Lesson 6 Homework - Investments Course

timer Asked: May 8th, 2013

Question description

1. The central issue in the concept of efficient markets is:

a. competition
b. anomalies
c. prices
d. information

2. Assume ABC Company just announced that its earnings for the next quarter are likely to be higher than stock analysis currently expect. If markets are inefficient, the stock of company ABC will adjust in price:

a. after a time lag
b. downward
c. upward
d. unpredictably.

3. For a market to be efficient, a change in the price today for an individual stock must be independent of:

a. a previous change
b. the trading activity of insiders
c. changes in the price of other stocks
d. activity in the options market

4. Technical analysis is shown to be of little or no value in predicting future price changes by evidence that supports ________ market effiency.

a. strong-form
b. semistrong-form
c. weak-form
d. imperfect-form

5. A substantial body of research exists to test the concept of semistrong market efficiency. The majority of this research falls into the category of:

a. anomaly reviews
b. event studies
c. process speed examinations
d. assimilation tests

6. Stockholders that own more than ________% of a company's stock are considered insiders by the SEC.

a. 10
b. 20
c. 30
d. 40

7. An unexplained but commonly believed anomaly to the efficient market hypothesis is that higher returns can be generated through buying _______ stocks that are currently unpopular with investors.

a. cyclical
b. declining price
d. low PE ratio
c. low volume

8. A striking paradox of the concept of efficient markets is that the more investors seek ways to use information to generate superior returns, the more this activity:

a. discovers new anomalies
b delivers increasing returns
c. undermines the fairness of markets
d. helps to make the market more efficient

9. The diversity of the US economy, with its many variables and moving parts, ensures that each business cycle is:

a. unique
b. prolonged
c. diversified
d. independent

10. It is common practice among investment analysts to study measures of _______. They may be leading, coincident, or lagging and are used to evaluate components of economic activity that may affect stock prices.

a. composite economic indicators
b. overall industry trends
c. federal reserve activities
d. global economic climate

11. Historically, the stock market has been the most sensitive indicator of the business cycle. This is primarily because:

a. stocks are more volatile that other economic factors
b. investors are discounting the future
c. markets are only partially efficient
d. recessions cause declines in stock prices

12. It is clear that a strong correlation exists between interest rates and the business cycle because every recession since World War 2 has been preceded by a:

a. sharp correlation in bond prices
b. long term interest rate spike
c. credit crisis
d. downward sloping yield curve

13. A useful way to look at movements in aggregate stock prices is to understand that they are determined by corporate earnings streams and:

a. investor confidence
b. a market index
c. the PE ratio
d. required returns

14. A key linkage between the business cycle and aggregate stock prices is that as interest rates rise, PE ratios decline. This follows logically from investors' valuation decisions and particularly changes in:

a. corporate earnings
b. consumer confidence
c. the discount rate
d. dividend payouts

15. The Federal Reserve has developed a market forecasting model which was generated a good deal of attention because of its simplicity and relative accuracy. The Fed model suggests decision rules based on the relationship between the _______ and the _________.

a. discount rate; leading economic indicators
b. Dow Jones Industrial Average; business cycle
c. prime lending rate; gross domestic product
d. S&P 500 earnings yield, 10 year Treasury yield

16. It is very likely that forecasting the performance of industries and sectors has increased in importance due to the recent trend towards:

a. a collapse of high tech valuations
b. increasing cross-sectional volatility
c. greater influence of institutional investors
d. more discrete industry classifications

17. The industry lifecycle stage that probably has the most rewarding combination of potential capital appreciation and industry risk is the ______ stage.

a. expansion
b. pioneering
c. stabilization
d. consolidation

18. In addition to the business lifecyle, an important component of sector/industry analysis is consideration of qualitative factors. Key among these are competition, government affects, and:

a. economics of scale
b. barriers to entrance
c. structural changes
d. the regulatory environment

19. Companies in a ______ industry are likely to see the greatest downward stock price pressure during a recession.

a. growth
b. defensive
c. interest-sensitive
d. cyclical

20. Given the wealth of information available to investors, one might conclude that selecting the most promising industries over the short term is an easy exercise. One key reason this is NOT the case is that history has shown that:

a. the Federal Reserve gives no information on the expected direction of interest rates
b. earnings estimates are notoriously inaccurate
c. dividend payouts by companies are frequently changed
d. political elections can cause markets to react unpredictably.

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