple's earnings to be less than
b. market participants expected Apple's earnings to be $2 billion
c. market participants were expecting Apple's earnings to be gre
d. market participants have adaptive expectations.
Incorrect
Question13
Marks: 1
According to rational expectations theory, forecast errors of expectations
Choose one answer.
a. are more likely to be positive than negative.
b. tend to be persistently high or low.
c. are unpredictable.
d. are more likely to be negative than positive.
Correct
Question14
Marks: 1
You read a story in the newspaper announcing the proposed merger of Dell
Computer and Gateway. The merger is expected to greatly increase
Gateway's profitability. If you decide to invest in Gateway stock, you can
expect to earn
Choose one answer.
a. above average returns since you will share in the higher pro
b. a normal return since stock prices adjust to reflect expected

almost immediately.
c. below average returns since computer makers have low pro
d. above average returns since your stock price will definitely a

profits are earned.
Correct
Question15
Marks: 1
The efficient markets hypothesis predicts that an investor
Choose one answer.
a. will be able consistently to earn above-normal profits from bu
long as he or she makes use of rational expectations.
b. will be able consistently to earn above-normal profits so long

are rising.
c. will be able consistently to earn above-normal profits from bu
long as he makes us of adaptive expectations.
d. will not be able consistently to earn above-normal profits from
Incorrect
Question16
Marks: 1
In comparing actively managed mutual funds with those funds that simply buy
and hold a large market portfolio (index funds), we would expect that
Choose one answer.
a. the index funds provide a higher return after expenses than the
b. actively managed funds and index funds provide the same retu
c. index funds provide a lower return than actively managed fund

into consideration.
d. the actively managed funds provide a higher return than the in
Correct
Question17
Marks: 1
Which of the following expressions gives the present value of future dividends
for a company whose current dividend is $5.00 and whose future dividends
are expected to grow at rate g?
Choose one answer.
a. [$5.00(1 - g)]/(i - g)
b. [$5.00(1 + g)]/(i + g)
c. [$5.00(1 + g)]/(i - g)
d. [$5.00(1 - g)]/(i + g)
Correct
Question18
Marks: 1
Tests used to rate the performance of rules developed in technical analysis
conclude that technical analysis
Choose one answer.
a. does not outperform the overall market, suggesting that stockbr

services of any value.
b. does not outperform the overall market.
c. outperforms the overall market.
d. far outperforms the overall market, suggesting that stockbroker

services.
Correct
Question19
Marks: 1
If major traders believe the price of a stock should be higher than its current
market price,
Choose one answer.
a. they should petition the Securities and Exchange Commissi

adjustment in the price of the stock.
b. their actions will result in the information they possess being

price of the stock.
c. there is little they can do because government regulation pre
what they know.
d. they have an incentive to sell the stock.
Incorrect
Question20
Marks: 1
Rules used to predict movements in stock prices based on past patterns are,
according to the efficient markets hypothesis,
Choose one answer.
a. profitably employed by all financial analysts.
b. a waste of time.
c. consistent with the random walk hypothesis.
d. the most efficient rules to employ.
Correct
Question21
Marks: 1
The rate of return of a stock held for one year equals
Choose one answer.
a. the dividend yield minus the rate of capital gain.
b. the dividend yield plus the rate of capital gain.
c. the rate of capital gain minus the dividend yield.
d. the change in the price of the stock.
Correct
Question22
Marks: 10
What is the difference between adaptive expectations and rational
expectations in terms of stock valuation? write your answer concisely.
Answer:
Adaptive Expectations: agents form expectations about the future values of variables using the previou
same variable i.e., regardless of new information available, agents rely on past information, updating th
moving average. The adaptive-expectations approach dominated work on inflation and macroeconomi
intuitively plausible, tractable both mathematically and empirically, and successful in terms of yielding s
of models. In the 1970s, however, this hypothesis fell into disfavor following the work of John Muth , wh
optimality of using adaptive expectations (in the sense of delivering unbiased and efficient estimates o
limited class of variables.
Rational Expectations: John Muth introduced and applied the concept of rational expectations. Econom
influenced by the behavior of actors acting on their expectations of these variables. The stock market i
expectations of an increase in the value of equities will lead to buying, which in turn increases the price
expectations require that actors take all of these interactions into account, so that their actions are bas
in turn, realized as a result of their actions. The rational expectations model assumes that economic ag
the economy and that they can compute optimal forecasts that represent their expectations, much like
of all available and relevant information. In the extreme, when information is complete and there is no u
expectations hypothesis becomes a model of perfect foresight. Indeed, in games of strategic interactio
there is only one rational-expectations equilibrium, so that applying a rational-expectation assumption
a unique prediction.
The most basic criticism of rational-expectation models is that they make implausible demands on the
economic agents. Moreover, forecasting is a costly activity. The structure of the economy constantly ch
able to deal with these changes in statistical terms; and changes may occur faster than the speed at w
economy. In all cases, their forecasts will diverge from optimal forecasts. Even if it were plausible that
expectations, such learning would proceed very slowly given the complexity of the economy and the la
need to sift through. This criticism is perhaps more valid for rational-expectations models in the macro
are highly complex. For interaction among a few firms or individuals, it is more plausible that actions ca
Question23
Marks: 1
The efficient markets hypothesis suggests that investors
Choose one answer.
a. act on all "hot tips" they hear.
b. can use the advice of technical analysts to outperform the ma

