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Chapter 12Behavioral Finance and Technical AnalysisMultiple Choice Questions Conventional theories presume that investors ____________ and behavioral finance presumes that they ____________. A. are irrational; are irrational B. are rational; may not be rational C. are rational; are rational D. may n...

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Chapter 12 - Behavioral Finance and Technical Analysis

Chapter 12 Behavioral Finance and Technical Analysis Multiple Choice Questions

1. Conventional theories presume that investors ____________ and behavioral finance presumes that they ____________. A. are irrational; are irrational B. are rational; may not be rational C. are rational; are rational D. may not be rational; may not be rational E. may not be rational; are rational

2. The premise of behavioral finance is that A. conventional financial theory ignores how real people make decisions and that people make a difference. B. conventional financial theory considers how emotional people make decisions but the market is driven by rational utility maximizing investors. C. conventional financial theory should ignore how the average person makes decisions because the market is driven by investors that are much more sophisticated than the average person. D. conventional financial theory considers how emotional people make decisions but the market is driven by rational utility maximizing investors, and conventional financial theory should ignore how the average person makes decisions because the market is driven by investors that are much more sophisticated than the average person. E. None of these is correct.

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Chapter 12 - Behavioral Finance and Technical Analysis

3. Some economists believe that the anomalies literature is consistent with investors' ____________ and ____________. A. ability to always process information correctly and therefore they infer correct probability distributions about future rates of return; given a probability distribution of returns, they always make consistent and optimal decisions B. inability to always process information correctly and therefore they infer incorrect probability distributions about future rates of return; given a probability distribution of returns, they always make consistent and optimal decisions C. ability to always process information correctly and therefore they infer correct probability distributions about future rates of return; given a probability distribution of returns, they often make inconsistent or suboptimal decisions D. inability to always process information correctly and therefore they infer incorrect probability distributions about future rates of return; given a probability distribution of returns, they often make inconsistent or suboptimal decisions E. None of these is correct.

4. Information processing errors consist of I) forecasting errors II) overconfidence III) conservatism IV) framing A. I and II B. I and III C. III and IV D. IV only E. I, II and III

5. Forecasting errors are potentially important because A. research suggests that people underweight recent information. B. research suggests that people overweight recent information. C. research suggests that people correctly weight recent information. D. research suggests that people either underweight recent information or overweight recent information depending on whether the information was good or bad. E. None of these is correct.

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Chapter 12 - Behavioral Finance and Technical Analysis

6. DeBondt and Thaler believe that high P/E result from investors' A. earnings expectations that are too extreme. B. earnings expectations that are not extreme enough. C. stock price expectations that are too extreme. D. stock price expectations that are not extreme enough. E. None of these is correct.

7. If a person gives too much weight to recent information compared to prior beliefs, they would make ________ errors. A. framing B. selection bias C. overconfidence D. conservatism E. forecasting

8. Single men trade far more often than women. This is due to greater ________ among men. A. framing B. regret avoidance C. overconfidence D. conservatism E. None of these is correct.

9. ____________ may be responsible for the prevalence of active versus passive investments management. A. Forecasting errors B. Overconfidence C. Mental accounting D. Conservatism E. Regret avoidance

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Chapter 12 - Behavioral Finance and Technical Analysis

10. Barber and Odean (2000) ranked portfolios by turnover and report that the difference in return between the highest and lowest turnover portfolios is 7% per year. They attribute this to A. overconfidence. B. framing. C. regret avoidance. D. sample neglect. E. overconfidence, framing, regret avoidance, and sample neglect.

11. ________ bias means that investors are too slow in updating their beliefs in response to evidence. A. Framing B. Regret avoidance C. Overconfidence D. Conservatism E. None of these is correct.

12. Psychologists have found that people who make decisions that turn out badly blame themselves more when that decision was unconventional. The name for this phenomenon is A. regret avoidance. B. framing. C. mental accounting. D. overconfidence. E. obnoxicity.

