Q&A Hero

Q: The stock market is a leading indicator of the economy because investors discount future earnings.

Q: To value the market, an investor must analyze both corporate earnings and multipliers.

Q: The longest peacetime expansion ran from 1991 to 2000.

Q: Despite political, cultural and economic differences, foreign markets are driven by the same factors that drive U.S. markets.

Q: The earnings yield, which is used in the Fed model, is the: a. same as the dividend yield. b. inverse of the dividend yield. c. same as the P/E ratio. d. inverse of the P/E ratio.

Q: Which of the following statements regarding market P/E ratios is true? a. P/E ratios are higher when interest rates are lower. b. P/E ratios are higher when interest rates are higher. c. P/E ratios are higher when inflation is higher. d. P/E ratios are lower when unemployment is higher.

Q: Warren Buffett thinks long-term movements in stock prices are caused by which of the following two economic variables? a. interest rates and realized corporate profits. b. interest rates and expected corporate profits c. interest rates, inflation, and unemployment d. interest rates, inflation, and growth in GDP

Q: Which of the following types of yield curves is typically considered to be stimulative to the economy? a. a steep, upward-sloping yield curve b. a flat yield curve c. an inverted yield curve d. a skewed yield curve

Q: The Fed model, which uses the E/P ratio in its calculations, : a. is relatively complex. b. uses the yield on the 3-month Treasury bill as the risk-free rate. c. assumes investors can easily switch between stocks and bonds. d. all of the above

Q: Many market participants believe that when the dividend yield on the Standard and Poor's 500 is ____, the market is in for a downward correction. a. above 6 percent b. below 6 percent c. above 3 percent d. below 3 percent

Q: P/E ratios are generally depressed when interest rates are _____ and inflation is ________. a. high; low b. low; high c. high; high d. low: low

Q: Assume that the dividend payout ratio on the S&P 500 will be 40 percent when the rate on long-term government bonds falls to 9 percent. Investors being risk averse demand an equity risk premium of 8 percent. If the growth rate of dividends is expected to be 10 percent, what will be the price of the market index if the earnings expectation is $30? a. $384.00 b. $213.44 c. $266.56 d. $171.43

Q: The ability of the market to predict economic recoveries is remarkably good. Stock prices almost always turn up how many months before recovery? a. 3-5, with 4 typical. b. 3-7, with 5 typical. c. 4-8, with 6 typical. d. 5-9, with 7 typical.

Q: During a typical contraction, stock prices decline 25 percent from peak. During recent recessions, however, the range of decline has been: a. less than 20 percent. b. between 20 and 30 percent. c. between 30 and 40 percent. d. greater than 40 percent.

Q: The relationship between the stock market and the business cycle is generally considered reliable, but the stock market tends to give false signals about: a. business cycle peaks (booms). b. business cycle troughs (recessions). c. business cycle inflection points between peaks and troughs, and between troughs and peaks (i.e., when the rates of decline in growth change from increasing to decreasing rates, and vice versa). d. ex post stock market returns.

Q: If someone was to tell you that "the market" was up by two percent, they are usually referring to: a. the DJIA. b. the NYSE. c. the NASDAQ. d. GDP.

Q: Current stock prices reflect: a. investors' confidence in the current economy. b. investors' confidence in the current administration. c. investors' expectations of the future. d. investors' attitudes about the past market.

Q: Stock prices often peak when? a. Two years before the start of a recession. b. One year before the start of a recession. c. At the start of a recession. d. One year after the start of a recession.

Q: Estrella and Mishkin (1996) developed a somewhat successful model to predict whether the economy is going into recession using what variable? a. spread between the 10-year U.S. Treasury Inflation Protected Security and the 3- month T-Bill. b. spread between the 5-year U.S. Treasury Note and the 3-month T-Bill. c. spread between the 10-year U.S. Treasury Note and the 3-month T-Bill. d. spread between the 30-year U.S. Treasury Note and the 3-month T-Bill.

Q: In the early stages of a business cycle, yield tends to be: a. low and upward sloping. b. flat. c. high and downward sloping. d. inverted.

Q: _______ is a publication that compiles consensus economic forecasts. a. The Wall Street Journal's Economic Letter b. The Conference Board's Economic Forecast c. The Kiplinger Letter d. Blue Chip Economic Indicators

Q: An inverted yield curve generally indicates: a. the economy is accelerating. b. economic activity is slowing down. c. a pending recession. d. rising inflation.

Q: Generally, when interest rates fall, bond prices a. rise. b. fall. c. remain unchanged. d. rise or fall depending on the expected inflation premium.

Q: Stock investors pay attention to the bond market because: a. it is more stable than the stock market. b. it can provide daily signals whereas stock market data tends to trend weekly, monthly or quarterly. c. it is a more accurate measure of overall economic activity. d. it is privy to more government information, especially from the Federal Reserve.

