Financial Markets – Quiz Answers

Financial Markets

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Instructor: Robert Shiller

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An overview of the ideas, methods, and institutions that permit human society to manipulate risks and foster enterprise. Emphasis on financially-savvy management skills. Description of practices these days and evaluation of potentialities for the future. Introduction to threat administration and behavioral finance ideas to recognize the real-world functioning of securities, insurance, and banking industries. The final purpose of this route is using such industries efficiently and toward a higher society. Here you will find all the questions and quiz answers related to “Financial Markets By Coursera”   N.B. We endeavored our best to keep this site invigorated for our customers in vain. You can similarly contribute by reviving new requests or existing request answer(s). There are various requests on our site, it is hard for us to check them reliably. It will be exceptional if you can help us with refreshing the site. Simply let us know whether you locate any new inquiries through mail or remark . We will endeavor to invigorate the request/answer ASAP.

Financial Markets – Quiz Answer

Week-1

Lesson #1 Quiz

1. Which of the following professions has the highest projected employment for 2024?

• Teacher
• Economist
• Truck driver
• Financial Advisor

2. Which of the following is NOT a learning objective in this course?

• Applying psychology and sociology to finance
• How to make money
• Regulating financial markets
• How we incentivize people to get things done

3. According to Andrew Carnegie, what should somebody do once she is wealthy?

• Throw extravagant parties to help her wealth trickle down
• Pass it on to her children
• Retire early and commit to philanthropy while young
• Retire late to accumulate as much wealth as possible, and then give the wealth away

4. Why is it relevant that finance tends to attract large amounts of money?

• Money can be used for good or evil
• Finance attracts people from around the globe
• Financial markets are a critical components of economic success
• All of the above

Lesson #2 Quiz

1. A stress test: (check all that apply)

• Tries to incorporate all the interconnections between financial institutions.
• Aims to test the behavior of historical returns and their fluctuations during all sorts of potential financial crises.
• Tries to incorporate all potential economic and financial crises, such as recessions, appreciation and depreciation of currency, liquidity crisis, etc.
• Does not look at historical returns, and looks at all the details of the portfolios and their vulnerabilities during all sorts of potential financial crises.

2. A 5% 3-month Value At Risk (VaR) of $1 million represents:

• A 5% decline in the value of the asset after 3 month, per each $1 million of notional.
• A 5% chance of the asset increasing in value by $1 million during the 3-month time frame.
• A 5% chance of the asset declining in value by $1 million during the 3-month time frame.
• The likelihood of a 5% of $1 million decline in the asset over the next 3-month.

3.In the Capital Asset Pricing Model (CAPM), a measure of systematic risk is captured by:

• The standard deviation of returns.
• The variance of returns.
• The Beta.
• The Alpha.

4. Market (or systematic) risk ___________ whereas idiosyncratic risk

__________.

• Is the risk for an asset to not be able to be traded in the market at a later time
• Is the risk for an asset to experience losses due to factors that affect the entire stock market
• Is the risk for an asset to experience losses due to factors that affect the entire stock market
• Is the risk which is endemic to a specific asset and therefore not the market as a whole
• Is the risk for an asset to experience losses due to factors that affect the entire stock market
• Is the risk which is endemic to the industry of the asset and therefore not the market as a whole
• Is the risk for an asset to experience losses due factors that solely affect the industry associated with the asset
• Is the risk which is endemic to a specific asset and therefore not the market as a whole

5. Why might an investor not normally invest large sums of money into Walmart or Apple stock?

• Both companies have received extensive media coverage
• The stock prices are very stable, making it difficult to gain large sums of money
• Their stock prices are highly volatile, and thus carry a lot of risk
• Their stock prices closely track the S&P500

6. Why is the normal distribution not a good model of some financial data?

• Extreme events occur in it too often
• The standard deviation is too high
• It does not have many outliers
• The standard deviation is too low