13. An example of ________ is that a person may reject an investment when it is posed in terms of risk surrounding potential gains but may accept the same investment if it is posed in terms of risk surrounding potential losses. A. framing B. regret avoidance C. overconfidence D. conservatism E. None of these is correct.

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Chapter 12 - Behavioral Finance and Technical Analysis

14. Statman (1977) argues that ________ is consistent with some investors' irrational preference for stocks with high cash dividends and with a tendency to hold losing positions too long. A. mental accounting B. regret avoidance C. overconfidence D. conservatism E. None of these is correct.

15. An example of ________ is that it is not as painful to have purchased a blue-chip stock that decreases in value, as it is to lose money on an unknown start-up firm. A. mental accounting B. regret avoidance C. overconfidence D. conservatism E. None of these is correct.

16. Arbitrageurs may be unable to exploit behavioral biases due to ____________. I) fundamental risk II) implementation costs III) model risk IV) conservatism V) regret avoidance A. I and II only B. I, II, and III C. I, II, III, and V D. II, III, and IV E. IV and V

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Chapter 12 - Behavioral Finance and Technical Analysis

17. ____________ are good examples of the limits to arbitrage because they show that the law of one price is violated. I) Siamese Twin Companies II) Unit trusts III) Closed end funds IV) Open end funds V) Equity carve outs A. I and II B. I, II, and III C. I, III, and V D. IV and V E. V

18. __________ was the grandfather of technical analysis. A. Harry Markowitz B. William Sharpe C. Charles Dow D. Benjamin Graham E. None of these is correct.

19. The goal of the Dow theory is to A. identify head and shoulder patterns. B. identify breakaway points. C. identify resistance levels. D. identify support levels. E. identify long-term trends.

20. A long-term movement of prices, lasting from several months to years is called _________. A. a minor trend B. a primary trend C. an intermediate trend D. trend analysis E. both a primary trend and trend analysis

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Chapter 12 - Behavioral Finance and Technical Analysis

21. A daily fluctuation of little importance is called ____________. A. a minor trend B. a primary trend C. an intermediate trend D. a market trend E. None of these is correct.

22. Price movements that are caused by short-term deviations of prices from the underlying trend line are called A. primary trends. B. secondary trends. C. tertiary trends. D. Dow trends. E. contrary trends.

23. The Dow theory posits that the three forces that simultaneously affect stock prices are ____________. I) primary trend II) intermediate trend III) momentum trend IV) minor trend V) contrarian trend A. I, II, and III B. II, III, and IV C. III, IV and V D. I, II, and IV E. I, III, and V

24. The Elliot Wave Theory ____________. A. is a recent variation of the Dow Theory B. suggests that stock prices can be described by a set of wave patterns C. is similar to the Kondratieff Wave theory D. is a recent variation of the Dow Theory and suggests that stock prices can be described by a set of wave patterns E. is a recent variation of the Dow Theory, suggests that stock prices can be described by a set of wave patterns, and is similar to the Kondratieff Wave theory

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Chapter 12 - Behavioral Finance and Technical Analysis

25. A trin ratio of less than 1.0 is considered as a _________. A. bearish signal B. bullish signal C. bearish signal by some technical analysts and a bullish signal by other technical analysts D. bullish signal by some fundamentalists E. bearish signal by some technical analysts, a bullish signal by other technical analysts and bullish signal by some fundamentalists

26. On October 29, 2009 there were 1,031 stocks that advanced on the NYSE and 610 that declined. The volume in advancing issues was 112,866,000 and the volume in declining issues was 58,188,000. The trin ratio for that day was ________ and technical analysts were likely to be ________. A. 0.87; bullish B. 0.87; bearish C. 1.15; bullish D. 1.15; bearish E. None of these is correct.

27. In regard to moving averages, it is considered to be a ____________ signal when market price breaks through the moving average from ____________. A. bearish; below B. bullish; below C. bearish; above D. bullish; above E. both bullish; below and bearish; above

28. Two popular moving average periods are A. 90-day and 52 week. B. 180-day and three year. C. 180-day two year. D. 200-day and 53 week. E. 200-day and two year.