c. let too many unexploited profit opportunities go by if they ado
strategy.
d. should purchase no-load mutual funds which have low mana
Correct
Question24
Marks: 1
The major criticism of the view that expectations are formed adaptively is that
Choose one answer.
a. adaptive expectations models have no predictive power.
b. people are irrational and therefore never learn from past mist
c. it is easier to model adaptive expectations than it is to model
d. this view ignores that people use more information than just p
expectations.
Correct
Question25
Marks: 1
In the generalized dividend model, the current stock price is the sum of
Choose one answer.
a. the actual value of the future dividend stream.
b. the present value of the future dividend stream pl

sales price.
c. the present value of the future sales price.
d. the present value of the future dividend stream.
Correct
Question26
Marks: 1
In the one-period valuation model, an increase in the required return on
investments in equity
Choose one answer.
a. reduces the current price of a stock.
b. increases the expected sales price of a stock.
c. reduces the expected sales price of a stock.
d. increases the current price of a stock.
Correct
Question27
Marks: 1
To say that stock prices follow a "random walk" is to argue that stock prices
Choose one answer.
a. tend to follow trends.
b. rise, then fall in a predictable fashion.
c. cannot be predicted based on past trends.
d. rise, then fall, then rise again.
Correct
Question28
Marks: 1
A key point made by the Gordon-Growth model is that the
Choose one answer.
a. past trends in a stock's behavior indicate future price trends
b. dividends have little to do with a stock's value.
c. value of a stock depends on investor's expectations about th

firm.
d. risk has little effect on a stock's value.
Correct
Question29
Marks: 1
According to the efficient markets hypothesis, the difference between today's
price for a share of stock and tomorrow's price is
Choose one answer.
a. predictable given currently available information.
b. zero.
c. equal to today's price minus yesterday's price.
d. unforecastable.
Incorrect
Question30
Marks: 1
Which of the following types of information most likely allows the exploitation
of a profit opportunity?
Choose one answer.
a. Insider information
b. Technical analysis
c. Financial analysts' published recommendations
d. Hot tips from a stockbroker
Correct
Question31
Marks: 1
Which of the following statements is true of rational expectations?
Choose one answer.
a. If traders have rational expectations, any announcement by a co

on its stock price, even if the market was already aware of the fact
b. For a trader with rational expectations, the expectation of an ass

optimal price forecast.
c. Rational expectations forecasts are always correct.
d. If a trader really has rational expectations, he or she was always

normal return on his or her financial portfolio.
Correct
Question32
Marks: 1
Excessive volatility refers to the fact that
Choose one answer.
a. stock prices fluctuate more than is justified by dividend fluc
b. stock returns display mean reversion.
c. stock prices can be slow to react to new information.

d. stock price tend to rise in the month of January.
Correct
Question33
Marks: 1
Increased uncertainty resulting from the subprime crisis ________ the
required return on investment in equity.
Choose one answer.
a. decreased
b. lowered
c. had no impact on
d. raised
Correct
Question34
Marks: 1
According to the Gordon-Growth model, what is the value of a stock with a
dividend of $2, required return on equity of 8% and expected growth rate of
dividends of 4%?
Choose one answer.
a. $50
b. $25
c. $52
d. $26
Incorrect
Question35
Marks: 1
You have observed that the forecasts of an investment advisor consistently
outperform the other reported forecasts. The efficient markets hypothesis says
that future forecasts by this advisor
Choose one answer.
a. will definitely be worse in the future. What goes up must com
b. will always be the best of the group.
c. may or may not be better than the other forecasts. Past perf
of the future.
d. will be worse in the near future, but improve over time.
Correct
Question36
Marks: 1
Psychologists have found that people tend to be ________ in their own
judgments.
Choose one answer.
a. underconfident
b. insecure
c. indecisive
d. overconfident
Correct
Question37
Marks: 1
If market participants rely only past stock prices to forecast future stock prices,
Choose one answer.
a. they have rational expectations.
b. they will be better able to forecast future price increases than
c. they will be better able to forecast future price decreases than
d. they have adaptive expectations.
Incorrect
Question38
Marks: 1
Which of the following accurately summarize the empirical evidence about
technical analysis?
Choose one answer.
a. Technical analysts tend to outperform other financial analysi

