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Economics of Money, Banking & Financial Markets, 5e (Mishkin)
Chapter 7 The Stock Market, the Theory of Rational Expectations, and the Efficient
Market Hypothesis
7.1 Computing the Price of Common Stock
1) A stockholder's ownership of a company's stock gives her the right to ________.

A) vote and be the primary claimant of all cash flows
B) vote and be the residual claimant of all cash flows
C) manage and assume responsibility for all liabilities
D) vote and assume responsibility for all liabilities
Answer: B
Diff: 1 Type: MC Page Ref: 138
Skill: Recall
Objective List: 7.1 Illustrate how stocks are valued as the present value of dividends
2) Stockholders' rights include ________.

A) the right to vote
B) the right to manage
C) primary claims on all cash flows
D) ownership of bonds
Answer: A
Skill: Recall
3) Stockholders' rights include ________.

A) the right to manage
B) the right to change personnel policy
C) the right to veto management's decisions
D) residual claim on all of a company's assets
Answer: D
Skill: Recall
4) Stockholders are residual claimants, meaning that they ________.

A) have the first priority claim on all of a company's assets
B) are liable for all of a company's debts
C) will never share in a company's profits
D) receive the remaining cash flow after all other claims are paid
Answer: D
Skill: Recall
182
© 2014 Pearson Canada Inc.
5) Common stock is the principal way that corporations raise ________.
A) short-term debt
B) foreign exchange
C) long-term debt
D) equity capital
Answer: D
Skill: Recall
6) Dividends are paid from ________.

A) liabilities
B) debts
C) net earnings
D) interest
Answer: C
Skill: Recall
7) Periodic payments of net earnings to shareholders are known as ________.

A) capital gains
B) dividends
C) profits
D) interest
Answer: B
Skill: Recall
8) The value of any investment is found by computing the ________.

A) present value of all future sales
B) present value of all future liabilities
C) future value of all future expenses
D) present value of all future cash flows
Answer: D
Skill: Recall
183
9) The value of any investment is found by computing the ________.
A) present value of all coupon payments
B) present value of all future liabilities
C) future value of all dividends
D) value in today's dollars of all future cash flows
Answer: D
Skill: Recall
10) In the one-period valuation model, the value of a share of stock today depends upon
________.
A) the present value of both dividends and the expected sales price
B) only the present value of the future dividends
C) the actual value of the dividends and expected sales price received in one year
D) the future value of dividends and the actual sales price
Answer: A
Skill: Recall
11) In the one-period valuation model, the current stock price increases if ________.
A) the expected sales price increases
B) the expected sales price falls
C) the required return increases
D) dividends are cut
Answer: A
Skill: Recall
12) In the one-period valuation model, an increase in the required return on investments in equity
________.
A) increases the expected sales price of a stock
B) increases the current price of a stock
C) reduces the expected sales price of a stock
D) reduces the current price of a stock
Answer: D
Skill: Recall
184
13) In the one-period valuation model with no dividend payments the current price of the stock is
given by ________.
A) P0 =
B) P0 = +
C) P0 = × 100
D) P0 = × 365
Answer: A
Skill: Recall
14) Using the one-period valuation model, assuming a year-end dividend of $0.11, an expected
sales price of $110, and a required rate of return of 10 percent, the current price of the stock
would be ________.
A) $110.11
B) $121.12
C) $100.10
D) $100.11
Answer: C
Skill: Applied
15) Using the one-period valuation model, assuming a year-end dividend of $1.00, an expected
sales price of $100, and a required rate of return of 5 percent, the current price of the stock would
be ________.
A) $110.00
B) $101.00
C) $100.00
D) $96.19
Answer: D
Skill: Applied
185
16) The analysts predict that the price of corporation's XYZ stock one year from now will be
$22. XYZ announced that is not going to pay dividends next year. You decide that you would be
satisfied to earn a 10 percent on the investment on this stock, thus, this stock is worth ________
for you now.
A) $20
B) $22
C) $24
D) $18
Answer: A
Skill: Applied
17) The analysts predict that the price of corporation's XYZ stock one year from now will be
$120. XYZ announced that is not going to pay dividends next year. You decide that you would
be satisfied to earn a 20 percent on the investment on this stock, thus, this stock is worth
________ for you now.
A) $100
B) $120
C) $130
D) $90
Answer: A
Skill: Applied
18) General Electric announces that it is going to cut its dividends by $0.02 per share in the
future. This, everything else remaining the same, will cause its current stock price to ________.
A) increase
B) decrease
C) remain the same
D) fluctuate
Answer: B
Skill: Applied
19) In the generalized dividend model, if the expected sales price is in the distant future
________.
A) it does not affect the current stock price
B) it is more important than dividends in determining the current stock price
C) it is equally important with dividends in determining the current stock price
D) it is less important than dividends but still affects the current stock price
Answer: A
Diff: 2 Type: MC Page Ref: 138-139
Skill: Recall
186
20) In the generalized dividend model, a future sales price far in the future does not affect the
current stock price because ________.
A) the present value cannot be computed
B) the present value is almost zero
C) the sales price does not affect the current price
D) the stock may never be sold
Answer: B
Skill: Recall
21) In the generalized dividend model, the current stock price is the sum of ________.
A) the actual value of the future dividend stream
B) the present value of the future dividend stream
C) the future value of the future dividend stream
D) the present value of the future sales price
Answer: B
Skill: Recall
22) Using the Gordon growth model, a stock's price will increase if ________.
A) the dividend growth rate increases
B) the growth rate of dividends falls
C) the required rate of return on equity rises
D) the expected sales price rises
Answer: A
Skill: Recall
23) In the Gordon growth model, a decrease in the required rate of return on equity ________.
A) increases the current stock price
B) increases the future stock price
C) reduces the future stock price
D) reduces the current stock price
Answer: A
Skill: Applied
187
24) Using the Gordon growth formula, if D1 is $2.00, ke is 12 percent or 0.12, and g is 10
percent or 0.10, then the current stock price is ________.
A) $20
B) $50
C) $100
D) $150
Answer: C
Skill: Applied
25) Using the Gordon growth formula, if D1 is $1.00, ke is 10 percent or 0.10, and g is 5 percent
or 0.05, then the current stock price is ________.
A) $10
B) $20
C) $30
D) $40
Answer: B
Skill: Applied
26) One of the assumptions of the Gordon Growth Model is that dividends will continue growing
at ________ rate.
A) an increasing
B) a fast
C) a constant
D) an escalating
Answer: C
Skill: Recall
27) In the Gordon Growth Model, the growth rate is assumed to be ________ the required return
on equity.
A) greater than
B) equal to
C) less than
D) proportional to
Answer: C
Skill: Recall
188
28) The price earnings ratio (PE) is a measure of how much the market is willing to pay for $1 of
________ from a firm.
A) earnings
B) dividends
C) assets
D) stock
Answer: A
Skill: Recall
29) What is the current price of a telecommunication company's stock if earnings per share are
projected to be $1.50 per share and the industry's average PE ratio is $30?
A) $45
B) $20
C) $31.50
D) $28.50
Answer: A
Skill: Applied
30) What is the current price of a telecommunication company's stock if earnings per share are
projected to be $2.00 per share and the industry's average PE ratio is $20?
A) $40
B) $10
C) $22
D) $18
Answer: A
Skill: Applied
31) You believe that a corporation's dividends will grow 5 percent on average into the
foreseeable future. If the company's last dividend payment was $5 what should be the current
price of the stock assuming a 12 percent required return?
Answer: Use the Gordon Growth Model.
$5(1 + .05)/(.12-.05) = $75
Diff: 3 Type: SA Page Ref: 140
Skill: Applied
189
32) What rights does ownership interest give stockholders?
Answer: Stockholders have the right to vote on issues brought before the stockholders, be the
residual claimant, that is, receive a portion of any net earnings of the corporation, and the right to
sell the stock.
Skill: Recall
33) Explain the Gordon growth model of stock pricing. Explain how changes in each component
affect the current stock price. On what assumptions is the model based?
Answer: The basic model is
0=
where
P0 = the current stock price
D1 = the next period's dividend
ke = the required rate of return
g = the dividend growth rate
Increases in the dividend or the dividend growth rate increase the stock price, while an increase
in the required rate of return lowers the stock price.
The two assumptions that are the basis of the model are that dividends are assumed to grow at a
constant rate, and that the dividend growth rate is less than the required rate of return.
Skill: Recall
34) Describe the Price Earnings Valuation method for stocks.

