Question 1

A risky portfolio is one that: I. is poorly diversified. II. has a volatile stock in a basket of 200 stocks. III. has a positive correlation between most of its stock prices.

Accepted Answer

A)   I only
B)   II and III only
C)   I and III only
D)   I, II, and III

Question 2

According to the efficient markets hypothesis, investors who trade stocks actively earn higher than average returns.

Accepted Answer

A) True 
 B)False

Question 3

If the efficient markets hypothesis is valid, then a person should: I. buy mutual funds. II. diversify. III. follow a buy-and-hold strategy.

Accepted Answer

A)   I and II only
B)   I and III only
C)   II and III only
D)   I, II, and III

Question 4

Stocks are a good investment if: I. one is prepared to hold them for a while through market fluctuations. II. one can buy them immediately after prices have fallen. III. one is not averse to risk.

Accepted Answer

A)   I only
B)   I and II only
C)   I and III only
D)   I, II, and III

Question 5

Stockbrokers make _____ commissions the _____ their clients buy and sell stocks.

Accepted Answer

A)   lower; more frequently
B)   higher; more frequently
C)   higher; less frequently
D)   zero; more frequently B

Question 6

Briefly list several important lessons that economics offers for investing wisely.

Accepted Answer

"1. Passively managed funds outperform t...

Question 7

Suppose there is a rumor that Company X is about to merge with another very profitable company. Now suppose that a major broker spreads this rumor, and people take that broker seriously. Could this broker cause the company to "appear" to be a profitable stock to hold?

Accepted Answer

Yes, if enough people react to a predict...

Question 8

A risk-averse individual would choose which of the following investment instruments?

Accepted Answer

A)   stocks that are negatively correlated with the rest of one's portfolio
B)   agricultural stocks in a foreign agricultural economy
C)   oil stocks
D)   technology stocks A

Question 9

Someone offers you a hot tip that promises to offer a large payoff in the stock market. How would you respond to this person, based on the simple and practical guidance found in this chapter?

Accepted Answer

Answers will vary. The best answer is th...

Question 10

According to the efficient markets hypothesis, the person who most likely earns the highest return for holding the stock of Company ABC on a single day is:

Accepted Answer

A)   a person who follows a buy-and-hold strategy.
B)   an active trader who knows the historical prices of ABC.
C)   ABC's CEO who has inside information about the company's new projects.
D)   None of the answers is correct: No one can outperform anyone else at any time. C

Question 11

How fast will a $10,000 portfolio double if it is earning 10 percent annual returns?

Accepted Answer

A)   every 10 years
B)   every 7 years
C)   every 5 years
D)   every 14 years

Question 12

Which of the following are advantages of saving your money in a mutual fund? I. You have professional fund management. II. Mutual funds have always outperformed the S&P 500. III. People with smaller amounts of money can diversify risk.

Accepted Answer

A)   I only
B)   I and II only
C)   I and III only
D)   I, II, and III

Question 13

Technical analysis:

Accepted Answer

A)   looks for patterns in stock prices.
B)   can systematically beat market averages, according to research economists.
C)   is useful for predicting when stocks will stay above certain price thresholds.
D)   All of the answers are correct.

Question 14

The number of senior citizens will double by 2020, so investing in medical care and retirement homes is likely to generate above-normal market returns.

Accepted Answer

A) True 
 B)False

Question 15

Which of the following individuals seems to have followed a diversification strategy? Someone who has purchased stock in:

Accepted Answer

A)   lumber, paper, and furniture companies.
B)   oil, telecommunications, and clothing companies.
C)   silicon chips, computer, and cell phone companies.
D)   cat food, dog food, and dog bone companies.

Question 16

The fact that the majority of stock mutual funds cannot outperform the stock market averages is consistent with:

Accepted Answer

A)   the no free lunch principle.
B)   the risk-return trade-off principle.
C)   the efficient markets hypothesis.
D)   the active trading hypothesis.

Question 17

In financial investment, a riskier asset typically has:

Accepted Answer

A)   a higher expected return.
B)   a lower expected return.
C)   the same expected return as a less risky asset.
D)   a higher or lower expected return, depending on the industry.

