Chapter 7, The Stock Market, the Theory of Rational Expectations, and the Efficient Market Hypothesis Video Solutions, The Economics of Money, Banking, and Financial Markets

03:18

Problem 1

What basic principle of finance can be applied to the valuation of any investment asset?

Pragya Ahuja

Numerade Educator

01:39

What are the two main sources of cash flows for a stockholder? How reliably can these cash flows be estimated? Compare the problem of estimating stock cash flows to estimating bond cash flows. Which security would you predict to be more volatile?

Alexander Cheng

Numerade Educator

04:50

Problem 3

Some economists think that central banks should try to prick bubbles in the stock market before they get out of hand and cause later damage when they burst. How can monetary policy be used to prick a bubble? Explain how it can do this using the Gordon growth model.

Pragya Ahuja

Numerade Educator

00:54

Problem 4

If monetary policy becomes more transparent about the future course of interest rates, how would that affect stock prices, if at all?

Oluwadamilola Ameobi

Numerade Educator

02:24

Problem 5

"Forecasters' predictions of inflation are notoriously inaccurate, so their expectations of inflation cannot be rational." Is this statement true, false, or uncertain? Explain your answer

Pragya Ahuja

Numerade Educator

03:00

Problem 6

"Anytime it is snowing when Joe Commuter gets up in the morning, he misjudges how long it will take him to drive to work. When it is not snowing, his expectations of the driving time are perfectly accurate. Considering that it snows only once every ten years where Joe lives, Joe's expectations are almost always perfectly accurate." Are Joe's expectations rational? Why or why not?

Pragya Ahuja

Numerade Educator

02:19

Problem 7

If a forecaster spends hours every day studying data to forecast interest rates, but his expectations are not as accurate as predicting that tomorrow's interest rates will be identical to today's interest rate, are his expectations rational?

Pragya Ahuja

Numerade Educator

05:14

Problem 8

"If stock prices did not follow a random walk, there would be unexploited profit opportunities in the market." Is this statement true, false, or uncertain? Explain
your answer.

Pragya Ahuja

Numerade Educator

03:18

Problem 9

Suppose that increases in the money supply lead to a rise in stock prices. Does this mean that when you see the money supply has sharply increased in the past week, you should go out and buy stocks? Why or why not?

Pragya Ahuja

Numerade Educator

01:04

Problem 10

If the public expects a corporation to lose $\$ 5$ per share this quarter and it actually loses $\$ 4,$ which is still the largest loss in the history of the company, what does the efficient market hypothesis say will happen to the price of the stock when the $\$ 4$ loss is announced?

Oluwadamilola Ameobi

Numerade Educator

02:05

Problem 11

If you read in the Wall Street Journal that the "smart money" on Wall Street expects stock prices to fall, should you follow that lead and sell all your stocks?

Pragya Ahuja

Numerade Educator

03:04

Problem 12

If your broker has been right in her five previous buy and sell recommendations, should you continue listening to her advice?

Pragya Ahuja

Numerade Educator

01:03

Problem 13

Can a person with rational expectations expect the price of a share of Google to rise by $10 \%$ in the next month?

Kaylee Mcclellan

Numerade Educator

03:04

Problem 14

"If most participants in the stock market do not follow what is happening to the monetary aggregates, prices of common stocks will not fully reflect information about them." Is this statement true, false, or uncertain? Explain your answer

Pragya Ahuja

Numerade Educator

01:33

Problem 15

"An efficient market is one in which no one ever profits from having better information than the rest." Is this statement true, false, or uncertain? Explain your
answer.

Oluwadamilola Ameobi

Numerade Educator

01:03

Problem 16

If higher money growth is associated with higher future inflation, and if announced money growth turns out to be extremely high but is still less than the market expected, what do you think would happen to longterm bond prices?

Oluwadamilola Ameobi

Numerade Educator

06:55

Problem 17

"Foreign exchange rates, like stock prices, should follow a random walk." Is this statement true, false, or uncertain? Explain your answer.

Jennifer Stoner

Numerade Educator

02:48

Problem 18

Can we expect the value of the dollar to rise by $2 \%$ next week if our expectations are rational?

Pragya Ahuja

Numerade Educator

03:21

Problem 19

"Human fear is the source of stock market crashes, so these crashes indicate that expectations in the stock market cannot be rational." Is this statement true, false, or uncertain? Explain your answer.

Pragya Ahuja

Numerade Educator

01:54

Problem 20

In the late 1990 s, as information technology rapidly advanced and the Internet widely developed, U.S. stock markets soared, peaking in early 2001 . Later that year, these markets began to unwind, and then crash, with many commentators identifying the previous few years as a "stock market bubble." How might it possible for this episode to be a bubble, but still adhere to the efficient market hypothesis?

Oluwadamilola Ameobi

Numerade Educator

01:24

Problem 21

Why might the efficient market hypothesis be less likely to hold when fundamentals suggest stocks should be at a lower level?

Rashmi Sinha

Numerade Educator

01:18

Problem 22

Compute the price of a share of stock that pays a $\$ 1$ per year dividend and that you expect to be able to sell in one year for $\$ 20,$ assuming you require a $15 \%$ return.

Oluwadamilola Ameobi

Numerade Educator

01:56

Problem 23

After careful analysis, you have determined that a firm's dividends should grow at $7 \%,$ on average, in the foreseeable future. The firm's last dividend was $\$ 3$ Compute the current price of this stock, assuming the required return is $18 \%$

Oluwadamilola Ameobi

Numerade Educator

04:41

Problem 24

The current price of a stock is $\$ 65.88 .$ If dividends are expected to be $\$ 1$ per share for the next five years, and the required return is $10 \%$, then what should the price of the stock be in 5 years when you plan to sell it? If the dividend and required return remain the same, and the stock price is expected to increase by $\$ 1$ five years from now, does the current stock price also increase by $\$ 1 ?$ Why or why not?

Kaylee Mcclellan

Numerade Educator

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Problem 25

A company has just announced a 3 -for- 1 stock split, effective immediately. Prior to the split, the company had a market value of $\$ 5$ billion with 100 million shares outstanding. Assuming that the split conveys no new information about the company, what is the value of the company, the number of shares outstanding, and price per share after the split? If the actual market price immediately following the split is $\$ 17.00$ per share, what does this tell us about market efficiency?

Rashmi Sinha

Numerade Educator