Function of Financial Markets

7.5 Why the Efficient Market Hypothesis Does Not Imply That Financial Markets are Efficient

1) If in an efficient market all prices are correct and reflect market fundamentals, which of the following is a FALSE statement?

A) A stock that has done poorly in the past is more likely to do well in the future.
B) One investment is as good as any other because the securities' prices are correct.
C) A security's price reflects all available information about the intrinsic value of the security.
D) Security prices can be used by managers to assess their cost of capital accurately.

3) Stock market crashes lead us to believe that

A) factors other than market fundamentals have an effect on asset prices.
B) unexploited profit opportunities never exist.
C) crashes are always predictable when market participants behave rationally.
D) bubbles are a natural outcome of an efficient market.


7.6 Behavioral Finance

2) If a market participant believes that a stock price is irrationally high, they may try to borrow stock from brokers to sell in the market and then make a profit by buying the stock back again after the stock falls in price. This practice is called

A) short selling.
B) double dealing.
C) undermining.
D) long marketing.

3) ________ means people are more unhappy when they suffer losses than they are happy when they achieve gains.

A) Loss fundamentals
B) Loss aversion
C) Loss leader
D) Loss cycle

5) Psychologists have found that people tend to be ________ in their own judgments.

A) under-confident
B) over-confident
C) indecisive
D) insecure

6) ________ and ________ may provide an explanation for stock market bubbles.

A) Overconfidence; social contagion
B) Underconfidence; social contagion
C) Overconfidence; social isolationism
D) Underconfidence; social isolationism