Answer: Students must explain that the price earnings ration (PE) is a widely watched measure
of how much the market is willing to pay for $1 of earnings from a firm. A high PE has two
interpretations: a. The market expects earnings to rise in the future, b. The market feels that the
firm's earnings are very low risk and is therefore willing to pay a premium for them. The price to
earnings ratio is: PE = .

Skill: Recall
190
7.2 How the Market Sets Stock Prices
1) In asset markets, an asset's price is ________.

A) set equal to the highest price a seller will accept
B) set equal to the highest price a buyer is willing to pay
C) set equal to the lowest price a seller is willing to accept
D) set by the buyer willing to pay the highest price
Answer: D
Skill: Applied
Objective List: 7.2 Determine how information in the market affects asset prices
2) Information plays an important role in asset pricing because it allows the buyer to more
accurately judge ________.
A) liquidity
B) risk
C) capital
D) policy
Answer: B
Skill: Recall
3) New information that might lead to a decrease in an asset's price might be ________.
A) an expected decrease in the level of future dividends
B) a decrease in the required rate of return
C) an expected increase in the dividend growth rate
D) an expected increase in the future sales price
Answer: A
Skill: Applied
4) A change in perceived risk of a stock changes ________.

A) the expected dividend growth rate
B) the expected sales price
C) the required rate of return
D) the current dividend
Answer: C
Skill: Recall
191
5) A stock's price will fall if there is ________.
A) a decrease in perceived risk
B) an increase in the required rate of return
C) an increase in the future sales price
D) current dividends are high
Answer: B
Skill: Applied
6) A monetary expansion ________ stock prices due to a decrease in the ________ and an
increase in the ________, everything else held constant.
A) reduces; future sales price; expected rate of return
B) reduces; current dividend; expected rate of return
C) increases; required rate of return; future sales price
D) increases; required rate of return; dividend growth rate
Answer: D
Skill: Applied
7) The subprime financial crisis lead to a decline in stock prices because ________.
A) of a lowered expected dividend growth rate
B) of a lowered required return on investment in equity
C) higher expected future stock prices
D) higher current dividends
Answer: A
Skill: Applied
8) Increased uncertainty resulting from the subprime crisis ________ the required return on
investment in equity.
A) raised
B) lowered
C) had no impact on
D) decreased
Answer: A
Skill: Applied
192
9) In October 2008, the stock market crashed, falling by ________ from its peak value a year
earlier.
A) over 40 percent
B) over 30 percent
C) over 50 percent
D) over 25 percent
Answer: A
Skill: Applied
10) An increase in uncertainty for the economy will ________.

A) increase stock prices due to a higher required return
B) not affect stock prices
C) increase stock prices due to a lower required return
D) depress stock prices due to a higher required return
Answer: D
Skill: Applied
11) Dishonest corporate accounting procedures would cause stock prices to ________.
A) remain unchanged
B) decrease due to lower expected dividend growth and lower required return
C) decrease due to lower expected dividend growth and higher required return
D) increase due to higher expected dividend growth and lower required return
Answer: C
Skill: Applied
193
7.3 The Theory of Rational Expectations
1) Economists have focused more attention on the formation of expectations in recent years. This
increase in interest can probably best be explained by the recognition that ________.
A) expectations influence the behavior of participants in the economy and thus have a major
impact on economic activity
B) expectations influence only a few individuals, have little impact on the overall economy, but
can have important effects on a few markets
C) expectations influence many individuals, have little impact on the overall economy, but can
have distributional effects
D) models that ignore expectations have little predictive power, even in the short run
Answer: A
Skill: Recall
2) The view that expectations change relatively slowly over time in response to new information
is known in economics as ________.
A) rational expectations
B) irrational expectations
C) slow-response expectations
D) adaptive expectations
Answer: D
Skill: Recall
3) If expectations of the future inflation rate are formed solely on the basis of a weighted average
of past inflation rates, then economics would say that expectation formation is ________.
A) irrational
B) rational
C) adaptive
D) reasonable
Answer: C
Skill: Recall
194
4) If expectations are formed adaptively, then people ________.
A) use more information than just past data on a single variable to form their expectations of that
variable
B) often change their expectations quickly when faced with new information
C) use only the information from past data on a single variable to form their expectations of that
variable
D) never change their expectations once they have been made
Answer: C
Skill: Recall
5) If during the past decade the average rate of monetary growth has been 5 percent and the
average inflation rate has been 5 percent, everything else held constant, when the Bank of
Canada announces that the new rate of monetary growth will be 10 percent, the adaptive
expectation forecast of the inflation rate is ________.
A) 5 percent
B) between 5 and 10 percent
C) 10 percent
D) more than 10 percent
Answer: A
Skill: Applied
6) The major criticism of the view that expectations are formed adaptively is that ________.
A) this view ignores the fact that people use more information than just past data to form their
expectations
B) it is easier to model adaptive expectations than it is to model rational expectations
C) adaptive expectations models have no predictive power
D) people are irrational and therefore never learn from past mistakes
Answer: A
Skill: Recall
195
7) In rational expectations theory, the term "optimal forecast" is essentially synonymous with
________.
A) correct forecast
B) the correct guess
C) the actual outcome
D) the best guess
Answer: D
Skill: Recall
8) If a forecast is made using all available information, then economists say that the expectation
formation is ________.
A) rational
B) irrational
C) adaptive
D) reasonable
Answer: A
Skill: Recall
9) If a forecast made using all available information is not perfectly accurate, then it is
________.
A) still a rational expectation
B) not a rational expectation
C) an adaptive expectation
D) a second-best expectation
Answer: A
Skill: Recall
10) If additional information is not used when forming an optimal forecast because it is not
available at that time, then expectations are ________.
A) obviously formed irrationally
B) still considered to be formed rationally
C) formed adaptively
D) formed equivalently
Answer: B
Skill: Recall
196
11) An expectation may fail to be rational if ________.
A) relevant information was not available at the time the forecast is made
B) relevant information is available but ignored at the time the forecast is made
C) information changes after the forecast is made
D) information was available to insiders only
Answer: B
Skill: Recall
12) According to rational expectations theory, forecast errors of expectations ________.

A) are more likely to be negative than positive
B) are more likely to be positive than negative
C) tend to be persistently high or low
D) are unpredictable
Answer: D
Skill: Recall
13) Rational expectations forecast errors will on average be ________ and therefore ________
be predicted ahead of time.
A) positive; can
B) positive; cannot
C) negative; can
D) zero; cannot
Answer: D
Skill: Recall
14) People have a strong incentive to form rational expectations because ________.
A) they are guaranteed of success in the stock market
B) it is costly not to do so
C) it is costly to do so
D) everyone wants to be rational
Answer: B
Skill: Applied
197
15) If market participants notice that a variable behaves differently now than in the past, then,
according to rational expectations theory, we can expect market participants to ________.
A) change the way they form expectations about future values of the variable
B) begin to make systematic mistakes
C) no longer pay close attention to movements in this variable
D) give up trying to forecast this variable
Answer: A
Skill: Recall
16) According to rational expectations, ________.

