Chapter 37

One assumption of the efficient markets hypothesis is that markets are so unpredictable they will never truly clear.
1. True
2. False
Participants in a market act rationally. If they think that price is going to rise it makes sense for them to sell before it does.
1. True
2. False
A characteristic of efficient markets is that market prices change instantaneously when new information comes to light.
1. True
2. False
The fair value of a share reflects the expected future stream of dividends.
1. True
2. False
The random walk hypothesis suggests that traders will not be able to beat the market on a consistent basis.
1. True
2. False
Asset bubbles can arise because markets ignore fundamentals and base decisions on future expectations of themselves and others.
1. True
2. False
In efficient markets, changes in the value of an asset come about because information is hidden from some participants in the market.
1. True
2. False
There is a positive relationship between the price of a bond and its yield.
1. True
2. False
The greater the risk associated with an asset the higher the price.
1. True
2. False
The use of mathematics can help to completely eliminate risk from investment.
1. True
2. False
Collateralised debt obligations rely on a stream if income being received from payments of the asset on which the bond is based.
1. True
2. False
Calculation of default correlations were not based on data covering a sufficient spread of varying economic conditions which limited their value.
1. True
2. False
Toxic debt refers to the stock of junk bonds held by banks and other financial institutions which are used to leverage further lending.
1. True
2. False
The financial instability hypothesis makes a distinction between the working of normal markets and financial markets.
1. True
2. False
The opportunity cost of a recession is the total sum of money that the government has to spend on additional benefits for those who become unemployed.
1. True
2. False
In a financial crisis, central banks will tighten monetary policy to prevent the crisis getting out of control.
1. True
2. False
Credit markets froze because interest rates were so low it was not worth banks lending to each other.
1. True
2. False
Moral hazard refers to the situation where decision-makers are isolated from the consequences of their decisions and as a result they may behave in a way that is undesirable or detrimental to others.
1. True
2. False
Quantitative easing refers to the reductions in central bank base rates, the rates at which they are prepared to lend to the financial system.
1. True
2. False
Short selling involves traders betting on price changes in a limited range of stocks related to a particular industry sector.
1. True
2. False
A Tobin tax is levied with the primary aim of:
1. taxing bankers’ bonuses
2. reducing short-term speculation
3. raising long-term funds for the government
4. providing an incentive for bankers to become risk seeking
The main purpose of financial regulation is to:
1. penalize risk averse fund managers in financial institutions
2. ensure monetary policy is carried out in accordance with the Taylor Rule
3. create efficiency and equity in financial markets
4. monitor the remuneration packages of senior banking officials
Short selling is most likely to be a means to:
1. insure against the likelihood of an increase in default rates of junk bonds
2. hedge against short positions taken by bond traders
3. generate guaranteed returns in a bull market
4. demonstrate risk seeking trading strategies
5. offset losses that may be made on long positions
Asset price bubbles occur because:
1. of a global imbalance in assets
2. the supply of assets falls at a faster rate than the demand thus creating a shortage
3. expectations of price movements are factored in as a result of the rise in global asset levels
4. asset traders become more risk averse over time
5. regulators take insufficient notice of the supply and demand of global assets
In pricing the risk of purchasing a bond, the market will:
1. assess the likelihood of the coupon changing
2. always take a short position to hedge against default
3. look at the ratio of the price to the yield over the life of the bond
4. consider the probabilities of default
The risk of default of a bond is increased by:
1. the actions of short sellers in the bond market
2. the creation of collateralized debt obligations
3. the asset or debt on which the bond is based
4. announcements of interest cuts by central banks
The purpose of an asset purchasing facility is to:
1. free up credit in financial markets and increase lending to individuals and businesses
2. give the central bank greater control over monetary policy
3. reduce commercial bank assets to restrict risky lending
4. reduce the number of bonds in circulation so that it becomes easier for businesses to raise funds
In a financial crisis and recession, quantitative easing is most likely to be successful if:
1. the central bank fixes a total sum to be purchased at the outset of the policy
2. it is combined with a programme of stricter regulatory structures
3. purchases of toxic assets from the banking system are made
4. attention is focused on the corporate bond market only
The existence of moral hazard means that:
1. key banks are protected from failure because they are too big to fail
2. bankers have a duty to conduct their activities in an ethical way
3. risk seeking behaviour may be encouraged
4. the risks of trading in the bond market are perceived as too high
The efficient markets hypothesis states that:
1. information is more likely to be asymmetric in financial markets
2. markets are highly efficient and so are predictable over time
3. buyers and sellers in financial markets always have perfect information
4. asset prices will tend to rise over time to reflect their scarcity
5. the price of financial assets reflects all generally available information

Chapter 37

Quiz