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WorksheetsFMT tutorial 5
Total questions: 15
Worksheet time: 8mins
Rational expectations are:
always correct.
based only on past information.
identical to optimal forecasts using all information.
identical to optimal forecasts using all available information.
An implication of rational expectation is that
Changes in how a variable moves over time will not affect the way expectations are formed.
Forecast errors of expectations will, on the average, be zero.
Some error can be forecast.
Forecast error will always be zero
People and firms make optimal forecasts based upon all available information because:
Forecasting error is costly.
Optimal forecasting errors are zero.
Optimal forecasting errors are small.
All forecasting errors are small
The efficient market hypothesis states that
prices of securities in financial markets reflect only past price information on that and similar securities.
prices of securities in financial markets reflect all available information.
prices of securities in financial markets reflect only monetary policy changes.
prices of securities in financial markets reflect only past price information on that security
The expected rate of return (RETe) on a security is:
(Pet+1 – Pt+1 + C)/Pt+1
(Pet+1 – Pt + C)/Pt
(Pet+1 – Pt + C)/Pt+1
(Pet+1 – Pt+1 + C)/Pt
Based upon unexploited profit opportunities, if RETOF > RET*, then:
people will buy the security, increasing its price, and reducing RET*.
people will buy the security, increasing its price, and reducing RETOF.
people will not buy the security, lowering its price, and reducing RET*.
people will not buy the security, lowering its price, and reducing RETOF.
A random walk describes movements of a variable:
whose future changes cannot be predicted.
whose future changes can only be predicted with past information.
whose future changes can be predicted based upon money supply changes.
whose future changes can be perfectly predicted.
Technical analysis:
generates buy/sell rules that usually outperform the markets as a whole.
is the study of past stock price data in search of patterns.
exploits the idea that stocks follow a random walk.
examines the role of unexpected events in determining stock prices
Which of the following is not part of the evidence against market efficiency?
Stocks with high returns now tend to have high returns in the future.
Markets overreact to news and announcements.
The January effect.
The small firm effect.
Stock prices respond to announcements and news only when:
the announcements are well-known anyway before the official release of the announcement.
the announcements are about predictable events.
the announcements are new and unexpected.
the announcements are made early in the day.
Which of the following is true regarding adaptive expectations?
They are identical to optimal forecasts.
They are based only on past values of the variable being forecasted.
They quickly adjust to changes in the value of the variable being forecasted.
They are based on all available information.
Which is not an implication of the stronger version of efficient markets theory?
Any investment is as good as any other.
There are unexploited profit opportunities.
Securities' prices are based on market fundamentals.
Securities' prices are correct.
The generalized dividend model of determining stock prices hypothesizes that
The price you are willing to pay for a stock depends only on the amount of the dividends you expect to receive from the stock.
The price you are willing to pay for a stock today depends on the price you expect it to be next year.
The price you are willing to pay for a stock today depends on the price you expect it to be next year.
The price you are willing to pay for a stock depends on the present value of the dividends you expect to receive from the stock.
In an auction environment, a stock's price
Is determined by the buyer willing to pay the lowest price.
Will rise with the perceived risk of the stock.
Is determined by the buyer for whom the stock poses the greatest risk.
Is determined by the buyer willing to pay the highest price.
“An efficient market is one in which no one ever profits from having better information than the rest”. Why this statement is false?
People with better information make the market more efficient by exploiting profit-making opportunities
Acting by better information is not allowed by market regulators and organized exchange
An efficient market is one where the share prices never change
If markets follow a “random walk”, there is never opportunity for making profit
