Stocks, Stock Markets, And Market Ch8 Exam Questions

Student name:__________

1) Explain why being a residual claimant can increase the risk from owning stocks.

2) Does the concept of limited liability make owning stocks more or less attractive? Explain.

3) Explain why the willingness to purchase stocks is influenced heavily by shareholders' legal rights with respect to control of the corporation.

4) Why isn't the actual level of an index, for example the Dow Jones Industrial Average, very useful on its own?

5) Suppose a price-weighted index is made up of two stocks, A and B. The price of A equals $30 and the price of B equals $70. What is the current value of this index? Also, what is the percentage change in the index resulting from a 10 % increase only in the price of A? What is the percentage change in the index resulting from a10% increase only in the price of B?

6) Why might the Dow Jones Industrial Average have a value over 20,000 when the 30 stocks that make up the index all have values less than $200 per share?

7) What are two major differences between the Standard & Poor's 500 Index and the DJIA?

8) Consider the following information on the stock market in the small country of Utopia.

a. Compute a price-weighted stock price index for the beginning of the year and the end of the year. Find the percentage change.\

b. Compute a value-weighted stock price index for the beginning of the year and the end of the year. Find the percentage change.

9) There is a value-weighted index made up of two companies, A and B. Company A has a stock price of $25 per share, and there are 10,000 shares outstanding. Company B has a stock price of $100 per share and has 1,000 shares outstanding. What is the percentage change in the index from a 10% increase in the share price of company A? What is the percentage change in the index from a 10% increase in the share price of company B?

10) Compare/contrast the Nasdaq Composite Index with the Dow Jones Industrial Average.

11) Why must caution be employed in comparing stock indexes across countries?

12) Briefly explain the different focuses of valuing stocks taken by behavioralists, chartists, and fundamentalists.

13) Considering the different focuses of valuing stocks taken by behavioralists, chartists, and fundamentalists, which would you say is most consistent with your own views? Explain the different views as part of justifying your answer.

14) Many small companies currently pay no dividends to their shareholders. Based on the dividend-discount model, how is it possible for these stocks to sell for a positive price?

15) What price would an individual be willing to pay today for a stock he/she expects can be sold for $200 one year from now, if the individual has a discount rate of 6% (.06) and the stock pays an annual dividend of $7.50?

16) What price would an individual be willing to pay today for a stock that is expected to sell for $100 two years from now and which pays an annual dividend that is $6.00? Assume the individual has a discount rate of 8% (0.08).

17) What price would an individual would be willing to pay for a stock that currently pays a $5.00 annual dividend if the individual expects the dividend to grow by 4% (0.04) per year and the individual has a discount rate of 6.0% (0.06)?

18) After one year, a company will pay $20 in dividends. It commits to paying $21 two years from the current date. This growth rate in dividends is expected to continue indefinitely. The interest rate is 8%. Compute the current price of this stock, using the dividend-discount model.

19) Identify the ways in which a bondholder's rights differ from those of a stockholder. In what ways do they differ when a firm is bankrupt?

20) Suppose a firm needs $1,000 to obtain a new machine for its business. It can either issue stock or bonds, or some combination of both. If it issues bonds, it will have to pay $8.00 in interest for every $100 borrowed. Finally, assume the company will earn $150 in good years and $75 in bad years, with equal probability.

Determine the payment to the equity holders under the following three scenarios: (i) the first is the firm uses 0% debt financing, (ii) the second is the firm uses 50% debt financing, and (iii) the third finds the firm using 80% debt financing. For each scenario, determine the expected equity return (%).

21) An investor makes a $1,000 investment in the stock of ABC Inc. Over the next year the investment decreases by 60%. What percentage increase is required in the following year to get back to $1,000?

22) The investment you made in a mutual fund one year ago lost 50% of its value over the past year. What percentage increase is needed in the fund to restore your portfolio to the level it was one year ago?

23) After one year, a company will pay $5 in dividends. It commits to paying $5.30 two years from the current date. This growth rate for dividends is expected to continue indefinitely. The U.S. Treasury bond yield is 8% and the equity-risk premium is equal to 2.5%. Compute the required stock return and current price of this stock, using the dividend-discount model.

24) What are the two components that make up the return an investor requires from a stock? Briefly explain each of these components.