Lesson #3 Quiz

1. Which of these best describes risk pooling?

• If individual events are not independent, risk can be decreased by averaging across all of the events
• If individual events are independent, risk can be decreased by averaging across all of the events
• Insurance companies must avoid situations whereby customers are incentivized to intentionally cause an incident (e.g. burning their house down)
• Sick people are more likely to sign up for health insurance, and healthy people will not purchase the policy because this will make the premium more expensive

2. Which of the following was NOT a factor which led to the proliferation of life insurance?

• Insurance salespeople
• Increased life expectancy
• Statistical data on life expectancy
• New sales pitches

3. What happens in the United States if your insurance company goes bankrupt?

• There is no protection from the government against insurance company failure
• Consumers are insured from insurance company failure at the state level
• Insurance companies are partially owned by the government, and thus are not allowed to fail.
• Just like the FDIC protects consumers from bank failures, the federal government insures against insurance company failures

4. What problem does the US Affordable Care Act (“Obamacare”) attempt to address and how does it do so?

• It addresses selection bias by forcing everybody to buy health insurance or else face a tax penalty.
• It addresses selection bias by creating a healthcare system which is fully publicly-funded.
• It addresses moral hazard by forcing hospitals to provide emergency services to those who cannot pay for it.
• It addresses moral hazard by allowing hospitals to refuse treatment to those who cannot pay for it.

5. One of the main reasons why many homeowners did not have flood insurance before the advent of Hurricane Katrina in 2005 was:

• Many homeowners were relying on the government instead.
• Many homeowners were not aware that flood insurance existed in the first place.
• Insurance premiums in Louisiana went up by 70% between 1997-2005, causing many people to cancel their insurance.
• Homeowners thought that the likelihood of a flood was too low to justify buying a flood insurance.

Lesson #4 Quiz

1. Under the “Don’t put all your eggs in one basket” analogy, the eggs represent individual investments and the basket represents the overall investment portfolio. Spreading your “eggs” around allows you to:

• Minimize the possibility that bad luck for a single investment adversely affects your overall portfolio.
• Maximize the possibility that good luck for a single investment positively affects your overall portfolio.
• Maximize the return of your overall portfolio.
• Increase the uncertainty of your overall portfolio so you can try to generate an extra return.

2. Risk diversification can be better achieved: (check all that apply)

• With only low risk assets in your portfolio.
• By including in your portfolio all classes of assets traded in the market, independently of their risks.
• With mutual funds or unit investment trusts if you hold a small number of assets.
• With only stocks in your portfolio.

3. Short selling, which is defined as the sale of a security that the seller has borrowed, is motivated by the belief that:

• The price of the security will rise.
• The price of the security will decline.
• Short selling is never prompted by speculation.
• The price of the security will stay the same.

4. The expected return of a portfolio is computed as ___________ and the standard deviation of a portfolio is ___________.

• the simple average of the expected returns of each asset in the portfolio
• NOT the weighted average of the standard deviations of each individual asset
• the weighted average of the expected returns of each asset in the portfolio, weighted by the investment in each asset
• NOT the weighted average of the standard deviations of each individual asset
• the weighted average of the expected returns of each asset in the portfolio, weighted by the investment in each asset
• the weighted average of the standard deviations of each individual asset
• the simple average of the expected returns of each asset in the portfolio
• the weighted average of the standard deviations of each individual asset

5. An efficient portfolio is a combination of assets which:

• Achieves the highest return for a given risk.
• Minimizes risk by ensuring only diversifiable risk remains.
• Offers a risk free rate of return by minimizing the risk of the portfolio.
• Achieves the highest possible covariance among its assets.

Module 1 Honors Quiz

1. Which of the following are new advancements and changes in finance?

• Information technology
• Banking
• Insurance
• Behavioral finance

2. What did Andrew Carnegie believe some people succeed in business and others don’t?

• The business world selects for people with natural talent
• The business world selects for people who work hard
• The business world selects for people with a good education
• The business world selects for people who get lucky opportunities

3. The main difference between Value at Risk and Stress Testing is:

• Value at Risk takes a non-statistical approach, as opposed to Stress Testing.
• Stress Testing takes a non-statistical approach with its scenarios analysis.
• Value at Risk is not a quantitative approach.
• There are no differences between the two approaches.