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Chapter 12 - Behavioral Finance and Technical Analysis

29. ____________ is a measure of the extent to which a movement in the market index is reflected in the price movements of all stocks in the market. A. Put-call ratio B. Trin ratio C. Breadth D. Confidence index E. All of these are correct.

30. Then confidence index is computed from ____________ and higher values are considered ____________ signals. A. bond yields; bearish B. odd lot trades; bearish C. odd lot trades; bullish D. put/call ratios; bullish E. bond yields; bullish

31. The put/call ratio is computed as ____________ and higher values are considered ____________ signals. A. the number of outstanding put options divided by outstanding call options; bullish or bearish B. the number of outstanding put options divided by outstanding call options; bullish C. the number of outstanding put options divided by outstanding call options; bearish D. the number of outstanding call options divided by outstanding put options; bullish E. the number of outstanding call options divided by outstanding put options; bearish

32. The efficient market hypothesis ____________. A. implies that security prices properly reflect information available to investors B. has little empirical validity C. implies that active traders will find it difficult to outperform a buy-and-hold strategy D. has little empirical validity and implies that active traders will find it difficult to outperform a buy-and-hold strategy E. implies that security prices properly reflect information available to investors and implies that active traders will find it difficult to outperform a buy-and-hold strategy

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Chapter 12 - Behavioral Finance and Technical Analysis

33. Tests of market efficiency have focused on ____________. A. the mean-variance efficiency of the selected market proxy B. strategies that would have provided superior risk-adjusted returns C. results of actual investments of professional managers D. strategies that would have provided superior risk-adjusted returns and results of actual investments of professional managers E. the mean-variance efficiency of the selected market proxy and strategies that would have provided superior risk-adjusted returns

34. The anomalies literature ____________. A. provides a conclusive rejection of market efficiency B. provides conclusive support of market efficiency C. suggests that several strategies would have provided superior returns D. provides a conclusive rejection of market efficiency and suggests that several strategies would have provided superior returns E. None of these is correct.

35. Behavioral finance argues that ____________. A. even if security prices are wrong it may be difficult to exploit them B. the failure to uncover successful trading rules or traders cannot be taken as proof of market efficiency C. investors are rational D. even if security prices are wrong it may be difficult to exploit them, and the failure to uncover successful trading rules or traders cannot be taken as proof of market efficiency E. All of these are correct.

36. Markets would be inefficient if irrational investors __________ and actions if arbitragers were __________. A. existed; unlimited B. did not exist; unlimited C. existed; limited D. did not exist; limited E. None of these is correct.

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Chapter 12 - Behavioral Finance and Technical Analysis

37. If prices are correct __________ and if prices are not correct __________. A. there are no easy profit opportunities; there are no easy profit opportunities B. there are no easy profit opportunities; there are easy profit opportunities C. there are easy profit opportunities; there are easy profit opportunities D. there are easy profit opportunities; there are no easy profit opportunities E. None of these is correct.

38. __________ can lead investors to misestimate the true probabilities of possible events or associated rates of return. A. Information processing errors B. Framing errors C. Mental accounting errors D. Regret avoidance E. All of these are correct.

39. Kahneman and Tversky (1973) report that __________ and __________. A. people give too little weight to recent experience compared to prior beliefs; tend to make forecasts that are too extreme given the uncertainty of their information B. people give too much weight to recent experience compared to prior beliefs; tend to make forecasts that are too extreme given the uncertainty of their information C. people give too little weight to recent experience compared to prior beliefs; tend to make forecasts that are not extreme enough given the uncertainty of their information D. people give too much weight to recent experience compared to prior beliefs; tend to make forecasts that are not extreme enough given the uncertainty of their information E. None of these is correct.

