This file of ECO 316 Week 2 Chapter 10 Information and Financial Market Efficiency consists of:

10.1 Multiple Choice Questions

1) Expectations of asset values by participants in financial markets

2) When market participants use all available information

3) Which of the following is NOT a way in which prices communicate information in the markets for bonds, stocks, foreign exchange, and financial instruments?

4) The gap between the yield on a corporate bond and the yield on a U.S. Treasury bond of the same maturity represents

5) If the interest rate on a ten-year bond issued by GM is 7.8% while the interest rate on a ten-year treasury bond is 4.6%, the risk premium is

6) If the dollar is expected to depreciate against the Japanese yen during the next 60 days, then

7) If the dollar is expected to depreciate against the British pound during the next 60 days, then

8) When the market price of a financial instrument equals its present value, savers and borrower can be sure that

9) If a company’s sales begin to fall off so that it is now more likely to default on its bonds than financial markets had previously believed, the yields on the company’s bonds will

10) Suppose it is perceived that a company is more likely to go into bankruptcy. What will happen in the market for its bonds?

11) Acme Widget has been sued. It had been expected to lose suit and to be liable for massive payments that would have imperiled the future of the company. If Acme unexpectedly wins the suit

12) If market participants rely only past stock prices to forecast future stock prices

13) When market participants have adaptive expectations

14) George is trying to forecast the future price of IBM’s common stock. To do so he makes use only of past prices of IBM stock. George

15) When market participants have rational expectations,

16) When market participants have rational expectations,

17) Rational expectations involve the assumption that

18) An asset’s fundamental value equals

19) If traders in a market have rational expectations, then

20) Which of the following statements is true of rational expectations?

21) If Pe is the expectation of an asset’s price forecast and Pf is the optimal forecast of the asset’s price, then if market participants have rational expectations

22) When market participants have rational expectations, the deviation of the expected price from the actual future price is

23) If the prices of financial assets follow a random walk, then

24) If market participants have rational expectations, then the best forecast of the price of a stock in the next period is

25) If major traders believe the price of a stock should be higher than its current market price

26) An efficient financial market is one in which

27) In an efficient market, the market price of an asset

28) In an efficient market the price of a bond

29) In an efficient market with rational expectations, the actual price of an asset

30) The efficient markets hypothesis

31) According to the efficient markets hypothesis,

32) Which of the following is the correct expression for the price of an asset at time t?

33) Suppose a bond is expected to be selling for $110 one year from now, its coupon payment during the year will be $10.75, and the interest rate, adjusted for the bond’s risk, is 5%. If the bond market is efficient, what will be the current market price of the bond?

34) Which of the following will NOT result in an asset having a high price today in an efficient market?

35) Investors are better off when financial asset prices are determined in an efficient market because

36) Prices of securities

37) A decline in market interest rates

38) An increase in expected future market interest rates

39) Which of the following is an example of asymmetric information?

40) Which problems may exist for a stock market?

41) 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?

42) Under the efficient markets hypothesis, what would be the price per share of a company whose current dividend is $10.00 and whose dividends are expected to grow by 3% per year (assume the risk-adjusted interest rate is 10%)?

43) Under the efficient markets hypothesis, what will be the percentage change in the stock price of a company whose current dividend is $10.00 and whose dividends had been expected to grow by 3% but now are expected to grow by 4% per year?

44) Under the efficient markets hypothesis, what will be the percentage change in the stock price 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?

45) According to the efficient markets hypothesis,

46) According to the efficient markets hypothesis, who is most likely to benefit from frequently moving funds from one asset to another?

47) Recent research indicates that

48) Under the efficient markets hypothesis, for s about a company’s prospects to have a large impact on the price of the company’s stock the s must

49) Which of the following is a correct statement about interpreting an increase in the upward slope of the term structure?

50) Which of the following is a correct statement about interpreting an increase in risk premiums?

51) Which of the following is a correct statement about interpreting an increase in bond prices?

52) An implication of the efficient markets hypothesis is that

53) Above-normal returns on stock investments can be expected by investors who

54) One implication of the efficient markets hypothesis is that investors should

55) An investor will generally find that hiring an investment firm to actively manage his or her portfolio will

56) In comparing actively managed mutual funds with those funds that simply buy and hold a large market portfolio (index funds), we would expect that

57) The efficient markets hypothesis explains the fact that the stock picks of some investment analysts earn returns greater than broad-based market indexes as resulting from

58) “Tips” published in leading commercial or financial publications are unlikely to lead to profitable trades because

59) According to the efficient markets hypothesis, the difference between today’s price for a share of stock and tomorrow’s price is

60) Suppose Exxon-Mobil announces that its profits in the third quarter of 2006 were $35 billion. This will cause the price of Exxon-Mobil stock to

61) Suppose that Google announces that its profits for the third quarter of 2006 were $1.6 billion. As a result of this announcement the price of Google’s stock declines. The best explanation of this is

62) In studying the gold price of greenbacks, researchers have shown that

63) Significant skepticism has been expressed about which of the following being an efficient market?

64) The economist known for his early empirical work supporting the efficient markets hypothesis is

65) A researcher shows that stock prices reflect all available information, including “insider information” known only to corporate managers. This indicates that the efficient markets hypothesis has passed the test of

66) The efficient markets hypothesis predicts that an investor

67) In the context of the evaluation of the efficient markets hypothesis, pricing anomalies refer to

68) Suppose that research shows that by buying stocks issued by companies whose names begin with the letter G investors can earn above-normal returns in even-numbered years. From the perspective of the efficient markets hypothesis

69) The small-firm effect

70) The January effect

71) Mean reversion refers to the tendency for

72) Results supporting mean reversion are strongest for

73) Excessive volatility refers to

74) The largest stock market crash during the 1980s and 1990s took place in

75) Noise traders

76) In the context of analyzing movements in stock prices, “fads” refer to

77) Noise traders

78) A bubble occurs when

79) The “greater fool” theory assumes that

80) What is considered the original bubble?

81) Between 1989 and 2003, the Japanese Nikkei stock index

82) Specialists are

83) Circuit breakers are

84) Program trading

85) Evidence from the U.S. economy following the stock market crash of 1987 indicates that

86) A transactions tax imposed on financial markets would

10.2 Essay Questions

1) Suppose a bond has a current market price of $110 one year from now, its coupon payment during the year will be $10 and the interest rate, adjusted for the bond’s risk is 5%. If the bond market is efficient, what is the market price of the bond expected to be in one year?

2) Shouldn’t better informed investors be able to profit from the deviations from pricing efficiency caused by noise traders?

3) What is a “circuit breaker”? What is the rationale for employing them in the stock market? Are they a good idea?

4) What is meant by “value investing”? Is it consistent with the efficient markets hypothesis?