Q: When speculation pushes asset prices to unsustainable highs, this is known as a: a. crash. b. contraction. c. recession. d. bubble.

Q: The federal agency most involved with the money supply and interest rates is a. the Treasury Department b. the Federal Reserve c. the Department of Commerce d. the U. S. Mint

Q: Which of the following is considered to a leading indicator of a country's economy? a. duration of unemployment b. stock prices c. money supply d. interest rate spread

Q: Indexes of general economic activity include all but: a. lagging b. emerging c. leading d. coincident

Q: In the U.S., the largest component of GDP is: a. government spending. b. business investment. c. consumer spending. d. real estate.

Q: Which of the following is not a component of GDP? a. business investment spending. b. government "investment" (really spending). c. net exports. d. financial transactions.

Q: The National Bureau of Economic Research that measures business cycles and officially decides when there are economic "turning points" is: a. a division of the Department of Commerce of the U.S. Government. b. an association of academic and professional economic forecasters. c. a unit within the U.S. Federal Reserve. d. a private nonprofit organization.

Q: In the U.S. since the end of World War II, the typical business cycle contraction consists of how many months? a. 6 b. 10 c. 12 d. 15

Q: The period from a peak to a trough is: a. a cycle. b. an inflection point. c. a recession. d. a depression.

Q: In the U.S. since the end of World War II, the typical business cycle consists of an expansion of how many months? a. 57. b. 66. c. 75. d. 84.

Q: The advance estimate of GDP predicts direction of quarterly change in real GDP growth approximately what percent of the time? a. 10%. b. 25%. c. 75%. d. 90%.

Q: The Bureau of Economic Analysis of the U.S. Government releases advance estimates of quarterly GDP in the first month following quarter end. In the second month, it provides a preliminary estimate. In the third, it provides a "final" estimate (though even this estimate is subject to annual revisions). Over the past 30 years, the average revision of GDP growth rate from advance to final has been approximately what fraction of a percentage point? a. 1/4. b. 1/3. c. 1/2. d. 2/3.

Q: Gross Domestic Product (GDP) is a basic measure of the economy, and is defined as the market value of what items produced by an economy for some time period (typically a year)? a. final goods. b. final goods and services. c. final goods, services, and labor. d. final goods, services, labor, and capital.

Q: Multinational companies often follow the U.S. lead in restructuring processes and adopting new technologies. As a consequence, a. foreign equities markets are driven by earnings growth and political considerations, like U.S. equities markets. b. foreign equities markets are driven by earnings growth and political considerations, unlike U.S. equities markets. c. foreign equities markets are driven by earnings growth and interest rate changes, like U.S. equities markets. d. foreign equities markets are driven by earnings growth and interest rate changes, unlike U.S. equities markets.

Q: U.S. investors can buy equities from companies that comprise more than what fraction of the world's market capitalization and what fraction of the world's GDP. a. 1/5th world market cap, 1/4th world GDP b. 1/4th world market cap, 1/3rd world GDP c. 1/3rd world market cap, 1/2 world GDP d. 1/2 world market cap, 2/3rds world GDP

Q: The Auto Company (AC) had expected returns and realized returns for the periods shown below: Period Expected Return Actual Return 1 15% 16% 2 15% 13% 3 15% 17% 4 15% 15% Calculate the cumulative abnormal return for the four periods.

Q: In terms of Venn Diagrams in terms of states of the world, explain how weak-form, semistrong form, and strong form market efficiency relate to one another.

Q: Listed below are the actual returns on two stocks X and Y, and on the market (RM), along with their systematic risk measures (Betas) relative to the time period, t. Stock Ri,t% RM,t % ai Beta X 12.2 15.5 0 0.8 Y 9.7 6.0 0 1.2 (a) What is the abnormal return for stock X when you consider its systematic risk measure? (b) What is the abnormal return for stock Y when you consider its systematic risk measure?

Q: Calculate the SUE for a stock with expected second quarter earnings of $1.00 and actual second quarter earnings of $0.75. The standardization variable is 0.20. Is this stock one of interest to investors using the SUE technique?

Q: Nike Inc. reports first quarter earnings of $2.00 per share. As an investor using the SUE technique, you had estimated earnings to be $50 per share, with a standard error of estimate (SEE) of 0.15. (a) Calculate the SUE for Nike. (b) Would this stock be a good buy on the basis of this SUE?

Q: If an astute (or lucky) market analyst were to find a "money machine " system that consistently beat the market, would the system eventually become self-defeating?

Q: Some market scholars talk about tiers of stocks in the markets. A top tier on the NYSE would be the largest, most widely held stocks. Second and third tiers would consist of stocks that are less widely held and followed by fewer analysts. Is it possible that the market might be more efficient for the top tier and progressively less efficient for the lower tiers?

Q: According to the text, the most compelling evidence about relative market efficiency is: (1) __________% of large cap equity funds failed to perform as well as the S&P 500 index; and (2) the vast majority of __________________ fail to achieve top half performance rankings or outperform their index, especially on a consistent basis.