4. According to the Capital Asset Pricing Model (CAPM), a security with:

• An alpha of zero is able to generate a return which greater than the market return.
• A positive alpha is considered overpriced, since the security outperforms the market.
• An alpha of zero is able to generate a return which is inferior to the market return.
• A positive alpha is considered underpriced, since the security outperforms the market.

5. Which of the following are true about fat tail distributions?

• They are a good model for some financial data
• The mean is a good representation of the distribution
• They are the best choice for most types of data
• We must rely on the central limit theorem to gather useful information about them.

6. If an insurance company has 10000 policies, and each has 0.1 probability of making a claim, what is the standard deviation of the fraction of policies which result in a claim?

0.003

7. Why was the National Association of Insurance Commissioners created?

• To suggest laws that would prevent insurance corporations from becoming “too big to fail”
• To suggest laws that would decentralize the insurance industry
• To suggest laws that would decrease the complexity of insurance regulation
• To suggest laws that would strengthen the insurance industry

8. Insurance is managed by employers, so if an employee is sick and loses her job, her insurance will be expensive due to preexisting conditions; by contrast, a healthy person who loses his job may not be incentivized to purchase health insurance. This is an example of

• Moral hazard
• Selection bias
• Pooled risk
• HMO

9. In addition to earthquake, hurricane and terrorism, which of the following could be categorized as a “disaster” risk?

• Market liquidity risk
• A World War
• Bankruptcy Risk
• Currency Risk

10. One of the mentioned assumptions of portfolio management theory is that investors are rational. A rational investor:

• Invests only in fully diversified portfolios.
• Is always averse to risk.
• Prefers a higher return for a given risk and prefers a lower risk for a given return
• Invests in passive funds rather than active funds.

11. The market portfolio, which includes all traded assets available in the market, must have a beta which is:

• Negative
• Equal to 1
• Above 1
• Equal to 0

12. Among the risks associated with short selling a stock are: (check all that apply)

• Default risk: potential unlimited losses when buying back the stock.
• Regulatory risk: a ban on short sales can create a surge in the stock price.
• Dividend risk: the short seller must provide dividend payments on the shorted stock to the entity from whom the stock has been borrowed.
• Systematic risk: the uncertainty inherent to the market as a whole and which cannot be diversified.

13. Leveraging your portfolio: (check all that apply)

• Allows you increase your return on equity, magnifying positive (or negative) returns by borrowing money.
• Increases your default risk by magnifying the standard deviation (risk) of your portfolio.
• Does not increase the standard deviation of your portfolio, since the borrowed money is risk free and therefore has a standard deviation of zero.
• Increases systematic risk within your portfolio, that is the uncertainty inherent to the market as a whole and which cannot be diversified.

14. You are an investor who wants to form a portfolio that lies to the right of the “optimal” minimum standard deviation portfolio on the efficient frontier. You must:

• Invest only in risky securities.
• Borrow money at the risk-free rate, invest in the minimum standard deviation portfolio and, in addition, only in risky securities.
• Borrow money at the risk-free rate and invest everything in the minimum standard deviation portfolio.
• Invest only in risk-free securities.

Week-2

Lesson #5 Quiz

1. While discussing what the future of financial markets will look like, the following arguments were mentioned (check all that apply):

• It is hard to predict the nature of future financial markets, this evolution will depend on the involvement of young generations within the financial community.
• Financial markets will evolve following simple ideas and ideals, such as the ones historically mentioned by Karl Marx or Robert Owen.
• It is hard to predict the nature of future financial markets, since human species is the product of a complex evolution.
• Financial markets are likely to stay the way they are now for the next three decades.

2.In his work, David Moss describes how investors’ psychology favored limited liability after the early 19th century New York experiment. In fact, the comparison between investors’ psychologies in the context of unlimited liability and lottery tickets is:

• Symmetrical. Unlimited liability and lottery tickets investors tend to overestimate the minimum probability of loss.
• Asymmetrical. Unlimited liability investors tend to overestimate the minimum probability of loss, whereas in lottery tickets, they overestimate the minimum probability of win.
• Symmetrical depending on the amount of money involved. For large amounts, both unlimited liability and lottery tickets investors tend to overestimate the minimum probability of loss.
• There is no such comparison between lottery tickets and unlimited liability investors.