A) expectations of inflation are viewed as being an average of past inflation rates
B) expectations of inflation are viewed as being an average of expected future inflation rates
C) expectations formation indicates that changes in expectations occur slowly over time as past
data change
D) expectations will not differ from optimal forecasts that use all available information
Answer: D
Skill: Recall
17) Suppose Barbara looks out in the morning and sees a clear sky so decides that a picnic for
lunch is a good idea. Last night the weather forecast included a 100 percent chance of rain by
midday but Barbara did not watch the local news program. Is Barbara's prediction of good
weather at lunch time rational? Why or why not?
Answer: No, this prediction does not use rational expectations. Although Barbara based her
guess on the information that was available to her at the time, additional information was readily
available that could have been used to improve her prediction.
Diff: 3 Type: SA Page Ref: 144-146
Skill: Applied
18) Assume that your economics professor announces to your class that after thirty years of
giving exams only on scheduled dates, this semester she will give only surprise quizzes. What is
the rational expectation response to this new policy? Why does your self-interest require that you
change your behavior? What would the consequences be for students who changed their
expectations about exams adaptively?
Answer: Instead of being able to study for exams on known dates, students must now be
prepared for an exam at any possible time. Students must study regularly, before each class. Self-
interest dictates that students change their behavior, as their grade depends upon it. Students who
change their behavior adaptively don't adjust until they have experienced one or more surprise
quizzes, which in all likelihood hurt their grades.
Skill: Applied
198
7.4 The Efficient Market Hypothesis: Rational Expectations in Financial Markets
1) The theory of rational expectations, when applied to financial markets, is known as ________.
A) monetarism
B) the efficient markets hypothesis
C) the theory of strict liability
D) the theory of impossibility
Answer: B
Skill: Recall
2) Monetary economists and financial economists developed ________ theories on expectations

formations.
A) parallel
B) opposing
C) dissimilar
D) unusual
Answer: A
Skill: Recall
3) If the optimal forecast of the return on a security exceeds the equilibrium return, then
________.
A) the market is inefficient
B) no unexploited profit opportunities exist
C) the market is in equilibrium
D) the market is myopic
Answer: A
Skill: Recall
4) Another way to state the efficient markets condition is: in an efficient market, ________.
A) unexploited profit opportunities will be quickly eliminated
B) unexploited profit opportunities will never exist
C) unexploited profit opportunities never existed
D) every financial market participant must be well informed about securities
Answer: A
Skill: Recall
199
5) ________ occurs when market participants observe returns on a security that are larger than
what is justified by the characteristics of that security and take action to quickly eliminate the
unexploited profit opportunity.
A) Arbitrage
B) Mediation
C) Asset capitalization
D) Market intercession
Answer: A
Skill: Recall
6) The efficient markets hypothesis suggests that if an unexploited profit opportunity arises in an
efficient market, ________.
A) it will tend to go unnoticed for some time
B) it will be quickly eliminated
C) financial analysts are your best source of this information
D) prices will reflect the unexploited profit opportunity
Answer: B
Skill: Recall
7) Financial markets quickly eliminate unexploited profit opportunities through changes in

________.
A) dividend payments
B) tax laws
C) asset prices
D) monetary policy
Answer: C
Skill: Applied
8) The elimination of unexploited profit opportunities requires that ________ market participants
be well informed.
A) all
B) a few
C) zero
D) many
Answer: B
Skill: Recall
200
9) If in an efficient market all prices are correct and reflect market fundamentals, which of the
following is a false statement?
A) A stock that has done poorly in the past is more likely to do well in the future
B) One investment is as good as any other because the securities' prices are correct
C) A security's price reflects all available information about the intrinsic value of the security
D) Security prices can be used by managers to assess their cost of capital accurately
Answer: A
Skill: Applied
10) According to the efficient markets hypothesis, purchasing the reports of financial analysts
________.
A) is likely to increase one's returns by an average of 10 percent
B) is likely to increase one's returns by about 3 to 5 percent
C) is not likely to be an effective strategy for increasing financial returns
D) is likely to increase one's returns by an average of about 2 to 3 percent
Answer: C
Skill: Recall
11) You have observed that the forecasts of an investment advisor consistently outperform the
other reported forecasts. The efficient markets hypothesis says that future forecasts by this
advisor ________.
A) may or may not be better than the other forecasts Past performance is no guarantee of the
future
B) will always be the best of the group
C) will definitely be worse in the future What goes up must come down
D) will be worse in the near future, but improve over time
Answer: A
Skill: Recall
12) Sometimes one observes that the price of a company's stock falls after the announcement of
favorable earnings. This phenomenon is ________.
A) clearly inconsistent with the efficient markets hypothesis
B) consistent with the efficient markets hypothesis if the earnings were not as high as anticipated
C) consistent with the efficient markets hypothesis if the earnings were not as low as anticipated
D) consistent with the efficient markets hypothesis if the favorable earnings were expected
Answer: B
Skill: Recall
201
13) According to the efficient markets hypothesis, the current price of a financial security
________.
A) is the discounted net present value of future interest payments
B) is determined by the highest successful bidder
C) fully reflects all available relevant information
D) is a result of none of the above
Answer: C
Skill: Recall
14) You read a story in the newspaper announcing the proposed merger of Dell Computer and
Gateway. The merger is expected to greatly increase Gateway's profitability. If you decide to
invest in Gateway stock, you can expect to earn ________.
A) above average returns since you will share in the higher profits
B) above average returns since your stock price will definitely appreciate as higher profits are
earned
C) below average returns since computer makers have low profit rates
D) a normal return since stock prices adjust to reflect expected changes in profitability almost
immediately
Answer: D
Skill: Applied
15) The efficient markets hypothesis indicates that investors ________.

A) can use the advice of technical analysts to outperform the market
B) do better on average if they adopt a "buy and hold" strategy
C) let too many unexploited profit opportunities go by if they adopt a "buy and hold" strategy
D) do better if they purchase loaded mutual funds
Answer: B
Skill: Recall
16) The efficient markets hypothesis suggests that investors ________.

