Home > Business Professionals of America (BPA) > Quizzes > Money, Banking, and Financial Markets Practice Test: The Stock Market, the Theory of Rational Expectations, and the Efficient Market Hypothesis
Money, Banking, and Financial Markets Practice Test: The Stock Market, the Theory of Rational Expectations, and the Efficient Market Hypothesis
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The efficient market hypothesis (EMH) is a financial economics theory that states that asset prices reflect all available information. The EMH also states that stocks always trade at their fair value on exchanges, which means that it is impossible to outperform the market through expert stock selection or market timing. The EMH is a cornerstone of modern financial theory, but it is highly controversial and often disputed. For example, investors such as Warren Buffett have consistently beaten the market over long periods.  The rational expectations hypothesis, also known as the... Show more
Money, Banking, and Financial Markets Practice Test: The Stock Market, the Theory of Rational Expectations, and the Efficient Market Hypothesis
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25 Questions

1. Evidence in support of the efficient markets hypothesis includes
2. The efficient markets hypothesis indicates that investors
3. In asset markets, an assetʹs price is
4. Tests used to rate the performance of rules developed in technical analysis conclude that technical analysis
5. A phenomenon closely related to market overreaction is
6. 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
7. If expectations of the future inflation rate are formed solely on the basis of a weighted average of past inflation rates, then economics would say that expectation formation is
8. The elimination of unexploited profit opportunities requires that ________ market participants be well informed.
9. A stockholderʹs ownership of a companyʹs stock gives her the right to
10. 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
11. Rules used to predict movements in stock prices based on past patterns are, according to the efficient markets hypothesis,
12. 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
13. 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
14. In a rational bubble, investors can have ________ expectations that a bubble is occurring but continue to hold the asset anyway.
15. Studies of mutual fund performance indicate that mutual funds that outperformed the market in one time period usually
16. 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
17. The efficient markets hypothesis suggests that investors
18. A change in perceived risk of a stock changes
19. In October 2008, the stock market crashed, falling by ________ from its peak value a year earlier.
20. Evidence against market efficiency includes
21. 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
22. Increased uncertainty resulting from the subprime crisis ________ the required return on investment in equity.
23. According to rational expectations,
24. The efficient markets hypothesis predicts that stock prices follow a ʺrandom walk.ʺ The implication of this hypothesis for investing in stocks is
25. One of the assumptions of the Gordon Growth Model is that dividends will continue growing at________ rate.

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