QUESTION 6

STOCK MARKET. Which of the following responses to abnormal price movements is consistent with the "underreaction hypothesis"?

A. Extreme one-day movements in stock prices will be followed by significant movements in the opposite direction

B. Extreme one-day movements in stock prices will be followed by significant movements in the same direction

C. Extreme one-day movements in stock prices will not be followed by significant movements in stock prices

D. None of the above

QUESTION 7

STOCK MARKET. Which of the following responses to abnormal price movements is consistent with the "efficient market hypothesis"?

A. Extreme one-day movements in stock prices will be followed by significant movements in the opposite direction

B. Extreme one-day movements in stock prices will be followed by significant movements in the same direction

C. Extreme one-day movements in stock prices will not be followed by significant movements in stock prices

D. None of the above

QUESTION 8

STOCK MARKET. Exxon Mobil Corp recently paid a dividend of $1.31. Analysts expect the company's earnings to grow at the rate of 5% over the next several years. Using the constant growth valuation model, estimate the company's stock value if investors require 8.5%.

A. $39.30

B. $37.43

C. $28.57

D. None of the above

QUESTION 9

FOREX MARKETS. Which of the following transactions describes a covered interest arbitrage?

A. Sell a US bond and offset the position with the purchase of currency futures

B. Invest in a higher yielding foreign bond and at the same time use a forward currency contract to lock in the yield

C. Buy a higher yielding foreign bond and offset the position by selling the corresponding lower yielding US bond

D. Borrow at a lower interest rate in the US and use the proceeds to buy foreign currency forward contract

QUESTION 10

FOREX MARKETS. For this and the next 2. Suppose the following facts apply: Spot currency rate ($/ = $1.28); Forward exchange rate for 1 year delivery = $1.25; US 1-year interest rate: rUS = 4%; Euro 1-year interest rate: rE = 7%; Amount to invest = $5,000,000. You reside in the United States but wish to invest your $5 million in the 1-year European bonds. What is the future value of your investment in euros?

A. 4,179,687.50

B. 3,906,250.00

C. 4,906,250.10

D. None of the above