Exam 4 FINC 3700

Created by gmardre 

Upgrade to
remove ads

51 terms

net profits will tend to be higher because there will be fewer brokerage commissions.

The advantage of a "buy-and-hold strategy" is that

A) is based on the assumption that prices of securities fully reflect all available information. B) holds that the expected return on a security equals the equilibrium return.

The efficient market hypothesis

a bubble.

A situation in which the price of an asset differs from its fundamental market value is called

A) Sometimes a stock price declines when good news is announced. B) Stock prices will respond to announcements only when the information in these announcements is new. C) Future changes in stock prices should, for all practical purposes, be unpredictable.

Important implications of the efficient market hypothesis include which of the following?

unexploited profit opportunities will not exist for long, as market participants will act quickly to eliminate
them.

Another way to state the efficient market hypothesis is that in an efficient market,

have earned abnormally high returns even taking into account their greater risk.

The small-firm effect refers to the observation that small firms' stocks

stock prices cannot be predicted based on past trends.

To say that stock prices follow a "random walk" is to argue that

stock prices are more volatile than fluctuations in their fundamental values can explain.

The efficient markets hypothesis is weakened by evidence that

factors other than market fundamentals affect stock prices.

An important lesson from the Black Monday Crash of 1987 and the tech crash of 2000 is that

technical analysis does not outperform the overall market.

Tests used to rate the performance of rules developed in technical analysis conclude that

investors should purchase no-load mutual funds which have low management fees.

The efficient market hypothesis suggests that

experience an abnormal price rise from December to January.

According to the January effect, stock prices

a good starting point for analyzing expectations.

Although the verdict is not yet in, the available evidence indicates that, for many purposes, the efficient market hypothesis is

unexploited profit opportunities will be quickly eliminated.

Another way to state the efficient market condition is that in an efficient market,

A) one cannot expect to earn an abnormally high return by purchasing a security. B) information in newspapers and in the published reports of financial analysts is already reflected in market
prices.

According to the efficient market hypothesis

A) stock prices declined to 10 percent of their level in 1929. B) the aggregate price level declined. C) banks failed.

Adverse selection and moral hazard problems increased in magnitude during the early years of the Great Depression as

A) were different because in Mexico speculative attacks in the foreign exchange market played a key role. B) were similar in being precipitated by an increase in interest rates abroad. C) were similar in being preceded by stock market declines.

Financial crises in the United States and Mexico

A) a sharp rise in interest rates. B) a steep stock market decline. C) an increase in uncertainty resulting from the failure of a major firm.

Most financial crises in the United States have begun with

lenders are reluctant to make loans that are not secured by collateral.

Because of the adverse selection problem,

venture capital firm.

One financial intermediary in our financial structure that helps to reduce the moral hazard arising from the principal-agent problem is the

reflect the average quality of used cars in the market.

In the used car market, asymmetric information leads to the lemons problem because the price that buyers are willing to pay will

stocks.

Of the following sources of external finance for American nonfinancial businesses, the least important is

overcome free-rider problems by holding non-traded loans.

The authors' analysis of adverse selection indicates that financial intermediaries

B) A rise in foreign interest rates and domestic stock market declines. C) A rise in domestic interest rates and a deterioration in bank balance sheets.

Which of the following factors led up to the Mexican financial crisis of 1994?

A) high net worth.
B) monitoring and enforcement of restrictive covenants. C) greater reliance on equity contracts and less on debt contracts.

Solutions to the moral hazard problem include

low; adverse selection

Because of the lemons problem in the used car market, the average quality of the used cars offered for sale will be _________, which gives rise to the problem of _________.

A) Marketable securities account for a larger share of external business financing in the United States than in most other countries.
B) Since 1970, less than 5 percent of newly issued corporate bonds and commercial paper have been sold directly to American households.

With regard to external sources of financing for nonfinancial businesses in the United States, which of the following are accurate statements?

10 percent

Of the sources of external funds for nonfinancial businesses in the United States, stocks account for approximately _________ of the total.

bank panics.