A) should purchase no-load mutual funds which have low management fees
B) can use the advice of technical analysts to outperform the market
C) let too many unexploited profit opportunities go by if they adopt a "buy and hold" strategy
D) act on all "hot tips" they hear
Answer: A
Skill: Recall
202
17) The advantage of a "buy-and-hold strategy" is that ________.
A) net profits will tend to be higher because there will be fewer brokerage commissions
B) losses will eventually be eliminated
C) the longer a stock is held, the higher will be its price
D) profits are guaranteed
Answer: A
Skill: Recall
18) For small investors, the best way to pursue a "buy and hold" strategy is to ________.
A) buy and sell individual stocks frequently
B) buy no-load mutual funds with high management fees
C) buy no-load mutual funds with low management fees
D) buy load mutual funds
Answer: C
Skill: Recall
19) A situation when an asset price differs from its fundamental value is ________.
A) a random walk
B) an inflation
C) a deflation
D) a bubble
Answer: D
Skill: Recall
20) In a rational bubble, investors can have ________ expectations that a bubble is occurring but
continue to hold the asset anyway.
A) irrational
B) adaptive
C) rational
D) myopic
Answer: C
Skill: Recall
203
21) If a corporation announces that it expects quarterly earnings to increase by 25 percent and it
actually sees an increase of 22 percent, what should happen to the price of the corporation's stock
if the efficient markets hypothesis holds, everything else held constant?
Answer: The stock's price should fall. The price had adjusted based on the statement of expected
earnings. When the actual number turned out to be lower than expected, the stock price changes
to reflect the additional information.
Skill: Applied
22) Your best friend calls and gives you the latest stock market "hot tip" that he heard at the
health club. Should you act on this information? Why or why not?
Answer: No, if this information is readily available, it will already be reflected in the stock
price.
Skill: Applied
23) If you your stock broker tells you that you should buy stock in Ford as it has devised a new
hybrid engine system that will reduce consumption of fuel by 90 percent, would you follow this
advice and buy Ford's stock?
Answer: The efficient market hypothesis indicates that you should be skeptical of any such
information. If the market is efficient then it has already priced Ford's stock so that its expected
return will equal the equilibrium return. The tip is not valuable. But if the tip is based on new
information and gives you an edge on the rest of the market, only them it can be valuable to you
and you should buy the stock. In any other case Ford stock price will have already reflected the
news.
Skill: Applied
24) What is a recommended strategy for a small investor and how it is associated with the
efficient market hypothesis?
Answer: Students should be able to explain that a recommended strategy is to purchase no-load
mutual funds. EMH suggests that only "extremely clever investors" may be able top outperform
a buy-and-hold strategy.
Skill: Recall
204
7.5 Behavioral Finance
1) ________ is the field of study that applies concepts from social sciences such as psychology
and sociology to help understand the behavior of securities prices.
A) Behavioral finance
B) Strategical finance
C) Methodical finance
D) Procedural finance
Answer: A
Skill: Recall
2) If a market participant believes that a stock price is irrationally high, they may try to borrow
stock from brokers to sell in the market and then make a profit by buying the stock back again
after the stock falls in price. This practice is called ________.
A) short selling
B) double dealing
C) undermining
D) long marketing
Answer: A
Skill: Recall
3) ________ means people are more unhappy when they suffer losses than they are happy when
they achieve gains.
A) Loss fundamentals
B) Loss aversion
C) Loss leader
D) Loss cycle
Answer: B
Skill: Recall
4) Loss aversion can explain why very little ________ actually takes place in the securities
market.
A) short selling
B) bargaining
C) bartering
D) negotiating
Answer: A
Skill: Recall
205
5) Psychologists have found that people tend to be ________ in their own judgments.
A) underconfident
B) overconfident
C) indecisive
D) insecure
Answer: B
Skill: Recall
6) ________ and ________ may provide an explanation for stock market bubbles.
A) Overconfidence; social contagion
B) Underconfidence; social contagion
C) Overconfidence; social isolationism
D) Underconfidence; social isolationism
Answer: A
Skill: Recall
7.6 Web Appendix: Evidence on the Efficient Market Hypothesis
1) If a mutual fund outperforms the market in one period, evidence suggests that this fund is
________.
A) highly likely to consistently outperform the market in subsequent periods due to its superior
investment strategy
B) likely to under-perform the market in subsequent periods to average its overall returns
C) not likely to consistently outperform the market in subsequent periods
D) not likely to outperform the market in any subsequent period
Answer: C
Diff: 2 Type: MC Page Ref: 7A.1-1 -2
Topic: Questions for Web Appendix on the Efficient Market Hypothesis
Skill: Recall
Objective List: Appendix: Evidence on the Efficient Market Hypothesis
2) Studies of mutual fund performance indicate that mutual funds that outperformed the market
in one time period usually ________.
A) beat the market in the next time period
B) beat the market in the next two subsequent time periods
C) beat the market in the next three subsequent time periods
D) do not beat the market in the next time period
Answer: D
Diff: 1 Type: MC Page Ref: 7A.1-1 - 2
Skill: Recall
206
3) The number and availability of discount brokers has grown rapidly since the mid-1970s. The
efficient markets hypothesis predicts that people who use discount brokers ________.
A) will likely earn lower returns than those who use full-service brokers
B) will likely earn about the same as those who use full-service brokers, but will net more after
brokerage commissions
C) are going against evidence suggesting that full-service brokers can help outperform the
market
D) are likely to outperform the market by a wide margin
Answer: B
Diff: 2 Type: MC Page Ref: 7A.1-2
Skill: Recall
4) When Happy Feet Corporation announces that their fourth quarter earnings are up 10 percent,
their stock price falls. This is consistent with the efficient markets hypothesis ________.
A) if earnings were not as high as expected
B) if earnings were not as low as expected
C) if a merger is anticipated
D) the company just invented a new bunion product
Answer: A
Skill: Recall
5) To say that stock prices follow a "random walk" is to argue that stock prices ________.
A) rise, then fall, then rise again
B) rise, then fall in a predictable fashion
C) tend to follow trends
D) cannot be predicted based on past trends
Answer: D
Skill: Recall
207
6) The efficient markets hypothesis predicts that stock prices follow a "random walk." The
implication of this hypothesis for investing in stocks is ________.
A) a "churning strategy" of buying and selling often to catch market swings
B) turning over your stock portfolio each month, selecting stocks by throwing darts at the stock
page
C) a "buy and hold strategy" of holding stocks to avoid brokerage commissions
D) following the advice of technical analysts
Answer: C
Skill: Recall
7) Rules used to predict movements in stock prices based on past patterns are, according to the
efficient markets hypothesis, ________.
A) a waste of time
B) profitably employed by all financial analysts
C) the most efficient rules to employ
D) consistent with the random walk hypothesis
Answer: A
Skill: Recall
8) Tests used to rate the performance of rules developed in technical analysis conclude that
technical analysis ________.
A) outperforms the overall market
B) far outperforms the overall market, suggesting that stockbrokers provide valuable services
C) does not outperform the overall market
D) does not outperform the overall market, suggesting that stockbrokers do not provide services
of any value
Answer: C
Skill: Recall
208
9) Which of the following accurately summarizes the empirical evidence about technical
analysis?
A) Technical analysts fare no better than other financial analysis—on average they do not
outperform the market.
B) Technical analysts tend to outperform other financial analysis, but on average they
nevertheless underperform the market.
C) Technical analysts fare no better than other financial analysis, and like other financial analysts
they outperform the market.
D) Technical analysts fare no better than other financial analysis, and like other financial
analysts they underperform the market.
Answer: A
Skill: Recall
10) Evidence in support of the efficient markets hypothesis includes ________.

A) the failure of technical analysis to outperform the market
B) the small-firm effect
C) the January effect
D) excessive volatility
Answer: A
Skill: Recall
11) Evidence against market efficiency includes ________.

A) failure of technical analysis to outperform the market
B) the random walk behavior of stock prices
C) the inability of mutual fund managers to consistently beat the market
D) the January effect
Answer: D
Skill: Recall
209
12) The small-firm effect refers to the ________.
A) negative returns earned by small firms
B) returns equal to large firms earned by small firms
C) abnormally high returns earned by small firms
D) low returns after adjusting for risk earned by small firms
Answer: C
Skill: Recall
13) The January effect refers to the fact that ________.

A) most stock market crashes have occurred in January
B) stock prices tend to fall in January
C) stock prices have historically experienced abnormal price increases in January
D) the football team winning the Super Bowl accurately predicts the behavior of the stock
market for the next year
Answer: C
Skill: Recall
14) When a corporation announces a major decline in earnings, the stock price may initially
decline significantly and then rise back to normal levels over the next few weeks. This impact is
called ________.
A) the January effect
B) mean reversion
C) market overreaction
D) the small-firm effect
Answer: C
Skill: Recall
15) A phenomenon closely related to market overreaction is ________.

A) the random walk
B) the small-firm effect
C) the January effect
D) excessive volatility
Answer: D
Skill: Recall
210
16) Excessive volatility refers to the fact that ________.
A) stock returns display mean reversion
B) stock prices can be slow to react to new information
C) stock price tend to rise in the month of January
D) stock prices fluctuate more than is justified by dividend fluctuations
Answer: D
Skill: Recall
17) Mean reversion refers to the fact that ________.