25) Discuss the effects on the current price of a stock from each of the following.

a) an increase in the growth rate of the dividend

b) a decrease in the risk-free interest rate

c) an increase in the equity-risk premium

d) a decrease in the annual dividend

Use the dividend-discount model to explain your answers.

26) Why does the theory of efficient markets imply that stock price movements are unpredictable?

27) Is the efficient markets hypothesis (EMH) responsible for the financial crisis of 2007–2009?

28) What possibilities exist to explain the claim made by many professional portfolio managers that they can exceed the average stock market return year after year?

29) Use the theory of efficient markets to explain why it may be difficult for professional portfolio managers who have an exceptional year to continuously outperform the market average.

30) You hear someone claim that stocks are less risky than bonds. What possible evidence could this person offer for such a claim?

31) Use the five issues an investor should consider when purchasing stock to explain the popularity of mutual funds.

32) Explain how a well-functioning stock market contributes to the efficiency of the economy.

33) Explain at least two reasons an investor may want to consider an index fund over a managed (mutual) fund.

34) Discuss the inefficiencies that can be caused by stock market bubbles, especially focusing on firms and consumers.

35) Both euphoria and depression are contagious. Use the example of a global pandemic such as COVID-19 to explain how depression can become contagious with respect to worldwide stock markets.

36) Do the voting rights possessed by common stockholders ensure that managers and directors have the same objectives as stockholders? Explain.

37) Use the characteristics of common stocks to explain the following statement: One of the benefits from stock ownership is the unlimited upside potential and the limited downside.

38) XYZ Inc. announces plans to finance the expansion of the firm by issuing hundreds of millions of dollars of bonds. Discuss how the current stockholders of XYZ Inc. will feel about this plan.

39) Discuss how changes in economic conditions are likely to affect the equity-risk premium and stock prices. Considering the risks associated with investing in stocks (over short periods of time), what types of investments would you expect investors to buy during an economic recession?

40) You are a top Treasury official for a developing country who has been asked for advice on how best to open the nation's stock market to foreign investment. Previously, the government did not permit foreigners to purchase domestic stock. Now, the government has a plan to create two markets: one for domestic residents and one for foreign investment. What are the potential drawbacks of this system, compared to allowing both domestic and foreign investors to trade in the same market? What are the larger implications for economic efficiency? How might the government be able to address these issues?

41) Discuss whether the economy would be more or less efficient if public corporations issued fewer shares of stock.

42) Stock ownership

A) increases risk in wealth portfolios.
B) is not a widely held financial instrument.
C) reduces efficient operation of the economy.
D) benefits individuals by providing ways to diversify risk.

43) A share of common stock represents

A) equity in a company.
B) a loan to a company.
C) a share in the company's debts.
D) unlimited liability to the owner of the stock.

44) A share of common stock represents a(n)

A) claim from a lender against a borrower.
B) share in the company's debts.
C) share of ownership of the company.
D) unlimited liability to the owner of the stock.

45) Two characteristics that make owning stock attractive are

A) unlimited liability and owners having first claim on assets.
B) share prices that are relatively inexpensive and transferable.
C) that each share represents a large percentage of ownership and dividends are fixed.
D) dividends that are paid before any other distributions are made and transferability of stocks.

46) Voting rights in a corporation are held by the

A) board of directors.
B) preferred stockholders.
C) corporate bondholders.
D) common stockholders.

47) The fact that common stockholders are residual claimants means the stockholders

A) have a claim against the revenue that remains after everyone else is paid.
B) receive their dividends before any other residuals are paid.
C) are paid any past due dividends before other claims are paid.
D) are paid before the bondholders but after any taxes are paid.

48) If a public corporation goes bankrupt and does not have enough assets to pay off all creditors, the stockholders

A) are personally liable for the balance.
B) who are residual claimants may have to pay in additional capital to cover the obligations.
C) receive any dividends due before the other creditors are paid.
D) cannot lose more than their investment.

49) Limited liability means that a stockholder of a corporation

A) is liable for the corporation's liabilities, but nothing more.
B) cannot receive dividends that exceed his/her investment.
C) cannot lose more than their investment.
D) is only responsible for any taxes that the corporation may owe but not its other debts.