3. The introduction of inflation indexed debt was motivated by: (check all that apply)

• An incentive to hedge from inflation volatility.
• The idea to generate profits when inflation is equal to 0.
• Historical examples of nominal debt being wiped out in real terms by high inflation.
• An incentive to have a debt contract fixed in real terms.

4. Why did Chile introduce the Unidad de Fomento ?

• To provide stimulus to the economy.
• To create a unit of account indexed to inflation, in order to counteract the impact of hyperinflation.
• To bolster international trade.
• To replace the peso as the official currency because of hyperinflation.

5. The concept of equity-protected mortgages consists in:

• Mortgages that include fire insurance.
• Mortgages that include casualty insurance.
• Mortgages that include house price insurance.
• Mortgages that include accident insurance.

Lesson #6 Quiz

1.In the S&P 500 forecasting exercise, many subjects seemed to be subject to the representativeness heuristic. This concept of behavioral finance posits that:

• Most people don’t behave like forecasters, they tend to be affected by their recurring thoughts at the time.
• Most people don’t behave like forecasters, they tend to interpret new evidence as a confirmation of their existing beliefs or theories.
• Most people don’t behave like forecasters, what they saw in the past is representative of the future.
• Most people don’t behave like forecasters, they tend to rely too heavily on the first piece of new information offered when making decisions.

2. An efficient market is defined as one in which:

• All participants have the same opportunity to generate the same returns.
• Asset prices quickly and fully reflect all available information.
• Asset prices are often in line with the intrinsic value.
• Transactions are ultimately costless.

3. The Dividend Discount Model (or Gordon Growth Model) can be stated as follows.

Let the investor’s discount rate be equal to r .If earnings equal dividends, and if dividends grow at the long-run rate g, then the price of the stock P can be written as follows:

• P = E/(r+g)
• P = (E*g)/(r)
• P = E/(r-g)
• P = (E*r)/(g)

4. Human judgment and experience can play a role in the advent of stock market crash because:

• Investors with an experience of financial crises are better at staying out of the market in turbulent times.
• A lot of people who have lived through financial crises have reported that, as a consequence of these crises and their narratives, their faiths in the market have diminished.
• Investors with an experience of financial crises are better at diversifying their portfolios.
• Investors with an experience of financial crises are better at exploiting profit opportunities.

Lesson #7 Quiz

1. Which of the following best describes the “invisible hand”?

• Subtle government economic interventions can lead to the inefficient allocation of resources.
• The free market, guided by self-interest, is mislead to inefficiently allocate resources.
• Subtle government economic interventions can ensure the sufficient production of goods to meet society’s demands.
• The free market, guided by self-interest, ensures the sufficient production of goods to meet society’s demands.

2. What problems does prospect theory solve? (check all that apply)

• People can underestimate high probabilities and overestimate low probabilities
• People do not treat gambles as equivalent to their expected utility
• People will make big gambles to avoid losses
• People will often make purchases impulsively

3. What is the wishful thinking bias?

• People think that, if they hope for something strongly enough, it will be more likely to happen.
• People over-estimate probabilities of things they would like to be true.
• People do not consider the probability of the things they want most.
• People hope that their sports team or political candidate will win

4. Ricardo thinks that, since society seems similar to what it was in the late 1920s, a second Great Depression is coming soon. To which cognitive bias is Ricardo falling victim?

• Representativeness heuristic
• The framing effect
• The disjunction effect
• Attention anomalies

5. What is Newcomb’s paradox?

• People behave irrationally when faced with decisions which involve large sums of money.
• People will behave differently if playing games against a computer compared to playing them with a human opponent.
• People sometimes change their behavior when they learn about a prediction which has been made about the future.
• People prefer a small chance at winning $1 million than a high chance of winning $1000.

