Question 1

If the efficient markets hypothesis is valid, then a personshould:
I. buy mutual funds
II.diversify
III. follow a buy-and-hold strategy.
A)I and II only
B)I and III only
C)II and III only
D)I, II, and III

Accepted Answer

The answer of If the efficient markets hypothesis is valid,...

Question 2

Consider the market for ABC Company's stock. What shouldhappen in this market after an announcement that the companyis having financial difficulties?
A)The demand for the stock would shift to the left.(True Answer )Correct
B)The demand for the stock would shift to the right.
C)The supply of the stock would shift to the left.
D)The supply of the stock would shift to the right.

Accepted Answer

When a company announces financial difficulties, it is likely that investors will become less optimistic about the company's future earnings and growth prospects. As a result, the demand for the company's stock will decrease, causing a leftward shift in the demand curve. This means that at any given price, fewer investors will want to buy the stock. This is because they will be less confident about the company's ability to generate profits and pay dividends in the future.

Question 3

The efficient markets hypothesis implies that in the stockmarket:
A)everyone can earn more than everyone else some of the time.
B)no one can systematically earn more than the average market return.
C)people with more funds earn higher returns.
D)people can use technical analysis to systematically earn high returns.

Accepted Answer

The efficient markets hypothesis states that all available information is reflected in stock prices and therefore it is impossible for any investor to consistently achieve return greater than the market average. Therefore, option B is the correct choice. Option A is false because not everyone can earn more than others all the time due to the efficient markets. Option C is false because the efficient markets hypothesis does not indicate that people with more funds earn higher returns. Option D is false because technical analysis doesn't work in an efficient market.

Question 4

According to the efficient markets hypothesis, the person whomost likely earns the highest return for holding the stock ofCompany ABC on a single day is:
A)a person who follows a buy-and-hold strategy.
B)an active trader who knows the historical prices of ABC.
C)ABC's CEO who has inside information about the company's new projects.
D)None of the answers is correct: No one can outperform anyone else at any time.

Accepted Answer

The efficient markets hypothesis suggests that all available information is already reflected in stock prices. However, someone with inside information (not yet public) could potentially earn higher returns, making the CEO with inside information about new projects the most likely to outperform others.

Question 5

One of the problems with investment advice that claims youshould buy stock in a certain company or sector of the economyis that:
A)no one else knows such advice.
B)asset prices likely reflect that information already.(True Answer )Correct
C)investment advice is not regulated.
D)sellers know less than buyers in the financial markets.

Accepted Answer

Asset prices likely reflect the information contained in investment advice. Therefore, the advice may not offer any unique insight and there is a risk of market inefficiencies or bubbles if too many investors follow the same advice.

Question 6

Consider the market for ABC Company's stock. What shouldhappen to the stock for this company if there is a rumor thatthe company is set to merge with another very profitablecompany?
A)The demand for the stock would shift to the left.
B)The demand for the stock would shift to the right.(True Answer )Correct
C)The supply of the stock would shift to the left.
D)The supply of the stock would shift to the right.

Accepted Answer

If there is a rumour that the company is set to merge with another very profitable company, it is likely to increase investors' confidence in the company's future profitability. This would lead to an increase in demand for the company's stock, shifting the demand curve to the right. As a result, the price of the stock would increase.

Question 7

If a person diversifies her stock portfolio, then:
A)the expected return of her portfolio will increase.
B)the risk of her portfolio will decrease.
C)both the risk and expected return of her portfolio will increase.
D)neither the risk nor the expected return of her portfolio will change.

Accepted Answer

Diversification helps spread out risk across multiple stocks, thus reducing the overall risk of the portfolio. However, there is no guarantee that the expected return of the portfolio will increase. It may stay the same or even decrease depending on the performance of the individual stocks.

Question 8

When Chernobyl melted down in the Soviet Union, the:
A)price of U.S.basketballs increased.
B)prices of assets reacted slowly to the information.
C)price of U.S.potatoes increased.
D)stock prices of U.S.nuclear plants increased.

Accepted Answer

The answer of When Chernobyl melted down in the Soviet...

