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Module 2 Honors Quiz >> Financial Markets

Module 2 Honors Quiz >> Financial Markets

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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.

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