6. Which of the following is NOT a common trait of somebody with Antisocial Personality Disorder?

• Lack of empathy
• Lack of desire to interact with others
• Manipulative
• Heightened self-esteem

Module 2 Honors Quiz

1. A limited liability corporation in which you are a shareholder has just gone bankrupt. The company has a large debt, that is its liabilities are far in excess of its assets. Hence, you will be called on to pay:

• Nothing.
• A proportion of the total debt, which is decided at the discretion of the bankruptcy judge.
• An amount that could, at most, equal what you originally paid for the shares of common stock in the corporation.
• A proportional share of all creditor claims based on the number of common shares that you own.

2.The inflation risk, which inflation indexation aims to mitigate (check all that apply)

• Is not the risk that there will be inflation, it is the risk that inflation will significantly fluctuate over time.
• Is the risk that the nominal rate of return of an investment will exceed the rate of inflation.
• Is the risk that the cash flow from an investment won’t be worth as much in the future because of changes in purchasing power due to inflation.
• Is associated with any investment that involves cash flows over time.

3. The concept of human capital risk (check all that apply):

• Is a risk associated with the present value of all your future wages.
• Is not correlated with professional competency.
• Is not correlated with the stock market.
• Can also be considered as a protection against inflation.

4. The random walk hypothesis of the Efficient Market Theory posits that:

• Historical stock prices follow a random walk.
• Stock price volatility follows a random walk.
• Historical stock returns follow a random walk.
• Short-term investment returns are inherently unpredictable.

5. Suppose a market is inefficient. As new information is received about an asset:

• There will be a lag in the adjustment of the stock price.
• Nothing will happen.
• The volatility (standard deviation) of the stock price will increase.
• Investors will short the stock.

6.Investors mainly use the price-to-earnings (P/E) ratio in order to:

• Decide how much profit a company is likely to make in the future.
• Decide whether a company’s shares are overpriced or underpriced.
• Determine the optimal risk-return ratio.
• Determine the optimal price for the company’s products.

7. What is the shape of the value function in prospect theory?

• Gains: concave up; Losses: concave up
• Gains: concave up, Losses: concave down
• Gains: concave down; Losses: concave up
• Gains: concave down; Losses: concave down

8. Which of the following provide evidence that investors experience cognitive dissonance?

• Investors buy and sell stocks very rapidly
• Investors choose investments which already have many other investors
• Investors do not remember the negative performance of their investments.
• Investors hold onto funds that are doing poorly

9. Which of the following situations are examples of the framing effect? (check all that apply)

• An elevator lists a maximum capacity of 2000 lbs, even though it can safely carry up to 5000 lbs.
• A mattress which costs $1000 is advertised as $4000 with a “75% off” sticker on it
• A gold coin is sold for $1000, even though it is only worth $300.
• A stock splits from $60 to $30 and investors are given twice as many shares

10. Which of the following defines the relationship of doctors to patients, but generally does not apply to the relationship of financial advisors to their clients?

• Patients can do their own background research on medical concepts to help them better understand their health, but finance is too complicated for clients to do this.
• Doctors use both data and experience/intuition when advising patients, but financial advisors must use either one or the other.
• Doctors have made an oath of loyalty to their patients, but financial advisors have not.
• Patients may seek second opinions from other doctors, but not from financial advisors.

11. Which describes the concept of social contagion?

• Mathematical models of disease spread can be applied to the spread of ideas
• When an idea gains cultural momentum, it is more likely to be propagated throughout generations
• Contagious diseases tend to spread in social situations.
• Ideas can evolve and develop in a similar way to genes, and we can use the principles of evolutionary biology to understand this development.

Week-3

Lesson #8 Quiz

1. Which of the following describes current short term interest rates?

• They are approximately equal to zero
• They are very high
• They are strongly negative
• They are changing for the first time in the last 100 years

2. What is the Federal Funds Rate and how long does it take to mature?

• The longest term interest rate in the federal government, which takes one year to mature.
• The shortest term interest rate in the federal government, which takes one hour to mature.
• The shortest term interest rate in the federal government, which takes one month to mature.
• The shortest term interest rate in the federal government, which takes one day to mature.