50) Comparing home ownership and stock ownership over time,

A) stock ownership provides a higher financial return, on average, but the home also provides a place to live.
B) home ownership provides a higher financial return, on average, but stock ownership provides a share of company ownership.
C) stock ownership provides a higher financial return, on average, but home ownership is risk-free.
D) home ownership provides a higher financial return, on average, but stock ownership is adjusted for inflation.

51) Stockholders

A) have limited liability and no control over corporate leadership.
B) can dislodge the managers of the corporation but not the board of directors.
C) have unlimited liability and can dislodge members of the board of directors.
D) can dislodge members of the board and have limited liability.

52) Which one of the following is not a feature of common stock?

A) Stockholders receive regular fixed payments on their shares.
B) Stockholders have limited liability.
C) Stock holders are residual claimants.
D) Stockholders have voting rights.

53) Both bondholders and stockholders

A) are claimants.
B) have voting rights.
C) are shareholders in the company.
D) receive fixed payments on their securities each year.

54) Which one of the following statements is most correct?

A) Managers, directors, and stockholders almost always share the same interest.
B) Interests of managers and directors often conflict with stockholders' interest.
C) Interests of managers and stockholders often conflict with directors’ interest.
D) Interests of stockholders and directors often conflict with managers’ interest.

55) Which one of the following stock price indexes is a price-weighted index?

A) Dow Jones Industrial Average
B) Standard & Poor's 500 Index
C) Nasdaq
D) Wilshire 5000

56) An index number is valuable because

A) the level of every index number itself provides critical information.
B) it is more stable than the data it reflects.
C) it provides a meaningful measurement scale to calculate percentage changes.
D) it does not require any calculations to compute percentage changes.

57) The Dow Jones Industrial Average is

A) an index made up of the stock prices of the 100 largest corporations in the United States.
B) an index that measures the value of purchasing 100 shares in each of the corporations that make up the index.
C) the average price of stock in 30 of the largest companies in the United States.
D) the broadest measure of stock market performance.

58) The Dow Jones Industrial Average is a

A) simple average.
B) price-weighted index.
C) value-weighted index.
D) total-value index.

59) The Dow Jones Industrial Average

A) gives equal weight to a change in the price of the stock of any company in the index.
B) reflects that a 10% increase in a share of stock selling for $30 will have the same effect on the index as a 10% increase in the price of a stock selling for $60.
C) is a value-weighted index.
D) gives greater weight to shares with higher prices.

60) If the Dow Jones Industrial Average is currently at 20,000 and the price of one stock included in the index increases by $10, the Dow Jones Industrial Average will

A) not change; it is a value-weighted index.
B) increase by 5.0%.
C) increase by 0.5%.
D) increase by 0.05%.

61) If the Dow Jones Industrial Average is at 20,205 and it is up 4% from the previous day, what was the index at the close of the market the previous day?

A) 808
B) 19,428
C) 20,236
D) 21,013

62) The stocks that make up the Dow Jones Industrial Average

A) are dominated by the automobile industry.
B) are the same ones that were originally used to construct the index.
C) are not a broad measure of the market since they do not include any technology companies.
D) have changed as the structure of the economy has changed.

63) If each company that made up the Dow Jones Industrial Average increased the number of their shares outstanding by 10%, but the share prices did not change, the value of the index would

A) not change.
B) increase by 10%.
C) increase, but by less than 10%.
D) decrease since there are more shares outstanding.

64) The Standard & Poor's 500 Index differs from the Dow Jones Industrial Index because

A) it takes into account the stock prices of 500 of the largest firms, which is less than the DJIA.
B) it is a price-weighted index, where the DJIA is a value-weighted index.
C) larger firms are less important in the S&P 500 than in the DJIA.
D) it takes into account the prices of more stocks and it uses a different weighting scheme.

65) The Standard & Poor's 500 Index

A) gives more weight to large companies than small companies.
B) actually includes more than 500 of the largest corporations in the United States.
C) is a price-weighted index.
D) assigns equal weight to all the prices of all the stocks in the index.

66) Considering the S&P 500 Index, if each company's stock price increased by 10%, the

A) weights in the index would remain the same.
B) companies with the most shares outstanding would have even greater weight after the increase.
C) companies with fewer shares would gain more weight at the expense of the companies with greater shares.
D) weights in the index would change to reflect the percentage changes in the prices of the various stocks.