A) small firms have higher than average returns
B) stocks that have had low returns in the past are more likely to do well in the future
C) stock returns are high during the month of January
D) stock prices fluctuate more than is justified by fundamentals
Answer: B
Skill: Recall
211
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considerable pain. She endured it for a time, then thinking that
perhaps a hot drink would help her, she decided to go down to the
kitchen and heat some milk. She got up quietly so as not to awake
her husband, and left the bedroom. A quarter-moon dimly lit up the
staircase and hall, so she carried no light. Just as she reached the
head of the lower flight of stairs she heard the front door open.
Startled, she drew back into the shadows, peering down at the same
time into the hall. She was relieved to see that it was Colonel
Domlio. He wore a hat and overcoat, and taking these off, he moved
very quietly across the hall. Then she heard the click of the
cloakroom door and slight sounds of movement as he approached
the stairs. She slipped back into the passage which led to the
servants’ quarters and in a few seconds the colonel’s bedroom door
closed softly. This was a few minutes past two o’clock.
It was unusual for the colonel to be out at night and her woman’s
curiosity led her to examine the hat and coat. They were soaking
wet. Rain was falling, but only very slightly, and she realised,
therefore, that he must have been out for a considerable time.
She thought no more of the incident, and having had her hot milk,
returned to bed. But she had not slept, and soon Sergeant Daw
appeared with his story of the missing men. This excited but did not
perturb her, but when, a few minutes later, she heard Colonel Domlio
assuring the sergeant that he had spent the whole evening in his
study until going up to bed, she felt that something was wrong. But it
was not until the next day, when she had learnt the full details of
what had happened and had talked the matter over with her
husband, that any possible sinister significance of her master’s
action occurred to her. Burt, however, had pointed out that it was not
their business and that their obvious policy was silence.
Mrs. Burt did not state that she had coupled the colonel’s
nocturnal excursion with the tragedy, but French could sense that
this was in both her and her husband’s minds. He wondered what
motive they could have suspected and further questions showed that
it was connected with the colonel’s intimacy with Mrs. Berlyn.
According to Mrs. Burt this had been more serious than he had
imagined. Mrs. Berlyn had spent several afternoons and an
occasional evening with the colonel in his study and they were
known to have had many excursions together on the moor. Since the
tragedy, moreover, both the Burts noticed a change in their master.
He had developed fits of abstraction and brooding and acted as if he
had a weight on his mind.
Believing he had got all he could from the couple, French warned
them to keep his visit to themselves and immensely comforted Mrs.
Burt by assuring her that she had told him little that he had not
known before. Then saying he wished to have another word with the
two outside men, he left the house and walked round the
outbuildings.
At the back of the main house was a large walled yard with an
old-fashioned stone-built well in the center and farm buildings along
one side. Wheel tracks leading into one of these indicated that it was
the garage, and there, polishing up some spare parts, was Coombe.
French repeated his explanation about having forgotten to ask
Colonel Domlio a question, then, after chatting for some moments,
he returned to the night of the tragedy. Putting up a bluff, he asked at
what hours the colonel had taken out and brought back the car.
Coombe was considerably taken aback by the question and said
at once that he knew nothing about it.
“But,” said French, in apparent surprise, “you must have known
that the car was out?”
To his delight, the man did not deny it. Oh yes, he knew that, but
he had not heard it pass and he didn’t know when it had left or
returned.
“Then how did you know it had been out? Did Colonel Domlio tell
you?”
“No, he didn’t say naught about it. I knew by the mud on the car
and the petrol that had been used.”
“Pretty smart of you, that,” French said, admiringly. “So there was
mud on her? Was she clean the night before?”
“No. He had her out in the afternoon and got her a bit dirty. But
he said it was late and for me not to bother with her till the next day,
and so I let her alone.”
“Naturally. And was much petrol gone?”
“ ’Bout two gallons.”
“Two gallons,” French repeated, musingly. “That would run her
about forty miles, I suppose?”
“Easy that and more.”
“You live at the lodge gate, don’t you, Coombe?”
“That’s right.”
“Then the car must have passed you twice in the night. Surely
you would have heard it?”
“I might not. Anyhow, I wouldn’t if she went out the back way.”
All this was excessively satisfactory to French. The theory he had
formed postulated that Domlio had secretly run his car to the works
on the night of the tragedy. And now it looked as if he had done so.
At least, he had taken the car out. And not only had he denied it, but
he had arranged that the machine should be left dirty so that the
fresh mud it might gather should not show. Furthermore, the hour at
which he returned exactly worked in.
For a moment French was puzzled about the quantity of petrol
which had been used. Forty miles or more was enough for two trips
to the works. Then he saw that to carry out the plan Domlio must
have driven there twice. First he must have been at the works about
ten to drug Gurney’s tea. Then he must have gone in about midnight
with Berlyn and Pyke. So this also fitted in.
French, always thorough, interviewed Mee. But he was not
disappointed when he found the man could tell him nothing. Keenly
delighted with his progress, he renewed his directions to keep his
visit secret, and took his leave.
Chapter Fourteen: French Turns
Fisherman
On reaching the road, French returned to his clump of brushwood
and once more concealed himself. He was anxious to intercept
Domlio before he reached home and received the account of the
afternoon’s happenings. A question as to the man’s nocturnal
activities would be more effective were it unexpected.
Though French enjoyed moorland scenery, he had more than
enough of this particular view as he sat waiting for the colonel’s
appearance. Every time he heard a car he got up hopefully, only to
turn back in disappointment. Again and again he congratulated
himself that he had found a position which commanded the
entrances of both front and back drives, or he would have supposed
that his quarry had eluded him. For two hours he waited and then at
last the green car hove in sight. He stepped forward with upraised
arm.
“Sorry to stop you, Colonel,” he said, pleasantly, “but I have had
some further information since I saw you and I wish to put another
question. Will you tell me, please, where exactly you took your car
on the night of the tragedy?”
The colonel was evidently taken aback, though not so much as
French had hoped.
“I thought I had explained that I wasn’t out on that night,” he
answered, with only a very slight pause.
“To be candid,” French rejoined, “that’s why I am so anxious to
have an answer to my question. If there was nothing in the trip which
would interest me, why should you try to hide it?”
“How do you know I was out?”
“You may take it from me, sir, that I am sure of my ground. But if
you don’t care to answer my question I shall not press it. In fact, I
must warn you that any answers you give me may be used against
you in evidence.”
In spite of evident efforts the colonel looked uneasy.
“What?” he exclaimed, squaring his shoulders. “Does this mean
that you really suppose I am guilty of the murder of Mr. Pyke?”
“It means this, Colonel Domlio. You’ve been acting in a
suspicious way and I want an explanation. I’m not making any
charges, simply, I’ve got to know. Whether you tell me now or not is
a matter for yourself.”
“If I don’t tell you, does it mean that you will arrest me?”
“I don’t say so, but it may come to that.”
The colonel gave a mirthless laugh.
“Then I’m afraid I have no alternative. There is no mystery
whatever about my taking out the car that night and I have no
objection to telling you the whole thing.”
“But you denied that you had done so.”
“I did, and there I admit having made a foolish blunder. But my
motive in doing so must be obvious.”
“I’m afraid not so obvious as you seem to think. However, having
regard to my warning, if you care to answer my question I shall be
pleased to hear your statement.”
“I’ll certainly answer it. Possibly you know that I am interested in
entomology? I think I told you I was writing a book about the insects
of the moor?
“In order to get material for my book I make expeditions all over
the moor. I made one on that day of the tragedy. I went to a little
valley not far from Chagford where there are numbers of a certain
kind of butterfly of which I wanted some specimens for microscopic
purposes. While chasing one of these I had the misfortune to get a
severe fall. My foot went into a rabbit hole and I crashed, as the
airmen say. I was winded and it was some time before I could get up,
but I was thankful not to have broken my leg, as I might easily have
done. That put me off running for one day and I crawled back to the
car and drove home.
“I was feeling a bit shaken and I went up to bed early that night,
just before eleven. When I began to undress I found I had lost a
miniature which I always carry and which I value extremely, not so
much because of its intrinsic worth, but for sentimental reasons.
Here it is.”
He took a small gold object from his pocket and passed it across.
It was of a charming design, exquisitely chased and set with
diamonds, and French saw at once that it was of considerable value.
It contained the portrait of a woman—a beautiful haunting face, clear
cut as a cameo. The whole thing was a wonderful example of artistic
skill.
“My late wife,” Colonel Domlio explained as he replaced it in his
pocket. “As you can imagine, I was distressed by the loss. I could
only account for it by supposing it had dropped out of my pocket
when I fell. I thought over it for some time and then I decided to go
out to the place then and there and have a look for it, lest some
shepherd or labourer might find it in the early morning. I did so. I took
out the car and a strong electric torch and went back, and on
searching the place where I fell I found it almost immediately. I came
straight back, arriving shortly after two. Does that satisfy you?”
“No,” said French. “Not until you explain why you denied having
been out when Sergeant Daw asked you.”
“That, as I have said, was a mistake. But you can surely
understand my motive. When I heard the sergeant’s story I
recognised at once that my having taken out the car was a very
unfortunate thing for me. I felt sure that foul play would sooner or
later be suggested and I thought I should be suspected. I couldn’t
prove where I had been and I was afraid I should not be believed
when I explained.”
“I’m afraid that is not very clear. Why did you imagine that foul
play would be suspected?”
Domlio hesitated.
“I suppose,” he said at last, “things have gone so far there is no
use in trying to keep anything back. I knew that there was bad blood
between Berlyn and Pyke. The sergeant’s news at once suggested
to me that the trouble might have come to a head. I hoped not, of
course, but the idea occurred to me.”
“Even yet I don’t understand. What was the cause of the bad
blood between those two and how did you come to know of it?”
“Surely,” Domlio protested, “it is not necessary to go into that? I
am only accounting for my own actions.”
“It is necessary in order to account for your own actions.”
Domlio squared his shoulders.
“I don’t think I should tell you, only that, unfortunately, it is pretty
well common property. I hate dragging in a lady’s name, though you
have already done it, but the truth is that they had had a
misunderstanding about Mrs. Berlyn.”
“About Mrs. Berlyn?”
“Yes. She and Pyke saw rather too much of each other. I don’t for
a moment believe there was the slightest cause for jealousy, but
Berlyn was a bit exacting and he probably made a mountain out of a
molehill. I knew Mrs. Berlyn pretty well myself, and I am certain that
Berlyn had no real cause for complaint.”
“You haven’t explained how you came to know of the affair?”
“It was common property. I don’t think I can tell you where I first
heard of it.”
French considered for a moment.
“There is another thing, Colonel Domlio. You said that when you
heard the sergeant’s story you suspected the trouble between the
two men had come to a head?”
“Might have come to a head. Yes.”
“Suppose it had. Why, then, did you fear that the sergeant might
have suspected you?”
Again Domlio hesitated.
“That is a nasty question, Inspector,” he said at last, “but from
what you asked me in my study you might guess the answer. As a
matter of fact, I had myself seen a good deal of Mrs. Berlyn for some
time previously. About this there was nothing in the slightest degree