nevertheless under-perform the market.
b. Technical analysts fare no better than other financial analysi

analysts they under-perform the market.
c. Technical analysts fare no better than other financial analysi
not outperform the market.

d. Technical analysts fare no better than other financial analysi
analysts they outperform the market.
Correct
Question39
Marks: 1
An implication of the efficient markets hypothesis is that
Choose one answer.
a. unless he or she acts recklessly, the average investor should
normal profits.
b. above-normal profits are available only to major traders.
c. only sophisticated investors will be able to earn above-norma

investments.
d. above-normal profits will be eliminated in the trading process
Correct
Question40
Marks: 1
Another way to state the efficient markets condition is: in an efficient market,
Choose one answer.
a. unexploited profit opportunities will be quickly eliminated.
b. unexploited profit opportunities will never exist.
c. every financial market participant must be well informed about
d. arbitragers guarantee that unexploited profit opportunities neve
Correct
Question41
Marks: 1
Suppose that Google announces that its profits for the third quarter of 2011
were $1.6 billion. As a result of this announcement the price of Google's stock
declines. The best explanation of this is
Choose one answer.
a. market participants have adaptive expectations.

b. market participants expected Google's profits to be less than
quarter.
c. market participants expected Google's profits to be greater th
third quarter.
d. the stock market is not an efficient market.
Incorrect

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6th Assignment (CH.

Completed on Tuesday, February 22, 2011, 01:20 PM

Time taken 2 hours 11 mins

Grade 3.1 out of a maximum of 5 (62%)

a. A stock that has done poorly in the past is more likely to

b. A security's price reflects all available information about t

b. is likely to increase one's returns by an average of 10%

c. is likely to increase one's returns by about 3 to 5%.

d. is likely to increase one's returns by an average of abo

a. dividends are cut.

b. the expected sales price falls.

c. the required return increases.

d. the expected sales price increases.

a. the expected sales price rises.

b. the dividend growth rate increases.

c. the required rate of return on equity rises.

a. an increase in the future sales price.

b. current dividends are high.

c. an increase in the required rate of return.

d. a decrease in perceived risk.

a. market participants expected Apple's earnings to be less than

b. market participants expected Apple's earnings to be $2 billion

c. market participants were expecting Apple's earnings to be gre

d. market participants have adaptive expectations.

a. are more likely to be positive than negative.

b. tend to be persistently high or low.

d. are more likely to be negative than positive.

b. a normal return since stock prices adjust to reflect expected

d. above average returns since your stock price will definitely a

b. will be able consistently to earn above-normal profits so long

c. index funds provide a lower return than actively managed fund

a. does not outperform the overall market, suggesting that stockbr

b. does not outperform the overall market.

c. outperforms the overall market.

d. far outperforms the overall market, suggesting that stockbroker

a. they should petition the Securities and Exchange Commissi

b. their actions will result in the information they possess being

a. profitably employed by all financial analysts.

c. consistent with the random walk hypothesis.

d. the most efficient rules to employ.

a. the dividend yield minus the rate of capital gain.

b. the dividend yield plus the rate of capital gain.

c. the rate of capital gain minus the dividend yield.

d. the change in the price of the stock.

a. act on all "hot tips" they hear.

b. can use the advice of technical analysts to outperform the ma

a. adaptive expectations models have no predictive power.

c. it is easier to model adaptive expectations than it is to model

a. the actual value of the future dividend stream.

b. the present value of the future dividend stream pl

d. the present value of the future dividend stream.

a. reduces the current price of a stock.

b. increases the expected sales price of a stock.

c. reduces the expected sales price of a stock.

d. increases the current price of a stock.

a. tend to follow trends.

b. rise, then fall in a predictable fashion.

c. cannot be predicted based on past trends.

d. rise, then fall, then rise again.

b. dividends have little to do with a stock's value.

c. value of a stock depends on investor's expectations about th

a. predictable given currently available information.

c. equal to today's price minus yesterday's price.