97 notecards = 25 pages (4 cards per page)
A stockholder's ownership of a company's stock gives her the right to
Stockholders are residual claimants, meaning that they
Periodic payments of net earnings to shareholders are known as
The value of any investment is found by computing the
In the one-period valuation model, the value of a share of stock today depends upon
In the one-period valuation model, the current stock price increases if
In the one-period valuation model, an increase in the required return on investments in equity
In a one-period valuation model, a decrease in the required return on investments in equity causes a(n) ________ in the ________ price of a stock.
Using the one-period valuation model, assuming a year-end dividend of $0.11, an expected sales price of $110, and a required rate of return of 10%, the current price of the stock would be
Using the one-period valuation model, assuming a year-end dividend of $1.00, an expected sales price of $100, and a required rate of return of 5%, the current price of the stock would be
In the generalized dividend model, if the expected sales price is in the distant future
In the generalized dividend model, a future sales price far in the future does not affect the current stock price because
In the generalized dividend model, the current stock price is the sum of
Using the Gordon growth model, a stock's current price will increase if
Using the Gordon growth model, a stock's current price decreases when
In the Gordon growth model, a decrease in the required rate of return on equity
Using the Gordon growth formula, if D1 is $2.00, ke is 12% or 0.12, and g is 10% or 0.10, then the current stock price is
Using the Gordon growth formula, if D1 is $1.00, ke is 10% or 0.10, and g is 5% or 0.05, then the current stock price is
Using the Gordon growth model, if D1 is $.50, ke is 7%, and g is 5%, then the present value of the stock is
One of the assumptions of the Gordon Growth Model is that dividends will continue growing at ________ rate.
In the Gordon Growth Model, the growth rate is assumed to be ________ the required return on equity.
You believe that a corporation's dividends will grow 5% on average into the foreseeable future. If the company's last dividend payment was $5 what should be the current price of the stock assuming a 12% required return?
Answer: Use the Gordon Growth Model.
$5(1 + .05)/(.12 - .05) = $75
What rights does ownership interest give stockholders?
Answer: Stockholders have the right to vote on issues brought before the stockholders, be the residual claimant, that is, receive a portion of any net earnings of the corporation, and the right to sell the stock.
In asset markets, an asset's price is
Information plays an important role in asset pricing because it allows the buyer to more accurately judge
New information that might lead to a decrease in a stock's price might be
A change in perceived risk of a stock changes
A stock's price will fall if there is
A monetary expansion ________ stock prices due to a decrease in the ________ and an increase in the ________, everything else held constant.
The global financial crisis lead to a decline in stock prices because
Increased uncertainty resulting from the global financial crisis ________ the required return on investment in equity.
Economists have focused more attention on the formation of expectations in recent years. This increase in interest can probably best be explained by the recognition that
The view that expectations change relatively slowly over time in response to new information is known in economics as
If expectations of the future inflation rate are formed solely on the basis of a weighted average of past inflation rates, then economists would say that expectation formation is
If expectations are formed adaptively, then people
If during the past decade the average rate of monetary growth has been 5% and the average inflation rate has been 5%, everything else held constant, when the Federal Reserve announces that the new rate of monetary growth will be 10%, the adaptive expectation forecast of the inflation rate is
The major criticism of the view that expectations are formed adaptively is that
In rational expectations theory, the term "optimal forecast" is essentially synonymous with
If a forecast is made using all available information, then economists say that the expectation formation is
If a forecast made using all available information is NOT perfectly accurate, then it is
If expectations are formed rationally, then individuals
If additional information is not used when forming an optimal forecast because it is not available at that time, then expectations are
An expectation may fail to be rational if
According to rational expectations theory, forecast errors of expectations
When using rational expectations, forecast errors will, on average, be ________ and ________ be predicted ahead of time.
People have a strong incentive to form rational expectations because
If market participants notice that a variable behaves differently now than in the past, then, according to rational expectations theory, we can expect market participants to
According to rational expectations
Suppose Barbara looks out in the morning and sees a clear sky so decides that a picnic for lunch is a good idea. Last night the weather forecast included a 100% chance of rain by midday but Barbara did not watch the local news program. Is Barbara's prediction of good weather at lunch time rational? Why or why not?
