Home > General Studies (Hindi) > 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 theory of rational expectations, when applied to financial markets, is known as
2. 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
3. The elimination of unexploited profit opportunities requires that ________ market participants be well informed.
4. Loss aversion can explain why very little ________ actually takes place in the securities market.
5. 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
6. The efficient markets hypothesis suggests that if an unexploited profit opportunity arises in an efficient market,
7. Stockholders are residual claimants, meaning that they
8. 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
9. In rational expectations theory, the term ʺoptimal forecastʺ is essentially synonymous with
10. Which of the following types of information most likely allows the exploitation of a profit opportunity?
11. ________ 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.
12. A change in perceived risk of a stock changes
13. 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
14. In the generalized dividend model, a future sales price far in the future does not affect the current stock price because
15. ________ and ________ may provide an explanation for stock market bubbles.
16. A stockholderʹs ownership of a companyʹs stock gives her the right to
17. The January effect refers to the fact that
18. In the one-period valuation model, an increase in the required return on investments in equity
19. ________ is the field of study that applies concepts from social sciences such as psychology and sociology to help understand the behavior of securities prices.
20. In the one-period valuation model, the value of a share of stock today depends upon
21. According to the efficient markets hypothesis, purchasing the reports of financial analysts
22. According to rational expectations,
23. The major criticism of the view that expectations are formed adaptively is that
24. In the generalized dividend model, if the expected sales price is in the distant future
25. 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

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