Question 9

Which of the following individuals is using information outsidethe efficient markets hypothesis?
Someone who:
A)has information about the aging U.S.population and expects stock for companies that cater to senior citizens to increase in
Value.
B)reads in the newspaper about a merger between two profitable firms and expects the stock prices for these
Companies to rise.
C)while auditing a dishonest company realizes that its profit estimates are greatly inflated and immediately sells her stock in
The company.
D)hears a rumor that a top bank may be in trouble, and decides to sell his stock in that company.

Accepted Answer

The efficient markets hypothesis (EMH) posits that all available information is already reflected in stock prices. Therefore, someone acting on public information (like aging population trends, news of mergers, or rumors) is operating within the bounds of EMH. However, someone using insider information obtained through their unique position (e.g., discovering inflated profit estimates while auditing a company) is using information not accounted for by the market, thus operating outside the EMH.

Question 10

The efficient markets hypothesis implies that an investor:
A)cannot systematically outperform the market as a whole over time.
B)should rely on publicly available information to outperform the market.
C)should buy and sell lower volumes of shares.
D)can manage a portfolio and regularly outperform the whole market.

Accepted Answer

According to the efficient markets hypothesis, all relevant information about a security is already reflected in its price. Therefore, it is not possible for an investor to consistently outperform the market by using any method of analysis. This is because any new information that is released would quickly be incorporated into the stock price, leaving no opportunity for investors to profit from it.

Question 11

Consider the market for ABC Company's stock. What shouldhappen to the stock for ABC Company after a merger with ahighly successful supply firm is announced?
A)The demand for the stock would shift to the left.
B)The demand for the stock would shift to the right.(True Answer )Correct
C)The supply of the stock would shift to the left.
D)The supply of the stock would shift to the right.

Accepted Answer

When a highly successful supply firm merges with ABC Company, investors are likely to expect improved profitability and growth potential for the company, leading to an increase in demand for the stock. This increased demand would shift the demand curve for the stock to the right.

Question 12

If a person follows a buy-and-hold strategy, she will initiallyhold stocks:
A)until the stock prices rise.
B)until the stock prices fall.
C)until the stock prices stabilize.
D)whether or not stock prices rise or fall.(True Answer )Correct

Accepted Answer

A buy-and-hold strategy involves holding onto stocks for a long period of time, regardless of whether the stock prices rise or fall in the short term. The goal is to benefit from the long-term growth potential of the stocks.

Question 13

Which of the following statements is TRUE?
I. For every transaction in the stock market there is a buyerand a seller
II.At any point in time, the price of a stock tends to reflect allavailable public information about the company's futureprospects
III. A revolutionary cancer treatment pill will be released nextyear. An investor will get rich by buying stock in that companynow.
A)I and II only
B)III only
C)II and III only
D)I, II, and III

Accepted Answer

Statement I is true because for every transaction in the stock market, there must be a buyer and a seller. Statement II is true because the stock market is considered efficient, meaning that at any point in time, the current stock price reflects all available public information about the company's future prospects. Statement III is false because the stock price should already reflect the expected release of the cancer treatment pill and buying the stock now is more likely to result in an overvalued purchase rather than a future profit.

Question 14

Which of the following statements is TRUE?
I. The riskiest stocks tend to move in sync with the economy
II.A relatively safe stock is one that does not vary much withthe state of the economy
III. Health care stocks are some of the riskiest stocks.
A)III only
B)I and II only
C)II and III only
D)I only

Accepted Answer

Statement I is true because riskier stocks, such as those in industries like technology or finance, are more susceptible to changes in the economy. Statement II is true because a safe stock is one that is stable and not greatly influenced by the economy. Statement III is false because while health care stocks can have regulatory risks, they are generally considered to be more stable and less risky than other industries.

Question 15

Technical analysis:
A)looks for patterns in stock prices.
B)can systematically beat market averages, according to research economists.
C)is useful for predicting when stocks will stay above certain price thresholds.
D)All of the answers are correct.

Accepted Answer

Technical analysis is primarily focused on analyzing patterns in stock prices to make investment decisions. It is not a guaranteed method for beating market averages and cannot always predict when stocks will stay above certain price thresholds.

Question 16

Stocks are a good investment if:
I. one is prepared to hold them for a while through marketfluctuations
II.one can buy them immediately after prices have fallen
III. one is not averse to risk.
A)I only
B)I and II only
C)I and III only
D)I, II, and III

Accepted Answer

Stocks are a good long-term investment and holding them through market fluctuations is advisable. Buying stocks immediately after prices have fallen can potentially result in buying low and selling high. However, investing in stocks does involve risk and one should only invest money that they are willing to lose. Therefore, the correct statements are I and III.

