# Economics Study Set 17

## Quiz 9 :Securities: Business Finance and the Economy: the Tail That Wags the Dog

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If the price of a company's stock constitutes a random walk, next year its price will equal today's price plus what
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Company's stock will equal today's price plus complete random number if the price of a stock constitutes a random walk. Random walk indicates the uncertainty of stock prices.
If the stock constitutes a magnitude of random walk, then the future valuation of stock becomes unpredictable.
A random number is added to the present price of stock while measuring the next year's price. A random number can be positive or negative in this regard.

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Discuss "herd behavior" among investors. Explain how it can sometimes take what would otherwise have been a modest fall in the price of the stocks of a single company and transform that into a precipitate collapse in the price of many stocks.
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A fall in the stock price of a single company affects on the stock prices of other companies. Investors have general tendency to judge market in a random way. They assume that the stock prices are going to decline in the future.
Hence, investors try to sell their shares. Increase in the selling of shares leads to reduce the market price of stocks.
Thus, the herd behavior of investors causes to transform a fall in the stock price of a single company in to the precipitate collapse in the piece of many stocks.

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Show in diagrams that if a speculator were to buy when price is high and sell when price is low, he would increase price fluctuations. Why would it be in his best interest not to do so ( Hint: Draw two supply-demand diagrams, one for the high-price period and one for the low-price period. How would the speculator's activities affect these diagrams )
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A price fluctuation tends to increase when stocks are purchased despite higher price and they are sold when price is lower.
Normally people would sell their stocks when the price is higher in the market. But, on the contrary, speculators behave irrationally; they sell their stocks when the price is relatively lower. This behavior of speculators tends to increase price fluctuations in the market.
The following are two diagrams which indicate buying and selling of stocks.
The above diagram (a) indicates that a speculator demands for stocks is higher at higher price. The quantity supplied changes according changes in quantity demanded.
The figure (b) shows that the stock is sold at lower price. The quantity demanded changes according to changes in the quantity supplied.
If a speculator sells his stocks when the price is lower in the market, then he would have to bear the loss. Thus, buying when price is high and selling when price is lower is not in a best interest of a speculator.

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Suppose that in the economy described in Test Yourself 1, interest rates suddenly fall to 3 percent. What will happen to the price of the bond that pays $3 per year Essay Answer: Tags Choose question tag Suppose that interest rates are 6 percent in the economy and a safe bond promises to pay$3 per year in interest forever. What do you think the price of the bond will be Why
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Jenny purchases some stocks of Company X that initially cost $1,000 and pays for them in cash. Jim makes the same purchase but leverages his investment by borrowing$500 for the purpose at 10 percent interest, using the stocks as security for repayment. If the stock's price rises 20 percent, how much money do Jenny and Jim each make on their investments If the stock declines in value by 20 percent, how much money will Jenny and Jim each have (Remember that, in both instances, Jim must repay his \$500 loan with interest.)
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If you hold shares in a corporation and management decides to plow back the company's earnings some year instead of paying dividends, what are the advantages and disadvantages to you
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