compromising. All through we were merely friends. Not only that, but
Berlyn knew of our meetings and excursions. When he could he
shared them, and he had not the slightest objection to our intimacy.
But Daw wouldn’t know that. For all I could tell, the excellent
scandalmongers of the district had coupled Mrs. Berlyn’s name with
mine. Berlyn was dead and gone and he could not state his views.
My word would not be believed, nor Mrs. Berlyn’s, neither, if she
were dragged into it. I thought, at all events, I had better keep secret
a mysterious excursion which might easily be misunderstood.”
Not very convincing, French thought, as he rapidly considered
what the colonel had told him. However, it might be true. At all
events, he had no evidence to justify an arrest. He therefore
pretended that he fully accepted the statement, and, wishing the
colonel a cheery good evening, stood aside to let the car pass.
As he cycled slowly into Ashburton he kept turning over in his
mind the question of whether there was any way in which he could
test the truth of Colonel Domlio’s statement. Frankly, he did not
believe the story. But unbelief was no use to him. He must prove it
true or false.
All the evening he puzzled over the problem, then at last he saw
that there was a line of research which, though it might not solve the
point in question, yet bade fair to be of value to the enquiry as a
whole.
Once again it concerned a time-table—this time for Domlio’s
presumed movements. Assume that Berlyn and Pyke reached the
point at which the car was abandoned about 11.30. To convince
Pyke of the bona fides of the breakdown, Berlyn would have to
spend some time over the engine, say fifteen minutes. In the dark
they could scarcely have reached Torview in less than another
fifteen; say that by the time Domlio had admitted them it was close
on midnight. Some time would then be consumed in explaining the
situation and in getting out the car; in fact, the party could scarcely
have left Torview before 12.10. Running to the works would have
occupied the most of another half hour; say arrive 12.40. Domlio
reached his home about 2.10, which, allowing half an hour for the
return journey, left an hour unaccounted for. In this hour Pyke’s
murder must have been committed, the duplicator taken to pieces
and the parts left in the store, fresh tea put into Gurney’s flask,
Pyke’s clothes and the small parts of the duplicator got rid of, and
the magneto on Berlyn’s car changed.
French wondered if all these things could have been done in the
time. At last, after working out a detailed time-table, he came to the
conclusion that they could, on one condition: that the clothes and
duplicator parts were got rid of on the way to Torview; that is, if no
time were lost in making a detour.
Where, then, could this have been done?
French took his map and considered the route. The Dart River
was crossed three times and a part of the way lay through woods.
But he believed that too many tourists strayed from the road for
these to be safe hiding-places, though he realised that they might
have to be searched later.
There remained two places, either of which he thought more
promising—the works and Domlio’s grounds.
The fact that elaborate arrangements had been made to get
Pyke’s body away from the works indicated that the disposal of it
there was considered impossible. Nevertheless, French spent the
next day, which was Sunday, prowling about the buildings, though
without result.
This left Domlio’s little estate, and early the following morning
French borrowed the sergeant’s bicycle and rode out to his former
hiding-place outside the gates. History repeated itself, for after
waiting for nearly two hours he saw Domlio pass out towards
Ashburton.
As the car had not been heard by either Coombe or Mee on the
night of the tragedy, it followed that it had almost certainly entered by
the back drive. French now walked up this lane to the yard, looking
for hiding-places. But there were none.
He did not see any of the servants about and he stood in the
yard, pondering over his problem. Then his glance fell on the old
well, and it instantly occurred to him that here was the very kind of
place he was seeking. There was an old wheel pump beside it, rusty
and dilapidated, working a rod to the plunger below. He imagined the
well was not used, for on his last visit he had noticed a well-oiled
force pump a hundred yards away at the kitchen door.
The well was surrounded by a masonry wall about three feet
high, coped with roughly dressed stones. On the coping was a flat
wooden grating, old and decaying. Ivy covered about half of the wall
and grating.
French crossed the yard and, leaning over the wall, glanced
down. The sides were black with age and he could distinguish no
details of the walls, but there was a tiny reflection from the water far
below. Then suddenly he noticed a thing which once again set him
off into a ferment of delight.
The cross-bars of the grating were secured by mortar into niches
cut in the stone. All of these bore signs of recent movement.
Satisfied that he had at last solved his problem, French quietly
left the yard and, recovering his bicycle, rode back to the police
station at Ashburton.
“I want your help, Sergeant,” he said as Daw came forward. “Can
you get some things together and come out with me to Colonel
Domlio’s to-night?”
“Of course, Mr. French.”
“Good. Then I want a strong fishing-line and some hooks and
some twenty-five or thirty yards of strong cord. I should like also a
candle-burning lantern and, of course, your electric torch. I want to
try an experiment.”
“I’ll have all those ready.”
“I want to be there when there’s no one about, so, as the Colonel
sits up very late, I think we’ll say three o’clock. That means we ought
to leave here about one-fifteen. Can you borrow a second bicycle?”
The sergeant looked completely mystified by these instructions,
but he answered, “Certainly,” without asking any questions. It was
agreed that they should meet in the evening at his house, sitting up
there until it was time to start.
Having explained at the hotel that he had to go to Plymouth and
would be away all night, French started out for a tramp on the moor.
About eleven he turned up at Daw’s cottage, and there the two men
spent the next couple of hours smoking and chatting.
Shortly before three they reached Torview. They hid their bicycles
in the brushwood and walked softly up the back drive to the yard.
The night was fine and calm, but the sky was overcast and it was
very dark. Not a sound broke the stillness.
Silently they reached the well, and French, with his electric torch,
examined the wooden cover.
“I think if we lift together we can get it up,” he whispered. “Try at
this side and use the ivy as a hinge.”
They raised it easily and French propped it with a billet of wood.
“Now, Sergeant, the fishing line.”
At the sergeant’s cottage they had tied on a bunch of hooks and
a weight. French now let these down, having passed the line through
one of the holes in the grating to ensure its swinging free from the
walls. Gradually he paid out the cord until a faint plop announced
that the water had been reached. He continued lowering as long as
the cord would run out; then he began jerking it slowly up and down.
“Swing it from side to side, Sergeant, while I keep jerking it. If
there’s anything there we should get it.”
For twenty minutes they worked, and then, just as French was
coming to the conclusion that a daylight descent into the well would
be necessary, the hooks caught. Something of fair weight was on the
line.
“Let it stay till it stops swinging, or else we shall lose the hooks in
the wall, Mr. French,” the sergeant advised, now as keenly interested
as was French himself.
“Right, Sergeant. The water will soon steady it.”
After a few seconds, French began to pull slowly up, the drops
from the attached object echoing loudly up the long funnel. And then
came into the circle of the sergeant’s torch a man’s coat.
It was black and sodden and shapeless from the water, and slimy
to the touch. They lifted it round the well so that the wall should be
between them and the house and examined it with their electric
torches.
In the breast pocket was a letter case containing papers, but it
was impossible to read anything they bore. A pipe, a tobacco pouch,
a box of matches, and a handkerchief were in the other pockets.
Fortunately for French, there was a tailor’s tab sewn into the
lining of the breast pocket and he was able to make out part of the
legend: “R. Shrubsole & Co., Newton Abbot.” Beneath was a
smudge which had evidently been the owner’s name, but this was
undecipherable.
“We’ll get it from the tailor,” French said. “Let’s try the hooks
again.”
Once again they lowered their line, but this time without luck.
“No good,” French declared at last. “We’ll have to pump it out.
You might get the depth, and then close up and leave it as we found
it. We’d better bring a portable pump, for I don’t suppose that old
thing will work.”
They replaced the grating and the billet of wood, and stealing
silently out of the yard, rode back to Ashburton.
With the coat wrapped in paper and packed in his suitcase,
French took an early bus to Newton Abbot. There he soon found
Messrs. Shrubsole’s establishment and asked for the proprietor.
“It’s not easy to say whose it was,” Mr. Shrubsole declared when
he had examined the coat. “You see, these labels of ours are printed
—that is, our name and address. But the customer’s name is written
and it would not last in the same way. I’m afraid I cannot read it.”
“If it had been possible to read it, I should not have come to you,
Mr. Shrubsole. I want you to get at it from the cloth and size and
probable age and things of that kind. You can surely find out all
those things by examination.”
This appeared to be a new idea to Mr. Shrubsole. He admitted
that something of the kind might be done, and calling an assistant,
fell to scrutinising the garment.
“It’s that brown tweed with the purple line that we sold so much of
last year,” the assistant declared. He produced a roll of cloth. “See, if
we lift the lining here it shows clear enough.”
“That’s right,” his employer admitted. “Now can we get the
measurements?”
“Not so easy,” said the assistant. “The thing will be all warped
and shrunk from the water.”
“Try,” French urged, with his pleasant smile.
An orgy of measuring followed, with a subsequent recourse to the
books and much low-voiced conversation. Finally Mr. Shrubsole
announced the result.
“It’s not possible to say for sure, Mr. French. You see, the coat is
shrunk out of all knowing. But we think it might belong to one of four
men.”
“I see your difficulty, Mr. Shrubsole, but if you tell me the four it
may help me.”
“I hope so. We sold suits of about this size to Mr. Albert
Cunningham of Twenty-seven, Acacia Street, Newton Abbot; Mr.
John Booth of Lyndhurst, Teignmouth; Mr. Stanley Pyke, of East
Street, Ashburton; and Mr. George Hepworth, of Linda Lodge,
Newton Abbot. Any of those any good to you?” Mr. Shrubsole’s
expression suddenly changed. “By Jove! You’re not the gentleman
that’s been making these discoveries about Mr. Berlyn and Mr.
Pyke? We’ve heard some report that some Scotland Yard man was
down and had found out that that tragedy was not all it was
supposed to be. That it, sir?”
“That’s it,” French replied, feeling that it was impossible to keep
his business private. “But I don’t want it talked about. Now you see
why I should like to be sure whether that was or was not Mr. Pyke’s
coat.”
But in spite of the tailor’s manifest interest, he declared that the
point could not be established. He was fairly sure that it belonged to
one of the four, but more than that he could not say.
But French had no doubt whatever, and, well pleased with his
progress, he left the shop and took the first bus back to Ashburton.
Chapter Fifteen: Blackmail
“Have you been able to get the pump, Sergeant?” asked French
as he reached the police station that afternoon.
“I’ve got the loan of one, Mr. French, or at least I’ll get it first thing
to-morrow. From a quarry close by. It’s a rotary hand-pump, and Mr.
Glenn, the manager, tells me that it will throw far faster than anything
we’ll want.”
“We shall have to fix it down in the well?”
“Yes, the well’s forty-two feet deep. It’s thirty to the water and
there’s twelve feet of water. But there’ll be no trouble about that. The
beams that carry the old pump will take it, too.”
“You think they’re strong enough?”
“We’ll just have to try them.”
“What about ladders?”
“I’ve got a fifty-foot length of rope ladder from the same quarry.”
“Good. What time can we start to-morrow?”
“I shall have the pump by half past eight.”
“Then we should be at the colonel’s shortly after nine.”
This time French thought it would be wise to have Domlio present
at their experiment. He therefore rang him up and made an
appointment for nine-thirty.
Early next morning a heavily loaded car left Ashburton. In
addition to the driver it contained French, Daw, and two constables in
plain clothes, as well as a low, squat pump with detachable handle,
an immense coil of armoured hose, another huge coil of rope ladder,
and several tools and small parts.