Question 17

The fact that the majority of stock mutual funds cannotoutperform the stock market averages is consistent with:
A)the no free lunch principle.
B)the risk-return trade-off principle.
C)the efficient markets hypothesis.
D)the active trading hypothesis.

Accepted Answer

The fact that stock mutual funds cannot outperform the stock market averages is consistent with the efficient markets hypothesis, which suggests that all publicly available information about a stock is already reflected in its price. Therefore, it is highly difficult for investors, including mutual fund managers, to consistently beat the market by exploiting mispricing opportunities. This means that the majority of mutual funds will perform similarly to the overall market, and it is not possible to outperform the market without taking on additional risk or engaging in active trading, which is not always successful.

Question 18

An efficient stock market means that:
A)it is difficult to outperform the market, since stock prices convey all relevant public information about a company.(True
Answer )Correct
B)traders with inside information cannot even outperform market averages.
C)new information is slowly reflected in stock prices.
D)All of the answers are correct.

Accepted Answer

An efficient stock market is one in which stock prices accurately represent all available public information about a company. This means that it is difficult for investors or traders to outperform the market by using public information alone, as all relevant information is already reflected in the stock prices. The other choices are not necessarily true indicators of an efficient stock market.

Question 19

About the only way to beat a well-functioning market and makemoney in the short run is:
I. through the efficient markets hypothesis
II.if one has insider information
III. through extreme speed and foresight.
A)I only
B)II and III only
C)II only
D)I, II, and III

Accepted Answer

The efficient markets hypothesis suggests that all known information is already reflected in stock prices, making it difficult to "beat" the market consistently without insider information or the ability to act faster than other market participants. Insider information can provide an unfair advantage, and extreme speed and foresight, such as that provided by high-frequency trading algorithms, can also lead to gains that outpace the general market.

Question 20

Popular U.S. stock indexes include:
i. FDICII. Dow Jones Industrial AverageIII. NASDAQ
A)I and II only
B)I and III only
C)II and III only
D)I, II, and III

Accepted Answer

Option C includes the two most well-known and frequently cited stock indexes in the United States, the Dow Jones Industrial Average and NASDAQ, while option I is not a stock index but rather a government insurance program.

Quiz 21: Consumer Utility and Optimization

If the efficient markets hypothesis is valid, then a personshould: I. buy mutual funds II.diversify III. follow a buy-and-hold strategy.

Consider the market for ABC Company's stock. What shouldhappen in this market after an announcement that the companyis having financial difficulties?

The efficient markets hypothesis implies that in the stockmarket:

According to the efficient markets hypothesis, the person whomost likely earns the highest return for holding the stock ofCompany ABC on a single day is:

One of the problems with investment advice that claims youshould buy stock in a certain company or sector of the economyis that:

Consider the market for ABC Company's stock. What shouldhappen to the stock for this company if there is a rumor thatthe company is set to merge with another very profitablecompany?

If a person diversifies her stock portfolio, then:

When Chernobyl melted down in the Soviet Union, the:

Which of the following individuals is using information outsidethe efficient markets hypothesis? Someone who:

The efficient markets hypothesis implies that an investor:

Consider the market for ABC Company's stock. What shouldhappen to the stock for ABC Company after a merger with ahighly successful supply firm is announced?

If a person follows a buy-and-hold strategy, she will initiallyhold stocks:

Which of the following statements is TRUE? I. The riskiest stocks tend to move in sync with the economy II.A relatively safe stock is one that does not vary much withthe state of the economy III. Health care stocks are some of the riskiest stocks.

Technical analysis:

Stocks are a good investment if: I. one is prepared to hold them for a while through marketfluctuations II.one can buy them immediately after prices have fallen III. one is not averse to risk.

The fact that the majority of stock mutual funds cannotoutperform the stock market averages is consistent with:

An efficient stock market means that:

About the only way to beat a well-functioning market and makemoney in the short run is: I. through the efficient markets hypothesis II.if one has insider information III. through extreme speed and foresight.

Popular U.S. stock indexes include: i. FDICII. Dow Jones Industrial AverageIII. NASDAQ