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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 major criticism of the view that expectations are formed adaptively is that
2. Using the Gordon growth model, a stockʹs price will increase if
3. The value of any investment is found by computing the
4. 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
5. One of the assumptions of the Gordon Growth Model is that dividends will continue growing at________ rate.
6. According to rational expectations theory, forecast errors of expectations
7. Studies of mutual fund performance indicate that mutual funds that outperformed the market in one time period usually
8. If the optimal forecast of the return on a security exceeds the equilibrium return, then
9. Financial markets quickly eliminate unexploited profit opportunities through changes in
10. The efficient markets hypothesis suggests that if an unexploited profit opportunity arises in an efficient market,
11. The small-firm effect refers to the
12. In the generalized dividend model, the current stock price is the sum of
13. Which of the following types of information most likely allows the exploitation of a profit opportunity?
14. Increased uncertainty resulting from the subprime crisis ________ the required return on investment in equity.
15. In the generalized dividend model, if the expected sales price is in the distant future
16. 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
17. In the one-period valuation model, an increase in the required return on investments in equity
18. The view that expectations change relatively slowly over time in response to new information is known in economics as
19. A situation when an asset price differs from its fundamental value is
20. According to the efficient markets hypothesis, purchasing the reports of financial analysts
21. The elimination of unexploited profit opportunities requires that ________ market participants be well informed.
22. ________ is the field of study that applies concepts from social sciences such as psychology and sociology to help understand the behavior of securities prices.
23. ________ and ________ may provide an explanation for stock market bubbles.
24. According to the efficient markets hypothesis, the current price of a financial security
25. In the Gordon growth model, a decrease in the required rate of return on equity

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