3.If you put $1000 into an account with a 20% interest rate, how much money will you have at the end of the year if interest is compounded ONCE per year?

• 200
• 1200
• 1210
• 1440

4. How do coupon bonds work?

• You purchase a bond for the same price you eventually sell it for, but if you have a “coupon”, you may buy it for less money.
• You purchase a bond for the same price you eventually sell it for, but while it reaches maturity, you may clip “coupons” off the bond and exchange them for money.
• You purchase a bond for the same price you eventually sell it for, but bond owners are eligible for special offers from the federal government, also known as “coupons”, which incentivize the purchase of the bonds.
• You purchase a bond for one price, but the final price you may sell it for depends on the type of “coupons” that are released to account for inflation.

5. What is the main difference between a consol and an annuity ?

• The consol has a fixed price of $1 at inception whereas the annuity price is given by the market.
• A consol pays a constant quantity (coupon) forever, whereas the annuity also pays a constant quantity but only until a fixed time T called the maturity date.
• An annuity pays a constant quantity (coupon) forever, whereas the consol also pays a constant quantity but only until a fixed time T called the maturity date.
• A consol is not subject to market risk.

6. The forward rate is:

• The expected rate (yield) on a bond several months or years from now.
• The (inflation-adjusted) rate on a bond.
• Equal to the yield to maturity of the bond.
• Equal to the nominal rate of the bond.

7. The real interest rate is calculated by:

• Subtracting the inflation rate from the nominal interest rate.
• Adding the inflation rate and the nominal interest rate.
• Subtracting the nominal interest rate from the inflation rate.
• Adding the nominal interest rate and the yield to maturity.

8.Irving Fisher’s Debt Deflation Theory starts from the observation that:

• Deflation redistributed real wealth from creditors to debtors.
• Deflation has no impact on the real wealth of debtors.
• Deflation redistributed real wealth from debtors to creditors.
• Deflation has no impact on the real wealth of creditors.

Lesson #9 Quiz

1.Market capitalization is calculated by using:

• The total number of employee of a company.
• The earnings of a company.
• The price per share and the total number of outstanding shares.
• The dividends of a company.

2. The greater an investor’s ownership in a corporation is, the greater:

• is the amount of taxes to be paid by the company.
• is the total number of shares he/she owns with respect to the total number of shares outstanding.
• is the profitability of the company.
• is the total number of shares he/she owns.

3. A firm must make its dividend payments to __________ before it makes any dividend payments to its ___________.

• preferred shareholders common shareholders
• its Chief Executive Officer preferred shareholders
• the members of the board bondholders
• bondholders preferred shareholders

4. The basic corporate charter: (check all that apply)

• does not say that the firm ever has to raise debt. The board decides.
• says that the firm must pay dividends during its lifetime.
• says that the firm must repurchase some of its shares beyond a certain threshold of issuance.
• does not say that the firm ever has to issue warrants, convertible debt or any other debt securities.

5. In the Pecking Order Theory, the companies prioritize their sources of financing in the following order:

• (1) Debt, (2) Internal financing, (3) Equity.
• (1) Internal financing, (2) debt issuance, (3) Equity.
• (1) Equity, (2) Debt issuance, (3) Internal financing.
• (1) Equity, (2) Internal financing, (3) Debt.

6.A dilution is:

• The issuance of new debt by a company.
• A sale of an investor’s shares.
• A reduction in the ownership percentage of a share of stock caused by the issuance of new shares.
• An increase in the ownership percentage of a share of stock caused by the issuance of new shares.

7. A share repurchase is: (check all that apply)

• An alternative to paying dividends in order to return cash to investors.
• The reverse of a dilution.
• A program by which investors buy back their previously sold shares of a given company.
• A program by which a company buys backs its own shares from the marketplace or from its shareholders (at a fixed price).

8.The price-to-earnings ratio: (check all that apply)

• Indicates the percentage of profit that is paid out as dividends.
• Shows how much an investor is willing to pay for the stock of the company for each dollar of the company’s earnings.
• Effectively shows the number of years of earnings at which the company is valued given the current level of the share price.
• Measures the funds provided by creditors versus the funds provided by owners.