67) Which one of the following statements is false?

A) A value-weighted index is a better index to use to reflect changes in the economy's overall wealth.
B) A price-weighted index is a better index to use to reflect the average change in the price of a typical share of stock.
C) The Dow Jones Industrial Average is a price-weighted index.
D) The S&P 500 is a price-weighted index.

68) The Nasdaq Composite Index is

A) a value-weighted index.
B) a price-weighted index.
C) made up of over 5000 companies traded on the NYSE.
D) made of mainly older firms and is heavily weighted by manufacturing.

69) The Nasdaq Composite Index is

A) made up of over 50,000 firms traded on the Over-the-Counter market.
B) a price-weighted index.
C) made up of mainly newer firms, and heavily influenced by technology and internet companies.
D) the most broadly based index in use.

70) The most broadly based stock index in use is the

A) Nasdaq Composite Index.
B) Wilshire 5000.
C) Dow Jones Industrial Average.
D) Standard and Poor's 500 Index.

71) When studying world stock indexes, we observe that

A) the S&P 500 is largest in terms of index value.
B) most of the world's indexes are price-weighted.
C) the indexes are very comparable.
D) the indexes are comparable but only in percentage terms.

72) When comparing stock indexes around the world, we

A) find that a given percentage change across all indexes has the same value.
B) observe that they always move together.
C) can see that the numeric change in indices allows investors to make easy comparisons of value.
D) can examine their respective movements if we look at them as percentage changes.

73) People differ on the method by which stocks should be valued. Some people are chartists, while others are behaviorists. The basic difference between these groups is

A) chartists rely on astrological charts to predict stock values, behavioralists rely on psychology.
B) behavioralists are finance based, chartists study charts of investor psychology.
C) chartists study charts of stock prices; behavioralists focus on investor psychology and behavior.
D) chartists and behavioralists are the same in their approach; essentially there aren't any differences.

74) The dividends that stockholders receive are

A) fixed by contract and paid annually.
B) distributions from profits.
C) paid before all other obligations of the company are met.
D) always equal to the average amount of interest paid to a bond holder, adjusting for the value of the holdings.

75) An investor starts with a $1,000 portfolio, and it loses 50% over the next year. The following year it gains 50% in value. At the end of two years the investor’s portfolio is worth

A) $1,000.
B) $500.
C) $750.
D) $950.

76) An investor starts with a portfolio valued at $500, and it loses 40% over the next 12 months. The following year it has a gain of 30%. At the end of two years the investor’s portfolio is worth

A) $390.
B) $450.
C) $300.
D) $410.

77) An investor has a portfolio valued at $1,000. Over the next twelve months it loses 75% of its value. What return is required over the following twelve months to restore the portfolio to its original value?

A) 75%
B) 200%
C) 300%
D) 25%

78) An investor has a portfolio valued at $10,000. Over the next twelve months it loses 50% of its value. What return is required over the following twelve months to restore the portfolio to its original value?

A) 100%
B) 50%
C) 200%
D) 25%

79) The dividend-discount model of stock valuation

A) is an application of the net present value formula.
B) takes the net present value of expected dividends and add it to the future sale price of the stock.
C) takes the net present value of the expected future price of the stock and adds the annual dividend.
D) takes the annual dividend, adds it to the expected future selling price and divides by the number of years to get the current price.

80) A stock has an annual dividend of $10.00 and it is expected not to grow. It is believed the stock will sell for $100 one year from now, and an investor has a discount (interest) rate of 6% (0.06). The dividend-discount model predicts the stock's current price should be

A) $94.67.
B) $116.00.
C) $103.77.
D) $106.60.

81) A stock has a current annual dividend of $6.00 per year, and it is expected to grow by 3% (0.03) a year. It is expected that two years from now the stock will sell for $90.00 a share. If the interest rate is 5% (0.05), the dividend-discount model predicts the stock's current price should be

A) $94.90.
B) $93.29.
C) $101.30.
D) $94.30.

82) A stock currently does not pay an annual dividend, and an investor expects this policy to remain in force. She believes, however, the stock of this company will sell for $110.00 per share four years from now. If she has an interest (discount) rate of 7% (0.07), the dividend-discount model predicts the current price of this stock should be

A) You cannot apply the model to this example since it requires a dividend be offered.
B) $82.00.
C) $83.92.
D) $86.35.