“Another rush to Klondyke,” said French, at which priceless pearl
of humour Daw smiled and the plain clothes men guffawed heavily.
“I should have thought that tailor could have fixed up the
ownership of the coat,” Daw remarked, presently. “Shouldn’t you,
sir?”
“Of course, Sergeant. But we shall get it, all right, even if we have
to do all the work ourselves. I thought it wasn’t worth troubling about.
It’s pretty certain the coat is not the only thing that was thrown into
the well and we shall get our identification from something else.”
The car was run into the yard, unloaded, and dismissed, while
French went to the hall door and asked for Colonel Domlio.
“Sorry to trouble you at this hour, Colonel, but I want you to be
present at a small experiment I am carrying out.” He watched the
other keenly as he spoke. “Will you please come out into the yard,
where I have left Sergeant Daw and some men?”
Surprise showed on the colonel’s face, but not, so far as French
could see, apprehension.
“This is very interesting, Inspector. I’m glad I’m at least being
informed of what is taking place on my own ground. I shall certainly
see what you are doing.”
As they turned the corner and the purpose of the visit became
apparent to Domlio, his surprise seemed to deepen, but still there
was no appearance of uneasiness. The police had lifted the cover of
the well and were getting the pump rigged. Coombe and Mee had
joined the others and stood speechlessly regarding the preparations.
“Ah, an invasion? I presume, Inspector, you have adequate
authority for these somewhat unusual proceedings?”
“I think you’ll find that’s all right, sir. With your permission we’re
going to pump out the well.”
“The removal of the well cover and the pump rather suggested
something of the kind, but for the moment I can’t quite recall the
permission.”
“I feel sure that under the circumstance you won’t withhold it.
Better lower that lantern with the candle, Sergeant, before you send
a man down. We want to be sure the air is good.”
“If it’s not an impertinence,” Domlio remarked, with ironic
politeness, “I should be interested to know why you are not using the
existing pump.”
“I didn’t think it was in working order. Is the well used?”
“An explanation, complete, no doubt, but scarcely satisfying. It
did not occur to you to try it?”
“No, sir. Too noisy. But what about the well?”
“Ah yes, the well. The well is used—in summer. We have a
gravity supply from the hill behind the house, but it fails in summer;
hence pumping from the well.”
This statement was very satisfactory to French. It cleared up a
point which had been worrying him. If it were possible to get rid of
the clothes by throwing them down the well, why had Pyke’s body
not been disposed of in the same way? But now this was explained.
The condition of the water in the following summer would have led to
investigation.
“Try the fixed pump, Sergeant. It may save us rigging the other.”
But a test showed that the valve leathers were dry and not
holding, and they went on with their original program.
French had been puzzled by the colonel’s attitude. If beneath his
cynical manner he were consumed by the anxiety which, were he
guilty, he could scarcely help feeling, he was concealing it in a way
that was little short of marvellous. However, the preparations would
take time and it was impossible that if the man knew what would be
found he could hide all signs of tension.
The candle, lowered to the surface of the water, burned clearly,
showing that the air was fresh. The rope ladder was then made fast
to the stonework and Sergeant Daw climbed down. Presently he
returned to say that the beams on which the old pump rested were
sound. The new pump was therefore lowered and one of the
constables sent down to begin work.
Getting rid of the water turned out a bigger job than French had
anticipated. Slowly the level dropped. At intervals the men spelled
each other, French and Daw taking their turns. By lunch-time the
water had gone down seven feet, though during the meal it rose six
inches. After that they worked with renewed energy to get the
remaining five feet six inches out before dusk.
“You have a second well, have you not, Colonel?” French
enquired. “I noticed a pump near the kitchen door.”
“Yes. We use it for drinking purposes. This is only good enough
for washing the car and so on.”
On more than one occasion Domlio had protested against what
he called the waste of his time in watching the work. But French
insisted on his remaining till the search was complete.
About four o’clock the water was so far lowered as to allow an
investigation of the bottom, and the sergeant, squeezing past the
man at the pump, went down with his electric torch. French, leaning
over the wall, anxiously watched the flickering light. Then came the
sergeant’s voice: “There’s a waistcoat and trousers and shoes here,
Mr. French.”
“That all?” called French.
“That’s all that I see. I’ve got everything of any size, anyhow.”
“Well, tie them to the rope and we’ll pull them up.”
How Domlio would comport himself when he saw the clothes was
now the important matter. French watched him keenly as the
dripping bundle appeared and was carried to a bench in the garage.
Though the day’s work had prepared the man for some
dénoûment, he certainly appeared to French to be genuinely
amazed when the nature of the find was revealed.
“Good Heavens! Inspector! What does this mean?” he cried,
squaring his shoulders. “Whose are these and how did you know
they were there?”
French turned to the plain-clothes men. “Just wait outside the
door, will you,” he said, then went on gravely to the other: “That is
what I have to ask you, Colonel Domlio.”
“Me?” The man’s sardonic calm was at last broken. “I know
nothing about them. The thing is an absolute surprise to me. I swear
it.” His face paled and he looked anxious and worried.
“There is something I should tell you,” French continued. “On
considering this Berlyn-Pyke case I formed a theory. I don’t say it is
correct, but I formed it from the facts I had learnt. According to that
theory you took out your car on the night of the tragedy, drove into
Ashburton, picked up Mr. Pyke’s coat, waistcoat, trousers, shoes,
and certain other things, brought them here and threw them into the
well. A moment, please.” He raised his hand as Domlio would have
spoken. “Rightly or wrongly, that was my theory. But there was a
difficulty. You had stated to the sergeant that you had not gone out
that night. I came here and found that that statement was not true.
You had been out. Then I made further enquiries and learnt that you
had taken out your car. You explained that, but I regret to say that I
was unable to accept your explanation. I thought, however, that the
presence or absence of these objects in the well would settle the
matter. I looked at the well and saw that the cover had recently been
moved. Two nights ago Sergeant Daw and I came out, and after
trying with a line and fish-hooks, we drew up a coat—Pyke’s coat.
Now, Colonel, if you wish to make a statement I will give it every
consideration, but it is my duty again to warn you that anything you
say may be used in evidence against you.”
“What? Are you charging me with a crime?”
“Unless you can satisfy me of your innocence you will be charged
with complicity in the murder of Stanley Pyke.”
The Colonel drew a deep breath.
“But, good Heavens! How can I satisfy you? I don’t even know
what you have against me, except this extraordinary business which
I can make neither head nor tail of. You must know more about it
than you have said. Tell me the rest.”
“You tell me this: Was your statement about the loss of the locket
on that night true?”
Colonel Domlio did not reply. He seemed to be weighing some
problem of overwhelming difficulty. French waited patiently,
wondering how far his bluff would carry. At last the colonel spoke.
“I have lied to the sergeant and to you, Inspector, with what I now
believe was a mistaken motive. I have been turning over the matter
in my mind and I see that I have no alternative but to tell you the
truth now or to suffer arrest. Possibly things have gone so far that
this cannot be avoided. At all events, I will tell you everything.”
“You are not forgetting my warning, Colonel Domlio?”
“I am not forgetting it. If I am acting foolishly it is my own lookout.
I tried to put you off, Inspector, to save bringing Mrs. Berlyn’s name
further into the matter, because, though there was nothing against
her character, I was sure you would have bothered her with annoying
questions. But, though I thought it right to lie with this object, I don’t
feel like risking prison for it.”
“I follow you,” said French.
“You will remember then what I told you about Mrs. Berlyn, that
she had been seeing a good deal first of Pyke and then of myself.
I’m sorry to have to drag this in again, but otherwise you wouldn’t
understand the situation.
“About—let me see—four months before the tragedy Mrs. Berlyn
came out here one afternoon. She said that she had been in London
to a lecture on entomology and that she had been so much
interested that she had read one or two books on the subject. She
said that she knew I was doing some research in it and she
wondered whether I would let her come and help me and so learn
more. I naturally told her I should be delighted, and she began to
come out here quite often. On different occasions she has
accompanied me on the moor while I was searching for specimens,
and she has spent several afternoons with me in my library mounting
butterflies and learning to use the microscope. This went on until the
day of the tragedy.”
Colonel Domlio paused, squared his shoulders, and continued:
“On that morning I had received by post a letter addressed in a
strange hand and marked ‘Personal.’ It was signed ‘X.Y.Z.’ and said
that the writer happened to be walking about four P.M. on the previous
Tuesday in the Upper Merton glen at a certain point which he
described; that he had seen me with Mrs. Berlyn in my arms; that,
having a camera, he had at once taken two photographs, one of
which had come out; and that if I cared to have the negative he
would sell it for fifty pounds. If I wished to negotiate I was to meet
him on the Chagford–Gidleigh road at the gate of Dobson’s Spinney
at one o’clock that night. Should I not turn up, the writer would
understand that I was not interested and would take his picture to
Mrs. Berlyn, who, he thought, would prefer to deal rather than have it
handed to Mr. Berlyn.
“At first I could not think what was meant; then I remembered
what had taken place. We had been, Mrs. Berlyn and I, searching for
a certain butterfly at the place and time mentioned. Suddenly she
had cried out that she had seen a specimen and she had rushed
after it past where I was standing. Just as she reached me she gave
a cry and lurched against me. ‘Oh, my ankle!’ she shouted and clung
to me. She had twisted her foot in a rabbit hole and she could not put
her weight on it. I supported her in my arms for a few seconds, and it
must have been at this moment that my blackmailer came on the
scene. I laid Mrs. Berlyn down on the grass. She sat quiet for some
minutes, then with my arm was able to limp to the car. She said her
ankle was not sprained, but only twisted, and that she would be all
right in a few hours. Next day when I rang up to enquire she said it
was still painful but a good deal better.
“At first I was doubtful whether I should act on the letter; then I
thought that if there was a genuine photograph it would be better for
me to deal with the owner. I therefore went out to the rendezvous at
the time mentioned. But I might have saved myself the trouble, for no
one was there. And from that day to this I never heard another word
about the affair, nor did I mention it to a soul. Indeed, the Berlyn-
Pyke tragedy put it out of my head, and the same thing, I suppose,
robbed the photograph of its value.”
“You told me,” said French, “something about Mrs. Berlyn’s
relations with Mr. Pyke and yourself, saying that I would not
understand your story otherwise. Just what was in your mind in
that?”
“Because these relations complicated the whole situation. Do you
not see that? Had everything been normal I could have treated the
thing as a joke and shown the photograph to Berlyn. As things were,
he would have taken it seriously.”
French felt a little puzzled by this statement. If the man were
lying, it was just the sort of story he would expect to hear, except for
one thing. It was capable of immediate confirmation. If it were not
true he would soon get it out of Mrs. Berlyn.
“I don’t want to be offensive, Colonel,” he said, “but by your own
admission you have twice lied about what took place that night. Can
you give me any proof that your present statement is true?”
Domlio squared his shoulders.
“I can’t,” he admitted. “I can show you the letter and you can ask
Mrs. Berlyn, but I don’t know that either of those would constitute
proof.”
“They wouldn’t in themselves, but from either I might get some
point which would. Now I’ll tell you what we’ll do. We’ll see first
whether Sergeant Daw has made any further discoveries; then you
can show me the letter and we’ll drive out to the place where Mrs.
Berlyn fell.”
“That’s easily done.”

