Oxford University Press | Online Resource Centre

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The concept of financial market efficiency implies...

a) ...all opportunities for easy arbitrage profit have been exhausted.

b) ...short-run interest rates will be lower than long-run interest rates, holding the risk quality of assets constant.

c) ...the existence of speculative asset price bubbles when interest rates approach zero.

d) ...the nominal rate of interest is positive.

The inverse relationship between interest rates and bond prices is due to the fact:

a) Market makers require a bid-ask spread to offer their services at all.

b) That maturity premiums increase with the term of a bond.

c) A bond price represents the present discounted value of the payments agreed upon at the time when the bond was issued.

d) Capital markets are not efficient for long-maturity loans.

A speculative bubble is rational as long as...

a) ...the asset price corresponds to its fundamental value.

b) ...it levels off at a high Fisher asset price plateau.

c) ... as long as traders believe that the bubble will continue to grow, validate market expectations, and offer the 'normal' return.

d) ...prices rise.

The implication for macroeconomics that assets are durable is that…

a) …expectations of the value of assets in future periods are essential for understanding the value of assets in the present period.

b) … one economic actor's asset is another's liability.

c) … flows of assets are traded in large, well-organized international markets.

d) …lower risk premiums are necessary with increasing asset durability.

Diversification cannot completely eliminate risk in an investor's portfolio because…

a) …of risk aversion

b) …of the bid-ask spread.

c) …there is no one willing to take an unnecessary risk.

d) …existing risks are almost never perfectly negatively correlated with each other.

Oxford University Press, Online Resource Centre, Chapter 14.