83) Next year, the price of a stock is expected to be $2,200 and the stock will pay a $55 dividend. The interest rate is 10%. Based on the dividend-discount model, what is the current price of this stock?

A) $1,980
B) $2,000
C) $2,050
D) $2,035

84) The price of a stock is currently $750 and the stock will pay a $43 dividend. The interest rate is 7.5%. Based on the dividend-discount model, what is the expected price of this stock for next year?

A) $651.17
B) $657.67
C) $691.17
D) $763.25

85) A company currently pays a dividend of $4.00 per share. It expects the growth rate of the dividend to be 3% (0.03) annually. If the interest rate is 6% (0.06) what does the dividend- discount model predict the current price of the stock should be?

A) $33.33
B) $66.67
C) $103.33
D) $137.33

86) A company currently pays an annual dividend of $6.50 per share. It expects the growth rate of the dividend will be 2.5% (0.025) annually. If the interest (discount) rate is 5% (0.05), what does the dividend-discount model predict the current price of the stock should be?

A) $225.00
B) $257.50
C) $130.00
D) $266.50

87) The dividend-discount model predicts that stock prices

A) should be high when dividends are high.
B) will be high when interest rates are high.
C) will be higher when the growth rate of dividends is low.
D) should be high when dividends are low.

88) Suppose that the current dividend for a stock is D_today, the expected dividend growth rate is r, and the interest rate is i. If we ignore risk, which one of the following represents the dividend-discount model formula for the fundamental price of a stock?

A) D_today/(i +g)
B) (i +g)/D_today
C) D_today(1 +g)/(i −g)
D) D_today/(i −g)

89) Which one of the following statements is not true about how a share of stock resembles a consol?

A) Neither the share of stock nor the consol have a maturity date.
B) The annual dividend the stock pays resembles the coupon on a consol.
C) The prices of both can be computed using a variation of the net present value formula.
D) Owners of both are residual claimants.

90) As a corporation uses more debt financing, the expected return to the stockholders

A) decreases, and the standard deviation of the return decreases.
B) increases, and the standard deviation of the return decreases.
C) increases, and the standard deviation of the return increases.
D) decreases, and the standard deviation of the return increases.

91) The fact that many corporations use debt financing as well as equity financing creates all of the following except which one?

A) the opportunity for a greater expected return for the stockholders
B) greater risk for the stockholders
C) leverage for the stockholders
D) consistently lower debt-to-equity ratios

92) Without the stockholders' limited liability, the risk from the use of leverage would

A) be significantly less.
B) be significantly greater.
C) still be the same.
D) be irrelevant.

93) Consider the effect of business cycles on bondholders versus stockholders. We expect that business cycles will affect

A) bondholders and stockholders about the same.
B) bondholders more since the amount they receive depends on profits.
C) stockholders more since they are residual claimants.
D) bondholders more since they do not have any claim to property.

94) In the event of bankruptcy, stockholders

A) are paid before bondholders.
B) receive at least their initial investment due to limited liability.
C) could lose more than their initial investment.
D) are the last to be paid and could end up losing what they have invested.

95) As a company issues more debt,

A) its leverage decreases.
B) the share of financing from equity increases.
C) the expected return to equity holders falls.
D) risk increases.

96) All other things equal, a decrease in the equity risk premium leads to a(n)

A) increase in the required return on stock.
B) decrease in the present value of stock.
C) increase in the price of equity shares.
D) decrease in dividend growth.

97) The basic dividend-discount model is a bit of an oversimplification for valuing stocks because it ignores

A) expected dividend growth.
B) the value of future dividends.
C) the risk involved in holding stocks.
D) stocks that do not pay dividends.

98) The required stock return an investor seeks can best be represented by which one of the following?

A) Risk Premium− Risk-free Return
B) Risk-free Return × Risk Premium
C) (Risk-free Return + Risk Premium)/(1 +i)
D) Risk-free Return + Risk Premium

103) The theory of efficient markets assumes that

A) prices of bonds, but not stocks, reflect all available information.
B) the prices of all financial instruments reflect all available information.
C) stock prices are relatively rigid because it takes a while for information to efficiently move through the market.
D) the best approach to determining stock prices is to follow the chartists.

