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Chapter 7 The Stock Market, the Theory of Rational Expectations, and the Efficient Markets Hypothesis 253

78)

Another way to state the efficient markets condition is: in an efficient market,

(a)

unexploited profit opportunities will never exist as market participants ensure that they are instantaneously dissipated.

(b)

unexploited profit opportunities will not exist for long, as market participants will act quickly to eliminate them.

(c)

every financial market participant must be well informed about securities.

(d)

only (a) and (c) of the above.

Answer:

Question Status: Revised

79)

Financial markets quickly eliminate unexploited profit opportunities through

(a)

changes in dividend payments.

(b)

changes in tax laws.

(c)

changes in asset prices.

(d)

accounting conventions.

(e)

changes in monetary policy.

Answer:

Question Status: Study Guide

80)

Assume you own a ranch and graze your cattle on land leased from the Bureau of Land Management (BLM) at a price below the equilibrium price. If the price for leasing the BLM land increases, the value of your ranch will

(a)

fall since ranching is no longer profitable.

(b)

be unaffected, since the value of the land does not depend on the price of grazing rights.

(c)

rise since the value of BLM land rises.

(d)

rise since the value of BLM land falls.

Answer:

Question Status: Study Guide

81)

Since the efficient market hypothesis assumes that all relevant, publicly available information is discounted in asset price as soon as it is released

(a)

investors cannot construct systematically profitable trading rules based only on this information.

(b)

investors have no incentive to buy stock based on favorable information, since the market will have already discounted it.

(c)

investors have an incentive to buy stock based on favorable information, since the market takes time to discount it.

(d)

both (a) and b) of the above.

(e)

both (a) and (c) of the above

Answer:

Question Status: Study Guide

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