40. Errors in information processing can lead investors to misestimate __________. A. true probabilities of possible events and associated rates of return B. occurrence of possible events C. only possible rates of return D. the effect of accounting manipulation E. fraud

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Chapter 12 - Behavioral Finance and Technical Analysis

41. DeBondt and Thaler (1990) argue that the P/E effect can be explained by __________. A. forecasting errors B. earnings expectations that are too extreme C. earnings expectations that are not extreme enough D. regret avoidance E. both forecasting errors and earnings expectations that are too extreme

42. Barber and Odean (2001) report that men trade __________ frequently than women and the frequent trading leads to __________ returns. A. less; superior B. less; inferior C. more; superior D. more; inferior E. None of these is correct.

43. Conservatism implies that investors are too __________ in updating their beliefs in response to new evidence and that they initially __________ to news. A. quick; overreact B. quick; under react C. slow; overreact D. slow; under react E. None of these is correct.

44. If information processing were perfect, many studies conclude that individuals would tend to make __________ decisions using that information due to __________. A. less-than-fully rational; behavioral biases B. fully rational; behavioral biases C. less-than-fully rational; fundamental risk D. fully rational; fundamental risk E. fully rational; utility maximization

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Chapter 12 - Behavioral Finance and Technical Analysis

45. The assumptions concerning the shape of utility functions of investors differ between conventional theory and prospect theory. Conventional theory assumes that utility functions are __________ whereas prospect theory assumes that utility functions are __________. A. concave and defined in terms of wealth; s-shaped (convex to losses and concave to gains) and defined in terms of loses relative to current wealth B. convex and defined in terms of loses relative to current wealth; s-shaped (convex to losses and concave to gains) and defined in terms of loses relative to current wealth C. s-shaped (convex to losses and concave to gains) and defined in terms of loses relative to current wealth; concave and defined in terms of wealth D. s-shaped (convex to losses and concave to gains) and defined in terms of wealth; concave and defined in terms of loses relative to current wealth E. convex and defined in terms of wealth; concave and defined in terms of gains relative to current wealth

46. The law-of-one-price posits that ability to arbitrage would force prices of identical goods to trade at equal prices. However, empirical evidence suggests that __________ are often mispriced. A. Siamese Twin Companies B. equity carve outs C. closed-end funds D. both Siamese Twin Companies and closed-end funds E. All of these are correct.

47. Kahneman and Tversky (1973) reported that people give __________ weight to recent experience compared to prior beliefs when making forecasts. This is referred to as __________. A. too little; hyper rationality B. too little; conservatism C. too much; framing D. too much; memory bias E. None of these is correct.

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Chapter 12 - Behavioral Finance and Technical Analysis

48. Kahneman and Tversky (1973) reported that __________ give too much weight to recent experience compared to prior beliefs when making forecasts. A. young men B. young women C. people D. older men E. older women

49. Barber and Odean (2001) report that men trade __________ frequently than women. A. less B. less in down markets C. more in up markets D. more E. None of these is correct.

50. Barber and Odean (2001) report that women trade __________ frequently than men. A. less B. less in down markets C. more in up markets D. more E. None of these is correct.

51. Barber and Odean (2001) report that men __________ than women. A. earn higher returns B. earn lower returns C. earn about the same returns D. generate lower trading costs E. None of these is correct.

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Chapter 12 - Behavioral Finance and Technical Analysis

52. Barber and Odean (2001) report that women __________ than men. A. earn higher returns B. earn lower returns C. earn about the same returns D. generate higher trading costs E. None of these is correct.

53. __________ effects can help explain momentum in stock prices. A. Conservatism B. Regret avoidance C. Prospect theory D. Mental accounting E. Model risk

54. Studies of Siamese twin companies find __________ which __________ the EMH. A. correct relative pricing; supports B. correct relative pricing; does not support C. incorrect relative pricing; supports D. incorrect relative pricing; does not support E. None of these is correct.

55. Studies of equity carve-outs find __________ which __________ the EMH. A. strong support for the Law of One Price; supports B. strong support for the Law of One Price; violates C. evidence against the Law of One Price; violates D. evidence against the Law of One Price; supports E. None of these is correct.

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