104) The theory of efficient markets implies

A) stock prices should be highly unpredictable.
B) the price at which stocks currently trade only reflect past information.
C) expectations do not play a role in stock prices because this isn't real information.
D) the chartists are in fact correct that there are patterns in stock prices.

105) If the theory of efficient markets holds, then

A) professional fund managers should be able to consistently beat the market average.
B) a professional fund manager should really not expect to beat the market average consistently.
C) a professional fund manager who beats the market average one year should be expected to beat the market average the next year.
D) a professional fund manager who beats the market average one year should be expected to not beat the market average the next year.

106) The theory of efficient markets

A) rules out high returns due to chance.
B) says insider information makes markets less efficient.
C) allows for higher than average returns if the investor takes higher than average risk.
D) assumes people have equal luck.

107) The notion that stock prices reflect all current available information

A) makes the risk of holding stocks greater.
B) indicates that mutual fund managers will not, on average, outperform market averages.
C) says stock prices should be more rigid than they are.
D) makes it easier to predict the movements in the price of a stock.

108) People who claim to have the ability to accurately predict the future prices of stocks

A) are strong advocates of the theory of efficient markets.
B) should be looked at with skepticism, unless they have information not available to others.
C) are unusually lucky, and should be listened to intently.
D) are always psychologists.

109) In the first calendar quarter, a company issues a surprising report saying that it expects profits to rise in the fourth quarter. The theory of efficient markets says we should expect the price of the company's stock to

A) rise in the fourth quarter when the higher profits are actually seen.
B) fall immediately as stockholders will be disappointed about having to wait until the fourth quarter for higher profits.
C) rise immediately on the expectation of higher profits in the future.
D) rise around the third quarter since this information will take time to disseminate.

110) According to the theory of efficient markets,

A) investors use rules of thumb to make choices about which stocks to buy and sell.
B) investors are able to use forecasts based on the dividend-discount model to generate above-average returns.
C) a portfolio manager who charges no commission should not, on average, outperform an individual investor with access to the same funds.
D) the stock price should remain constant.

111) According to the theory of efficient markets, mutual fund managers may be expected to earn above-average returns if they

A) take on less risk.
B) have access to illegal, private information.
C) participate in efficient markets.
D) have learned from investing in the same stocks repeatedly.

112) Stocks appear to present risk, yet many people have substantial parts of their wealth invested in them. This behavior could be explained by the fact that

A) people are irrational in their investment behavior, only focusing on positive outcomes.
B) people are not very risk-averse and do not require a risk premium for stocks.
C) investing in stocks over the long run is not as risky as short-term holdings of stocks.
D) people are not efficient users of information.

113) Professor Jeremy Siegel, of the University of Pennsylvania, did research showing that

A) owning stocks over the long run produces returns below the risk-free return.
B) if an investor owns stocks for a very short time the risk is greater than if the stocks are held for a long time.
C) the return on the S&P 500 for a 25-year period often produces returns below zero.
D) bonds really are less risky to hold over the long term.

114) Professor Jeremy Siegel, of the University of Pennsylvania, conducted research that showed that

A) over the long run, stocks have been less risky than bonds.
B) over the long run, bonds have been less risky than stocks.
C) over the long run, bonds frequently outperform stocks.
D) investors should only own stocks for short periods of time to maximize returns.

115) Mutual funds are characterized by the fact that they all

A) have the same management fee set by regulation.
B) require the same minimum investment of $10,000.
C) provide some degree of diversification.
D) provide the same degree of liquidity.

116) Management fees for mutual funds are

A) fixed by regulation.
B) fixed by regulation and can vary by the size of the fund.
C) usually a percentage of the gains the fund achieves.
D) usually a percentage of the funds under management.

117) Management fees for mutual funds are

A) different across funds and can significantly impact the return to an investor.
B) fixed by regulation.
C) fixed by regulation but can vary by the size of the fund.
D) usually a percentage of the return achieved by fund managers.

118) Index funds are often preferred to other mutual funds because

A) they offer greater diversification.
B) they are managed better.
C) they have greater liquidity.
D) on average they have lower management fees.

119) When stock prices reflect fundamental values,

A) all investors will have positive returns.
B) the allocation of resources will be more efficient.
C) all companies will have an easier task of obtaining financing for investment projects.
D) the overall level of the stock market should move higher.