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7.1 Computing the Price of Common Stock

1) A stockholder's ownership of a company's stock gives her the right to ________.

2) Stockholders' rights include ________.

3) Stockholders' rights include ________.

4) Stockholders are residual claimants, meaning that they ________.

6) Dividends are paid from ________.

7) Periodic payments of net earnings to shareholders are known as ________.

8) The value of any investment is found by computing the ________.

34) Describe the Price Earnings Valuation method for stocks.

Diff: 2 Type: SA Page Ref: 141

1) In asset markets, an asset's price is ________.

4) A change in perceived risk of a stock changes ________.

10) An increase in uncertainty for the economy will ________.

12) According to rational expectations theory, forecast errors of expectations ________.

16) According to rational expectations, ________.

2) Monetary economists and financial economists developed ________ theories on expectations

7) Financial markets quickly eliminate unexploited profit opportunities through changes in

15) The efficient markets hypothesis indicates that investors ________.

16) The efficient markets hypothesis suggests that investors ________.

7.6 Web Appendix: Evidence on the Efficient Market Hypothesis

10) Evidence in support of the efficient markets hypothesis includes ________.

11) Evidence against market efficiency includes ________.

13) The January effect refers to the fact that ________.

15) A phenomenon closely related to market overreaction is ________.

17) Mean reversion refers to the fact that ________.

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