Q: An efficient market is defined as one in which prices of securities fully reflect all known ______________________ quickly and accurately.

Q: What is a market anomaly? Give examples of several market anomalies.

Q: An oil company's P/E ratio is 15; its projected EPS is $8; and its price is $120. Expectations are that a new field will add $2 EPS the next year. If the P/E remains constant, what should happen to the price in an efficient market? How soon? Are investors that pay the price after adjustment paying a fair price and are they expected to earn a normal return?

Q: What forms of EMH are strongly supported by economic studies? What is some evidence?

Q: If securities are fairly priced, then the portfolio manager is unlikely to be able to identify undervalued stocks. What other activities could portfolio managers perform?

Q: Technical analysis involves the use of historic price and volume information to predict future price movements. What does the EMH say about technical analysis?

Q: Insider trading is illegal in the U. S. How is this related to the strong form EMH?

Q: What types of information are considered in each of the three forms of the EMH?

Q: Value investing implies investors should always buy stocks with the lowest P/E ratios.

Q: A belief in the size-effect anomaly should encourage investors to buy large-firm stocks.

Q: Overall, the low P/E strategy should be viewed as a short run strategy.

Q: Tests of the strong-form EMH include studies of corporate insiders and event studies.

Q: The evidence obtained on weak-form efficiency casts serious doubts on fundamental analysis.

Q: Calendar market anomalies include the neglected firm effect, which means few analysts follow the stock, or few institutions own the stock.

Q: Calendar market anomalies include day-of-the-week, turn-of-the-month, day preceding a holiday effect.

Q: An earnings announcement effect would not be considered a good test of the weak form of the EMH.

Q: An investor who believes in the strong form of the EMH should be an active investor.

Q: If there is less efficiency in emerging markets than in developed markets, there should be higher performance in emerging markets than in developed markets.

Q: The efficiency of markets is driven largely by the vast number of participants and their quick and Easy access to information.

Q: Under the weak form of the EMH, technical analysis relying on the history of price information is of no value in trying to outperform the future market.

Q: In a semistrong form efficient market, investors are not able to use publicly available financial statement data to earn abnormal returns.

Q: If an investor searches for patterns in security returns by examining various techniques applied to a set of data and then applying the technique that works, this is known as: a. fundamental analysis. b. technical analysis. c. random-walk theory. d. data mining.

Q: The paradox of efficient markets is that a. even though markets are efficient overall, there are pockets of inefficiency. b. news about anomalies makes the market less efficient. c. investors attempting to uncover and use information about security prices help make the market more efficient (i.e., an "efficient amount of inefficiency ") d. investors make the market less efficient.

Q: Which of the following is true regarding the size anomaly? a. As much as 50% of small cap outperformance is associated with the January effect. b. Small cap stocks underperform large cap stocks in recent years. c. Small cap stock outperformance is a NASDAQ phenomenon, not NYSE. d. Small cap stock outperformance is unaffected by micro-cap, commission, or liquidity (i.e., bid-ask spread) concerns.

Q: The disposition effect relates to the fact that: a. investors tend to overconfident regarding potential stock prices. b. investors often experience regrets about trading decisions. c. investors are more likely to sell winners than losers. d. investors tend to dispose of stocks at the end of the year.

Q: Value Line's 1 to 5 stock ranking system of timeliness refers to: a. absolute return potential over a 10-year period b. probability of outperforming the market over a 3 to 5 year period c. probable total return including dividend yield d. probable relative price performance within the next 12 months

Q: Which of the following announcements has NOT been involved in a direct test of the semi-strong form of the EMH? a. Dividend announcements b. Accounting changes c. Stock splits d. Corporate insiders' actions

Q: The January effect concerns: a. large cap stocks. b. mid-cap stocks. c. small cap stocks. d. foreign stocks.

Q: All of the following are considered market anomalies EXCEPT: a. size effect b. January effect c. earnings announcement anomaly d. accounting changes effect

Q: Which of the following is a market anomaly? a. A relationship between money supply growth and stock prices. b. A relationship between P/E ratios and subsequent stock returns. c. Independence of stock price changes. d. Adjustment of stock prices due to accounting changes.

Q: Based on the research related to market anomalies, investors should prefer a. low standardized unexpected earnings (SUE) and high P/E ratios. b. low SUE, low P/E stocks. c. high SUE, low P/E stocks. d. high SUE, high P/E stocks.

Q: Which of the following is frequently used to test the semistrong form of the EMH? a. statistical tests of stock-price change independence. b. tests of specific trading rules that use past price data. c. event studies. d. insider returns.

Q: Evidence concerning the "overreaction hypothesis " indicates that a. most overreactions occur within the first two days of an economic event. b. investors are consistently risk-averse value maximizers. c. the market is even more efficient than the weak-form EMH proposes. d. investors sometimes act rationally.