Answer: No, this prediction is not using rational expectations. Although Barbara based her guess on the information that was available to her at the time, additional information was readily available that could have been used to improve her prediction.
The theory of rational expectations, when applied to financial markets, is known as
According to the efficient markets hypothesis, the current price of a financial security
If the optimal forecast of the return on a security exceeds the equilibrium return, then
Another way to state the efficient markets hypothesis is: in an efficient market
________ 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.
The efficient markets hypothesis suggests that if an unexploited profit opportunity arises in an efficient market
Financial markets quickly eliminate unexploited profit opportunities through changes in
The elimination of unexploited profit opportunities requires that ________ market participants be well informed.
If future changes in stock prices are unpredictable, then we say that the stock prices follow a
When we describe stock prices as following a random walk, we mean that future changes in stock prices are
The efficient markets hypothesis implies that future changes in exchange rates should for all practical purposes be
According to the efficient markets hypothesis, purchasing the reports of financial analysts
You have observed that the forecasts of an investment advisor consistently outperform the other reported forecasts. The efficient markets hypothesis says that future forecasts by this advisor
Which of the following types of information most likely allows the exploitation of a profit opportunity?
Sometimes one observes that the price of a company's stock falls after the announcement of favorable earnings. This phenomenon is
You read a story in the newspaper announcing the proposed merger of Dell Computer and Gateway. The merger is expected to greatly increase Gateway's profitability. If you decide to invest in Gateway stock, you can expect to earn
The efficient markets hypothesis indicates that investors
The efficient markets hypothesis suggests that investors
The advantage of a "buy-and-hold strategy" is that
For small investors, the best way to pursue a "buy and hold" strategy is to
If a corporation announces that it expects quarterly earnings to increase by 25% and it actually sees an increase of 22%, what should happen to the price of the corporation's stock if the efficient markets hypothesis holds, everything else held constant?
Answer: The stock's price should fall. The price had adjusted based on the statement of expected earnings. When the actual number turned out to be lower than expected, the stock price changes to reflect the additional information.
Your best friend calls and gives you the latest stock market "hot tip" that he heard at the health club. Should you act on this information? Why or why not?
Answer: No, if this information is readily available, it will already be reflected in the stock price.
If in an efficient market all prices are correct and reflect market fundamentals, which of the following is a FALSE statement?
The efficient markets hypothesis implies that prices in the stock market
Stock market crashes lead us to believe that
________ is the field of study that applies concepts from social sciences such as psychology and sociology to help understand the behavior of securities prices.
If a market participant believes that a stock price is irrationally high, they may try to borrow stock from brokers to sell in the market and then make a profit by buying the stock back again after the stock falls in price. This practice is called
________ means people are more unhappy when they suffer losses than they are happy when they achieve gains.
Loss aversion can explain why very little ________ actually takes place in the securities market.
Psychologists have found that people tend to be ________ in their own judgments.
________ and ________ may provide an explanation for stock market bubbles.
If a mutual fund outperforms the market in one period, evidence suggests that this fund is
Studies of mutual fund performance indicate that mutual funds that outperformed the market in one time period usually
The number and availability of discount brokers has grown rapidly since the mid-1970s. The efficient markets hypothesis predicts that people who use discount brokers
When Happy Feet Corporation announces that their fourth quarter earnings are up 10%, their stock price falls. This is consistent with the efficient markets hypothesis
To say that stock prices follow a "random walk" is to argue that stock prices
The efficient markets hypothesis predicts that stock prices follow a "random walk." The implication of this hypothesis for investing in stocks is
Rules used to predict movements in stock prices based on past patterns are, according to the efficient markets hypothesis
Tests used to rate the performance of rules developed in technical analysis conclude that technical analysis
Which of the following accurately summarize the empirical evidence about technical analysis?
The small-firm effect refers to the
The January effect refers to the fact that
When a corporation announces a major decline in earnings, the stock price may initially decline significantly and then rise back to normal levels over the next few weeks. This impact is called
A phenomenon closely related to market overreaction is
Excessive volatility refers to the fact that
Mean reversion refers to the fact that
Evidence in support of the efficient markets hypothesis includes
Evidence against market efficiency includes