FINA0102 Financial Markets and Institutions
Problem Set for Tutorial 5 (Ch6, 11, 25)
M.C.
1) According to the efficient market hypothesis, the current price of a financial security
A) is the discounted net present value of future interest payments.
B) is determined by the highest successful bidder.
C) fully reflects all available relevant information.
D) is a result of none of the above.
2) Another way to state the efficient market condition is that in an efficient market,
A) unexploited profit opportunities will be quickly eliminated.
B) unexploited profit opportunities will never exist.
C) arbitrageurs guarantee that unexploited profit opportunities never exist.
D) both A and C of the above occur.
3) Studies of mutual fund performance indicate that mutual funds that outperformed the market in one
time period
A) usually beat the market in the next time period.
B) usually beat the market in the next two subsequent time periods.
C) usually beat the market in the next three subsequent time periods.
D) usually do not beat the market in the next time period.
4) Sometimes one observes that the price of a companyʹs stock falls after the announcement of favorable
earnings. This phenomenon is
A) clearly inconsistent with the efficient market hypothesis.
B) consistent with the efficient market hypothesis if the earnings were not as high as anticipated.
C) consistent with the efficient market hypothesis if the earnings were not as low as anticipated.
D) the result of none of the above.
5) Which of the following is empirical evidence indicating that the efficient market hypothesis may not
always be generally applicable?
A) Small-firm effect
B) January effect
C) Market Overreaction
D) All of the above
6) (I) The largest of the organized stock exchanges in the United States is the New York Stock Exchange.
(II) To be listed on the NYSE, a firm must have a minimum of $100 million in market value or $10
million in revenues.
A) (I) is true, (II) false.
B) (I) is false, (II) true.
C) Both are true.
D) Both are false.
7) According to the Gordon growth model, what is an investor's valuation of a stock whose current
dividend is $1.00 per year if dividends are expected to grow at a constant rate of 10 percent over a long
period of time and the investor's required return is 11 percent?
A) $110
B) $100
C) $11
D) $10
E) $5.24
8) Suppose the average industry PE ratio for auto parts retailers is 20. What is the current price of Auto
Zone stock if the retailer's earnings per share is projected to be $1.85?
A) $21.85
B) $37
C) $10.81
D) $9.25
Short Questions
1) You have just taken a short position in T-bond futures to hedge against the interest rate risk. The
contract is $100,000 principal. The T-bond price is now 105 with duration 5.5 years. Now the interest
rate is 9%. If the interest rate rises to 9.2% immediately after you have bought the future contract, what
is your profit or loss on this contract?