Lesson #6 Quiz :Financial Markets (Financial Markets) answer 2025

Question 1

In the S&P 500 forecasting exercise, the representativeness heuristic posits that:

✅ Most people don’t behave like forecasters, what they saw in the past is representative of the future.
❌ Most people don’t behave like forecasters, they tend to interpret new evidence as a confirmation of their existing beliefs or theories.
❌ Most people don’t behave like forecasters, they tend to be affected by their recurring thoughts at the time.
❌ Most people don’t behave like forecasters, they tend to rely too heavily on the first piece of new information offered when making decisions.

Explanation:
The representativeness heuristic leads people to assume that recent patterns will continue, causing them to extrapolate past performance into the future.

Question 2

An efficient market is defined as one in which:

❌ Asset prices are often in line with the intrinsic value.
❌ All participants have the same opportunity to generate the same returns.
❌ Transactions are ultimately costless.
✅ Asset prices quickly and fully reflect all available information.

Explanation:
According to the Efficient Market Hypothesis (EMH), prices immediately incorporate all available information.

Question 3

The Dividend Discount Model (Gordon Growth Model):

❌ P = (E × g) / r
✅ P = E / (r − g)
❌ P = (E × r) / g
❌ P = E / (r + g)

Explanation:
When dividends equal earnings and grow at rate g, the stock price equals earnings divided by (r − g).

Question 4

Human judgment and experience can contribute to stock market crashes because:

❌ Investors with crisis experience diversify better.
✅ Many people who lived through financial crises report diminished faith in markets due to crisis narratives.
❌ Investors with crisis experience stay out of markets during turbulence.
❌ Investors with crisis experience exploit profit opportunities better.

Explanation:
Negative experiences and shared narratives reduce trust in markets, potentially amplifying panic and contributing to crashes.

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