Question 18

A friend argues that we should select mutual funds whose managers actively trade stocks. Is this correct? Explain your answer.

Accepted Answer

Mutual funds whose managers actively tra...

Question 19

A person purchases stocks of two companies in 2009. One has an annual return of 2.5 percent and the other's return is 3 percent. The difference between the dollar returns on the two company stocks would be the greatest in:

Accepted Answer

A)   2010.
B)   2012.
C)   2013.
D)   None of these is correct: The difference in dollar returns is always the same.

Question 20

The expected returns of different assets, adjusted for risk, should be:

Accepted Answer

A)   equal.
B)   different.
C)   sometimes equal but often different.
D)   unknown in most cases.

Exam 22: Managing Incentives

A risky portfolio is one that: I. is poorly diversified. II. has a volatile stock in a basket of 200 stocks. III. has a positive correlation between most of its stock prices.

Correct AnswerverifiedShow Answer

According to the efficient markets hypothesis, investors who trade stocks actively earn higher than average returns.

Correct AnswerverifiedShow Answer

If the efficient markets hypothesis is valid, then a person should: I. buy mutual funds. II. diversify. III. follow a buy-and-hold strategy.

Correct AnswerverifiedShow Answer

Stocks are a good investment if: I. one is prepared to hold them for a while through market fluctuations. II. one can buy them immediately after prices have fallen. III. one is not averse to risk.

Correct AnswerverifiedShow Answer

Stockbrokers make _____ commissions the _____ their clients buy and sell stocks.

Correct AnswerverifiedB

Briefly list several important lessons that economics offers for investing wisely.

Correct Answerverified"1. Passively managed funds outperform t...View AnswerShow Answer

Suppose there is a rumor that Company X is about to merge with another very profitable company. Now suppose that a major broker spreads this rumor, and people take that broker seriously. Could this broker cause the company to "appear" to be a profitable stock to hold?

Correct AnswerverifiedYes, if enough people react to a predict...View AnswerShow Answer

A risk-averse individual would choose which of the following investment instruments?

Correct AnswerverifiedA

Someone offers you a hot tip that promises to offer a large payoff in the stock market. How would you respond to this person, based on the simple and practical guidance found in this chapter?

Correct AnswerverifiedAnswers will vary. The best answer is th...View AnswerShow Answer

According to the efficient markets hypothesis, the person who most likely earns the highest return for holding the stock of Company ABC on a single day is:

Correct AnswerverifiedC

How fast will a $10,000 portfolio double if it is earning 10 percent annual returns?

Correct AnswerverifiedShow Answer

Which of the following are advantages of saving your money in a mutual fund? I. You have professional fund management. II. Mutual funds have always outperformed the S&P 500. III. People with smaller amounts of money can diversify risk.

Correct AnswerverifiedShow Answer

Technical analysis:

Correct AnswerverifiedShow Answer

The number of senior citizens will double by 2020, so investing in medical care and retirement homes is likely to generate above-normal market returns.

Correct AnswerverifiedShow Answer

Which of the following individuals seems to have followed a diversification strategy? Someone who has purchased stock in:

Correct AnswerverifiedShow Answer

The fact that the majority of stock mutual funds cannot outperform the stock market averages is consistent with:

Correct AnswerverifiedShow Answer

In financial investment, a riskier asset typically has:

Correct AnswerverifiedShow Answer

A friend argues that we should select mutual funds whose managers actively trade stocks. Is this correct? Explain your answer.

Correct AnswerverifiedMutual funds whose managers actively tra...View AnswerShow Answer

A person purchases stocks of two companies in 2009. One has an annual return of 2.5 percent and the other's return is 3 percent. The difference between the dollar returns on the two company stocks would be the greatest in:

Correct AnswerverifiedShow Answer

The expected returns of different assets, adjusted for risk, should be:

Correct AnswerverifiedShow Answer

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Stockbrokers make _ commissions the _ their clients buy and sell stocks.

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B

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"1. Passively managed funds outperform t...
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Yes, if enough people react to a predict...
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A

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Answers will vary. The best answer is th...
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C

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Mutual funds whose managers actively tra...
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