Factors that lead to worsening conditions in financial markets include

in Thailand in 1997.

Stock market declines preceded a full blown financial crisis

why financial markets are among the most heavily regulated sectors of the economy.

The concept of adverse selection helps to explain

difficulty financing a large budget deficit.

Argentina's 2001-2002 financial crisis was precipitated by

Bank panic

If the anatomy of a financial crisis is thought of as a sequence of events, which of the following events would be least likely to be the initiating cause of the financial crisis?

A) the borrower's incentive to undertake highly risky investments. B) the owners' inability to ensure that managers will act in the owners' interest.

Moral hazard is a problem associated with debt and equity contracts arising from

larger and more well known; issue securities

The pecking order hypothesis predicts that the _________ a corporation is, the more likely it will be to _________.

A) are agreements by the borrowers to pay the lenders fixed dollar amounts at periodic intervals. B) are used much more frequently to raise capital than are equity contracts. C) have an advantage over equity contracts in that they have a lower cost of state verification.

Debt contracts

A) are major disruptions in financial markets that are characterized by sharp declines in asset prices and the
failures of many financial and nonfinancial firms. B) frequently lead to sharp contractions in economic activity. C) occur when adverse selection and moral hazard problems in financial markets become more significant.

Financial crises

A) have advantages in overcoming the free-rider problem, helping to explain why indirect finance is a more important source of business finance than is direct finance.
B) play a greater role in moving funds to corporations than do securities markets as a result of their ability to overcome the free-rider problem.

The authors' analysis of adverse selection indicates that financial intermediaries in general, and banks in particular (because they hold a large fraction of non-traded loans),

A) increasing uncertainty in financial markets. B) declining stock prices. C) increases in interest rates.

Factors that lead to worsening conditions in financial markets include

nonbank loans.

Of the following sources of external finance for American nonfinancial businesses, the most important is

A) occur when adverse selection and moral hazard problems in financial markets become more significant. B) frequently lead to sharp contractions in economic activity. C) are major disruptions in financial markets that are characterized by sharp declines in asset prices and the
failures of many financial and nonfinancial firms.

Financial crises

mismanagement of financial liberalization or innovation.

In an emerging market economy, a financial crisis generally begins with

A) financial institutions may see the assets on their balance sheets deteriorate, leading to deleveraging. B) moral hazard may increase in companies that have lost net worth in the bust.

When asset prices fall following a boom,

currency

Stage Two of a financial crisis in an emerging market economy usually involves a ________ crisis.

a decline in net worth as price levels fall while debt burden remains unchanged.

Debt deflation refers to

severe fiscal imbalances

In an emerging market economy, there are typically two paths to a financial crisis: financial liberalization/globalization and ________.

both the currency crisis and the financial crisis

What does the "twin crises" in an emerging market financial crisis refer to?

increasing; decreasing

In addition to having a direct effect on increasing adverse selection problems, increases in interest rates also promote financial crises by ________ firms' and households' interest payments, thereby ________ their cash flow.

A) in Indonesia in 1997. B) in the United States in 2000. C) in the United States in 1987.

Stock market declines preceded a full-blown financial crisis

difficulty financing a large budget deficit.

Argentina's 2001-2002 financial crisis was precipitated by

$1 trillion

Approximately how large was the U.S. subprime mortgage market in 2007?

Please allow access to your computer’s microphone to use Voice Recording.

Having trouble? Click here for help.

We can’t access your microphone!

Click the icon above to update your browser permissions above and try again

Example:

Reload the page to try again!

Reload

Press Cmd-0 to reset your zoom

Press Ctrl-0 to reset your zoom

It looks like your browser might be zoomed in or out. Your browser needs to be zoomed to a normal size to record audio.

Please upgrade Flash or install Chrome
to use Voice Recording.

For more help, see our troubleshooting page.

Your microphone is muted

For help fixing this issue, see this FAQ.

NEW! Voice Recording

Click the mic to start.

Create Set