13. Adverse selection occurs when a

13. Adverse selection occurs when
a. sellers have relevant information about some aspect of the product’s quality that buyers lack (or vice versa).
b. an agent lacks the incentive to act in the best interests of the principal and the principal cannot observe the actions of the agent.
c. a principal and an agent reach an agreement that maximizes the principal’s profit while providing an incentive for the agent to participate.
d. a principal obtains information about an agent’s actions.
14. The fact that someone with a high risk of medical problems is more likely to buy a lot of health insurance is an example of
a. adverse selection.
b. monitoring.
c. moral hazard.
d. an optimal contract.
15. Diversification can eliminate
a. all types of risk.
b. idiosyncratic risk but not aggregate risk.
c. aggregate risk but not idiosyncratic risk.
d. all types of risk but only if insurance is purchased.
16. Bonds are preferred to stocks by individual investors who
a. need to have immediate access to their money.
b. don't think the business is profitable.
c. prefer a guaranteed lower return to a risky higher return.
d. prefer a risky higher return to a guaranteed lower return.
17. Corporate profits that are not reinvested in the corporation are distributed to
a. consumers in the form of lower prices.
b. management and bondholders.
c. management and the board of directors.
d. shareholders in the form of dividends.
18. Which of the following factors would be considered by a fundamental analyst when predicting a firm's stock price?
a. recent changes in the stock's price
b. the knowledge and skills of the firm's current management
c. the marketing strategies of the firm's competitors
d. Both b and c are correct.
19. Which of the following factors would not be considered by a fundamental analyst when predicting stock prices?
a. the future demand for a firm's products
b. the patents held by a firm
c. the likelihood of new firms competing with an existing firm
d. recent jumps in a firm's stock prices
20. If the price of stock is greater than what you believe to be the true value of the business then the stock is
a. undervalued.
b. overvalued.
c. fairly valued.
d. no longer going to be traded.
21. According to the efficient markets hypothesis,
a. fundamental analysis is a way to profit from predicting stock prices.
b. fundamental and technical analysis are largely useless.
c. technical analysis is the best approach to profit from predicting stock prices.
d. fundamental and technical analysis must be synthesized in order to profit from predicting stock prices.
22. The efficient markets view of the stock market says that new information
a. is quickly and completely incorporated into stock prices.
b. is incorporated into stock prices only when discovered by fundamental analysis.
c. causes stock prices to increase.
d. has little impact on stock prices.
23. If the efficient markets theory is correct, stock prices
a. do not respond to unpredictable events.
b. are unpredictable.
c. rise at the beginning of a month and fall at the end of a month.
d. follow a predictable pattern over time.
24. If stock prices follow a random walk, it means
a. long periods of declining prices are followed by long periods of rising prices.
b. the greater the number of consecutive days of price declines, the greater the probability prices will increase the following day.
c. stock prices are unrelated to random events that shock the economy.
d. stock prices are just as likely to rise as to fall at any given time.
25. If stock prices follow a random walk then stock investors can make large profits by
a. using computer programs that perform technical analysis using past stock trends.
b. performing fundamental analysis of stocks using data contained in annual reports.
c. quickly responding to rumors of mergers between companies.
d. using inside information.