Stock Market and Investment Questions

The Dow-Jones Industrial Average is the best-known measure of the performance of the U.S. stock market, and is an average of the stock prices of

• the 500 largest corporations in the United States.

• 30 large corporations.

• over 3,200 high-tech stocks.

• all major banking and financial companies.

For index numbers like stock market indexes

• the numbers are measured in dollars and their values are meaningful by themselves.

• the numbers are measured in dollars and changes in their values are more important that the values themselves.

• the numbers are not measured in dollars or any other units and their values are meaningful by themselves.

• the numbers are not measured in dollars or any other units and changes in their values are more important that the values themselves.

The required return on equity for an individual stock includes which of the following?

• systemic risk

• idiosyncratic risk

• risk-free interest rate

• all of the above

Suppose you plan to hold a stock for one year. You expect that, in one year, it will sell for $30 and pay a dividend of $3 per share. If your required return on equity is 10%, what is the most you should be willing to pay for the share today?

• $3.30

• $23

• $30

• $33

According to the Gordon growth model, what is the value of a stock with a dividend of $2, required return on equity of 8% and expected growth rate of dividends of 4%?

• $25

• $26

• $50

• $52

If market participants rely only on past stock prices to forecast future stock prices

• they will be better able to forecast future price increases than future price decreases.

• they will be better able to forecast future price decreases than future price increases.

• they have adaptive expectations.

• they have rational expectations.

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

• they should be easy to forecast, provided market participants have rational expectations.

• they should be easy to forecast, provided market participants have adaptive expectations.

• the change in price from one trading period to the next is not predictable.

• major traders in the market must not be making use of all available information about the assets.

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

• result in a higher return than would be received from an index mutual fund.

• be less expensive than simply placing money in an index mutual fund.

• result in a higher return, but will be more expensive than placing money in an index mutual fund.

• result in about the same return, but will be more expensive than placing money in an index mutual fund.

The long-run average annual return on investments in the stock market is _______ than the annual returns on investments in Treasury bills and ________ than the annual returns on investments in bank CDs.

• higher; higher

• lower; higher

• higher; lower

• lower; lower

Which of the following bonds will have the highest yield-to-maturity if all three bonds appear identical to investors in terms of risk, liquidity, information costs, and tax treatment?

• one with a coupon of $50

• one with a coupon of $100

• one with a coupon of $200

• none of the above