predict changes in investor irrationality.

A. T he extra return that stocks earn over bonds (on average) compensates stockholders for


a. the greater market risk that stockholding entails.

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b. the greater firm-specific risk that stockholding entails.

c. the higher taxes levied on stockholders.

d. the higher brokerage costs incurred buying stocks.

B. T he goal of fundamental analysis is to

a. determine the true value of a company.

b. put together a diversified portfolio.

c. predict changes in investor irrationality.

d. eliminate investor risk aversion.

C. According to the efficient markets hypothesis,

a. excessive diversification can reduce an investor’s expected portfolio returns.

b. changes in stock prices are impossible to predict from public information.

c. actively managed mutual funds should generate higher returns than index funds.

d. the stock market moves based on the changing animal spirits of investors.

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