Question : 7.4   The Efficient Market Hypothesis:  Rational Expectations in Financial Markets 1) : 1373690

7.4   The Efficient Market Hypothesis:  Rational Expectations in Financial Markets

1) The theory of rational expectations, when applied to financial markets, is known as

A) monetarism.

B) the efficient markets hypothesis.

C) the theory of strict liability.

D) the theory of impossibility.

2) According to the efficient markets hypothesis, the current price of a financial security

A) is the discounted net present value of future interest payments.

B) is determined by the highest successful bidder.

C) fully reflects all available relevant information.

D) is a result of none of the above.

3) If the optimal forecast of the return on a security exceeds the equilibrium return, then

A) the market is inefficient.

B) no unexploited profit opportunities exist.

C) the market is in equilibrium.

D) the market is myopic.

4) Another way to state the efficient markets condition is: in an efficient market,

A) unexploited profit opportunities will be quickly eliminated.

B) unexploited profit opportunities will never exist.

C) arbitragers guarantee that unexploited profit opportunities never exist.

D) every financial market participant must be well informed about securities.

5) ________ occurs when market participants observe returns on a security that are larger than what is justified by the characteristics of that security and take action to quickly eliminate the unexploited profit opportunity.

A) Arbitrage

B) Mediation

C) Asset capitalization

D) Market intercession

6) The efficient markets hypothesis suggests that if an unexploited profit opportunity arises in an efficient market,

A) it will tend to go unnoticed for some time.

B) it will be quickly eliminated.

C) financial analysts are your best source of this information.

D) prices will reflect the unexploited profit opportunity.

7) Financial markets quickly eliminate unexploited profit opportunities through changes in

A) dividend payments.

B) tax laws.

C) asset prices.

D) monetary policy.

8) The elimination of unexploited profit opportunities requires that ________ market participants be well informed.

A) all

B) a few

C) zero

D) many

9) If in an efficient market all prices are correct and reflect market fundamentals, which of the following is a false statement?

A) A stock that has done poorly in the past is more likely to do well in the future.

B) One investment is as good as any other because the securities’ prices are correct.

C) A security’s price reflects all available information about the intrinsic value of the security.

D) Security prices can be used by managers to assess their cost of capital accurately.

10) According to the efficient markets hypothesis, purchasing the reports of financial analysts

A) is likely to increase one’s returns by an average of 10%.

B) is likely to increase one’s returns by about 3 to 5%.

C) is not likely to be an effective strategy for increasing financial returns.

D) is likely to increase one’s returns by an average of about 2 to 3%.