Home > Consumer Behavior 101 > 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. The elimination of unexploited profit opportunities requires that ________ market participants be well informed.
2. Evidence in support of the efficient markets hypothesis includes
3. 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
4. According to the efficient markets hypothesis, purchasing the reports of financial analysts
5. Periodic payments of net earnings to shareholders are known as
6. The theory of rational expectations, when applied to financial markets, is known as
7. A change in perceived risk of a stock changes
8. If a forecast is made using all available information, then economists say that the expectation formation is
9. Mean reversion refers to the fact that
10. ________ means people are more unhappy when they suffer losses than they are happy when they achieve gains.
11. The January effect refers to the fact that
12. Stockholders are residual claimants, meaning that they
13. In October 2008, the stock market crashed, falling by ________ from its peak value a year earlier.
14. The advantage of a ʺbuy-and-hold strategyʺ is that
15. 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
16. In rational expectations theory, the term ʺoptimal forecastʺ is essentially synonymous with
17. Sometimes one observes that the price of a companyʹs stock falls after the announcement of favorable earnings. This phenomenon is
18. An expectation may fail to be rational if
19. The efficient markets hypothesis suggests that investors
20. Psychologists have found that people tend to be ________ in their own judgments.
21. The value of any investment is found by computing the
22. ________ and ________ may provide an explanation for stock market bubbles.
23. A stockholderʹs ownership of a companyʹs stock gives her the right to
24. You read a story in the newspaper announcing the proposed merger of Dell Computer and Gateway. The merger is expected to greatly increase Gatewayʹs profitability. If you decide to invest in Gateway stock, you can expect to earn
25. To say that stock prices follow a ʺrandom walkʺ is to argue that stock prices

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