120) The fact that returns from the stock market are less volatile over long periods of time suggests that

A) investors are more risk averse over the long run.
B) stock markets are efficient.
C) people get comfortable with the stocks they own.
D) stock market bubbles have become more common.

121) Stock market bubbles are

A) the increase in a stock's price resulting from reported higher profits by a firm.
B) persistent and expanding gaps between stocks' actual prices and the prices warranted by the fundamentals.
C) synonymous to stock market crashes.
D) those periods of time when the overall level of the stock market is rising at a slow rate reflecting market fundamentals.

122) Stock market bubbles are similar to global pandemics in that both typically lead to

A) stock market crashes.
B) an efficient allocation of resources.
C) patterns of stable returns from the stock market.
D) equalizing of actual stock prices and prices warranted by the fundamentals.

123) Stock market bubbles typically lead to all of the following except

A) an efficient allocation of resources.
B) stock market crashes.
C) patterns of volatile returns from the stock market.
D) gaps between actual stock prices and those warranted by the fundamentals.

124) Which one of the following could cause a stock market bubble?

A) changes in the real interest rate
B) better enforcement of insider trading laws
C) investor euphoria
D) changes in dividends

125) Stock market bubbles are costly for the economy because they

A) imply that the actual stock price is equal to the fundamental value of the stock.
B) hurt consumers more than corporations.
C) lead to a reduction in real investment in both the short term and long term.
D) lead to a misallocation of resources in both the short term and long term.

126) Companies whose stocks increase the most during a stock market bubble will

A) have a difficult time raising investment capital.
B) tend to underinvest.
C) usually rebound faster once the bubble bursts.
D) find it difficult to put their capital to profitable use after the bubble bursts.

127) The stock market bubble of the late 1990s and early 2000s

A) saw internet and computer technology companies over-invest.
B) saw an efficient allocation of resources toward the high-growth computer/internet sector.
C) was a good example of the theory of efficient markets.
D) was an example that not all bubbles burst.

128) Stock market bubbles impact consumers by encouraging

A) greater consumption and greater saving.
B) greater consumption and less saving.
C) more work and delaying retirement.
D) less investment in home ownership and more in stocks.

129) In April of 2020, Wall Street’s three major stock indexes fell more than 4% on the day that President Donald Trump offered a dire warning about the expected death rate to come from the coronavirus. Trump warned Americans of a “painful” two weeks to come. Why would this affect the stock market?

A) As the global pandemic spread, fundamental values fell.
B) Companies did not need financing during the global pandemic.
C) The prediction created pessimism, which led to a collapse in investment.
D) This was a coincidence, and the stock market fall was not actually related to Trump’s warning.

130) In early 2020, the U.S. stock market experienced one of its fastest bear market declines ever. The DJIA fell more than 35% in a single month. According to Professor Jeremy Siegel, once that happened, investors should have

A) continued to hold stocks for the long run.
B) moved investments out of the stock market.
C) switched to investing in bonds, which are less risky.
D) let year-to-year fluctuations in stock values guide investing.

131) A good outcome from the internet bubble of the late 1990s was

A) that people learned they should not invest in dotcom companies.
B) that start-up companies found they could bypass venture capitalists and raise funds directly from the capital markets.
C) the discovery that stock market bubbles do not have to result in an inefficient allocation of resources.
D) the discovery that the theory of efficient markets doesn't always hold and consistently better-than-market returns are achievable.

132) In early 2020, a global pandemic erupted, and the values of stock market indices worldwide plummeted. Global travel, a variety of events, and social gatherings screeched to a halt as countries attempted to isolate and stop the spread of COVID-19. Even so, every company was not simultaneously a loser. There are typically some stocks that benefit, depending on the type of crisis, or at least don’t get hit as hard as others. Which one of the following is the most likely to have benefited during the 2020 global pandemic?

A) Clorox Co.
B) Boeing Co.
C) Walt Disney Co.
D) Norwegian Cruise Line Holdings, Ltd.

133) The Nasdaq Composite Index is

A) composed of mainly newer, smaller firms.
B) a price-weighted index.
C) made up of over 5000 companies traded on the NYSE.
D) composed of mainly older firms and is heavily weighted by manufacturing.