Question 1

What are the implications of the efficient markets hypothesis for corporate managers regarding accounting earnings?

Accepted Answer

The answer of What are the implications of the efficient...

Question 2

Which of the following should be done by a manager wishing to raise his stock's price?
I. Focus on maximizing the present value (PV) of the free cash flow.
II. Focus on accounting earnings.
III. Focus on financial policy.

Accepted Answer

Maximizing the present value (PV) of the free cash flow is a key factor in increasing a company's stock price. Accounting earnings can be manipulated and do not necessarily reflect the true financial health of the company. Financial policy is important but is secondary to maximizing free cash flow.

Question 3

Individual investors trade conservatively, given the difficulty of finding over-valued and under-valued stocks.

Accepted Answer

Individual investors often engage in speculative trading and may not always trade conservatively. They might attempt to find over-valued or under-valued stocks based on personal research, tips, or market trends, which can lead to riskier investment behaviors.

Question 4

Individual investors' tendency to trade too much based on the mistaken belief that they can pick winners and losers better than investment professionals is known as ________.

Accepted Answer

The phenomenon described in the question is referred to as the investor overconfidence hypothesis. The disposition effect refers to the tendency of investors to hold onto losing investments for too long and to sell winning investments too quickly. The investor attention hypothesis suggests that attention-grabbing news or events can affect investment decisions. The excessive trading costs hypothesis suggests that frequent trading can reduce investment returns due to fees and taxes.

Question 5

Disposition effect is the tendency of individual investors to ________.

Accepted Answer

The disposition effect refers to the tendency of individual investors to hold on to stocks that have lost value and sell stocks that have risen in value since the time of purchase. This behavior can lead to suboptimal investment decisions and lower returns. Choices A, B, and C refer to other behavioral biases that can also affect investment decisions.

Question 6

Individual investors who grow up and live during a time of high stock returns are more likely to invest in stocks.

Accepted Answer

This is supported by research on the "experience effect," which suggests that individuals who have personally experienced high returns on stocks are more likely to invest in them in the future.

Question 7

On a particular day, a mining company reveals that, due to new extraction technology, the extractable yield from several of its nickel/lead mines has risen by 15%. Which of the following is the LEAST likely consequence of such an announcement?

Accepted Answer

The announcement of an increase in extractable yield due to new technology is positive news, indicating that the company can potentially generate more revenue and profit from its mining operations. This would likely lead to an increase in the stock price (A), as investors anticipate higher future cash flows (C) and revise their estimates of the firm's net present value (NPV) upwards (D). Therefore, it is least likely that investors would think their prior estimates of the firm's value were too high (B); instead, they might believe their prior estimates were too low, given the new information.

Question 8

A study of trading behavior of individual investors at a discount brokerage found that individual investors ________.

Accepted Answer

The study found that individual investors trade very actively, despite the fact that their performance is actually worse because of trading costs.

Quiz 10: Stock Valuation: a Second Look