9. Generally, a reduction in dividend is interpreted by investors as:

• A non-event.
• Good news, with often an increase of the stock price.
• Bad news, with often a drop in the stock price.
• A sign of future increase in profitability.

Module 3 Honors Quiz

1. Which of the following did Eugen von Böhm-Bawerk NOT believe caused the interest rate to be a small positive number?

• People value money more today than they do in a year.
• This is approximately the rate of technological progress.
• There are advantages to roundaboutness.
• Financial knowledge and expertise accumulates at a societal level at approximately this rate.

2.If you put $1000 into an account with a 20% interest rate, how much money will you have at the end of the year if interest is compounded CONTINUOUSLY?

(When inputting your answer, enter your rounded answer without decimal precision and do not type in the $ dollar sign) Enter answer here

1221

3. Suppose that a consol has a promised payment of 6 pounds per 100 pounds notional. This consol is now traded at 150 pounds. What it the current yield to maturity of the consol?

• 1%
• 2%
• 3%
• 4%

4. You observe that on today’s yield curve, the one year rate is R1=6% and the two year rate is R2=6.5%. What is the one year forward rate one year from now ?

• 5%
• 6.5%
• 7%
• 6%

5. A tech company can make a 3% real return on an investment. It can borrow funds to finance the investment at a nominal rate of 6% and the inflation rate is 1%. Hence:

• The real rate of interest is 3%.
• The investment will be unprofitable.
• The investment will be profitable.
• The real rate of interest is 2%.

6. If expected inflation is less than actual inflation, then wealth will be redistributed from:

• Lenders to borrowers.
• The government to consumers.
• The consumers to the government.
• Borrowers to lenders.

7. The market capitalization of a company provides information on:

• The value of a company.
• The pension benefits provided by the company.
• The capital expenditures of the company.
• The industry the company operates in.

8. Which of the following are true for stock splits ? (check all that apply)

• Market price per share is reduced after the split.
• The total number of outstanding shares increases.
• Proportional ownership is unchanged.
• Retained earnings are changed.

9. A rationale for preferred stock:

• It lowers the cost of financing, as compared with debt issuance.
• The dividends associated with it are tax-deductible.
• It expands the capital base without diluting common equity.
• Its holder benefits from an increased ownership in the company.

10. The Pecking Order Theory indicates that firms prefer _______ financing to _______ financing.

• stock; debt
• internal; external
• stock; retained earning
• flexible; risky

11.If the company I invest in issues a stock dividend at 5%, the value of my original shares are ___________ by a factor ___________. I am ___________ since I have an additional ___________ of value in the new shares.

• raised, 1.05/1, worse off, 0.05/1.05
• lowered, 1/1.05, worse off, 0.05/1.05
• lowered, 1/1.05, better off, 0.05/1.05
• raised, 1.05/1, better off, 0.05/1.05

12. Which one of the following statements is correct?

• A cash dividend has no effect on the market value per share.
• A stock repurchase increases the market value per share.
• Stock repurchases are more tax advantageous than are cash dividends.
• Stock repurchases provide more income to shareholders compared to dividends.

13. A company whose stock is selling at a price-to-earnings (P/E) ratio that is greater than the P/E ratio of the market most likely has:An anticipated earnings growth rate which is less than that of the average traded firm within the market.

• An unpredictable future stream of earnings.
• A larger dividend yield compared to the dividend yield of an average traded firm within the market.
• A dividend yield which is smaller than that of an average traded firm within the market.

14. What are the main implications of John Lintner’s dividend model?

• A firm should always pay a dividend equal to its EPS (earnings per share).
• A firm has to strike a balance. It should pay a dividend to share some of its earnings with shareholders but its dividend should not be too high, because that might lead to a cut in the dividend in a following year, which leads to a negative reaction among shareholders.
• If the company’s EPS is smaller than last year’s dividend, the company should engage in share repurchases.
• A firm should never pay any dividends.

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