Financial Markets Module 2 Honors Quiz Answer
week 2
Module 2 Honors Quiz
Q1) 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.
Q2) The inflation risk, which inflation indexation aims to mitigate (check all that apply)
- Is the risk that the nominal rate of return of an investment will exceed the rate of inflation.
- 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 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.
Q3) The concept of human capital risk (check all that apply):
- Is not correlated with professional competency.
- Is not correlated with the stock market.
- Is a risk associated with the present value of all your future wages.
- Can also be considered as a protection against inflation.
Q4) 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.
Q5) Suppose a market is inefficient. As new information is received about an asset:
- Nothing will happen.
- There will be a lag in the adjustment of the stock price.
- The volatility (standard deviation) of the stock price will increase.
- Investors will short the stock.
Q6) 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.
- Determine the optimal risk-return ratio.
- Determine the optimal price for the company’s products.
- Decide whether a company’s shares are overpriced or underpriced.
Q7) 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
Q8) 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 hold onto funds that are doing poorly
- Investors do not remember the negative performance of their investments.
Q9) 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 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
- A mattress which costs $1000 is advertised as $4000 with a “75% off” sticker on it
Q10) 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.
Q11) Which describes the concept of social contagion?
- 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.
- Mathematical models of disease spread can be applied to the spread of ideas
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