Chapter 09 Practice Questions PDF

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Student: _______________________________________________________________________________________

1. A. B. C. D. 2.

A. B. C. D.

Testing many different trading rules until you find one that would have worked in the past is called _______. data mining perceived patterning pattern searching behavioral analysis Models of financial markets that emphasize psychological factors affecting investor behavior are called _______.

data mining fundamental analysis charting behavioral finance

3. The TRIN statistic is a ______ indicator. A. B. C. D. 4. A. B. C. D. 5. A. B. C. D. 6. A. B. C. D. 7. A. B. C. D. 8. A. B. C. D. 9. A. B. C. D.

sentiment flow of funds market structure fundamental The put/call ratio is a ______ indicator. sentiment flow of funds market structure fundamental Relative strength is ______ indicator. a fundamental an economic a technical an international Short interest is a ______ indicator. sentiment flow of funds market structure fundamental Moving averages are ______ indicators. sentiment flow of funds trend fundamental Market breadth is a ______ indicator. sentiment flow of funds technical fundamental The cumulative tally of the number of advancing stocks minus declining stocks is called the ______________. market breadth market volume trin ratio relative strength ratio

10. A high amount of short interest is typically considered as a __________ signal, and contrarians may consider it as a _________ signal.

A. B. C. D.

bearish; bullish bullish; bearish bearish; false bullish; false

11. Technical analysis focuses on _____________________. A. B. C. D.

finding opportunities for risk-free investing finding repeating trends and patterns in prices changing prospects for earnings growth of particular firms or industries forecasting technical regulatory changes

12. Behaviorists point out that even if market prices are ____________, there may be _______________. A. B. C. D.

distorted; limited arbitrage opportunities distorted; fundamental efficiency allocationally efficient; limitless arbitrage opportunities distorted; allocational efficiency

13. According to market technicians, it is time to sell stock in a head-and-shoulders formation when ___________. A. B. C. D.

the price index pierces the left shoulder the price index pierces the right shoulder the price index pierces the head none of these options takes place

14. When a stock price breaks through the moving average from below, this is considered to be ______. A. B. C. D.

the starting point for a new moving average a bearish signal a bullish signal none of these options

15. When the stock price falls below a moving average, a possible conclusion is that _____. A. B. C. D.

market momentum has become positive market momentum has become negative there is no regular pattern for this stock's market momentum professional analysts' opinions are invalid until the stock price rises again

16. Following a period of falling prices, the moving average will _____. A. B. C. D.

be below the current price be above the current price be equal to the current price become more volatile than it had been before prices fell

17. A moving average of stock prices _________________. A. B. C. D.

always lies above the most recent price always lies below the most recent price is less volatile than the actual prices is more volatile than the actual prices

18. When the housing bubble burst in 2007, it set off the worst financial crisis _____. A. B. C. D.

in 25 years. in 40 years. in 50 years. in 75 years.

19. A support level is ___________________. A. B. C. D.

a level beyond which the market is unlikely to rise a level below which the market is unlikely to fall an equilibrium price level justified by characteristics such as earnings and cash flows the peak of a market wave or cycle

20. According to Kondratieff, the macro economy moves in a series of waves that recur at intervals of approximately _________________. A. B. C. D.

18 months 4 years 8 years 50 years

21. According to Elliot's wave theory, stock market behavior can be explained as _________________. A. B. C. D.

a series of medium-term wave cycles with no short-term trend a series of long-term wave cycles with no short-term trend a series of superimposed long-term and short-term wave cycles sine and cosine functions

22. Conventional finance theory assumes investors are _______, and behavioral finance assumes investors are _______. A. B. C. D.

rational; irrational irrational; rational greedy; philanthropic philanthropic; greedy

23. The only way for behavioral patterns to persist in prices is if ______________. A. B. C. D.

markets are not weak-form efficient there are limits to arbitrage activity there are no significant trading costs market psychology is inconsistent over time

24. In the context of a point and figure chart, a horizontal band of Xs and Os is a _____________. A. B. C. D.

buy signal sell signal congestion area trend reversal

25. Even though indexing is growing in popularity, only about _____ of equity in the mutual fund industry is held in indexed funds. This may be a sign that investors and managers __________. A. 5%; are excessively conservative B. 20%; overestimate their ability C. 15%; suffer from framing biases D. 25%; engage in mental accounting 26. If investors are too slow to update their beliefs about a stock's future performance when new evidence arises, they are exhibiting _______. A. B. C. D.

representativeness bias framing error conservatism memory bias

27. If investors overweight recent performance in forecasting the future, they are exhibiting _______. A. B. C. D.

representativeness bias framing error memory bias overconfidence

28. Trading activity and average returns in brokerage accounts tend to be _________. A. B. C. D.

uncorrelated negatively correlated positively correlated positively correlated for women and negatively correlated for men

29. Your two best friends each tell you about a person they know who successfully started a small business. That's it, you decide; if they can do it, so can you. This is an example of _____________. A. B. C. D.

mental accounting framing bias conservatism representativeness bias

30. Which of the following is not a sentiment indicator? A. confidence index B. short interest C. relative strength D. put/call ratio

31. Which of the following is considered a sentiment indicator? A. a 200-day moving average B. short interest C. credit balances in brokerage accounts D. relative strength 32. An investor holds a very conservative portfolio invested for retirement, but she takes some extra cash she earned from her year-end bonus and buys gold futures She appears to be engaging in ___________. A. B. C. D.

overconfidence representativeness forecast errors mental accounting

33. Which of the following analysts focus more on past price movements of a firm's stock than on the underlying determinants of its future profitability? A. credit analysts B. fundamental analysts C. systems analysts D. technical analysts

34. A TRIN ratio of greater than 1 is considered a __________. A. B. C. D.

bearish signal bullish signal bearish signal by some technical analysts and a bullish signal by other technical analysts trend reversal signal

35. Contrarian investors consider a high put/call ratio a __________. A. B. C. D.

bearish signal bullish signal trend confirmation signal signal to enter the options market

36. The ratio of the average yield on 10 top-rated corporate bonds to the average yield on 10 intermediate-grade bonds is called the __________. A. bond price index B. confidence index C. relative strength index D. TRIN ratio 37. An investor needs cash to pay some hospital bills. He is willing to use his dividend income to pay the bills, but he will not sell any stock to do so. He is engaging in ___________. A. B. C. D.

overconfidence representativeness forecast errors mental accounting

38. Bill and Shelly are friends. Bill invests in a portfolio of hot stocks that almost all his friends are invested in. Shelly invests in a portfolio that is totally different from the portfolios of all her friends. Both Bill's and Shelly's stocks fall 15%. According to regret theory,

_________________________________________. A. B. C. D.

Bill will have more regret over the loss than Shelly Shelly will have more regret over the loss than Bill Bill and Shelly will have equal regret over their losses Bill's and Shelly's risk aversion will increase in the future

39. The most common measure of __________ is the spread between the number of stocks that advance in price and the number of stocks that decline in price. A. B. C. D.

market breadth market volume odd-lot trading short interest

40. Jill is offered a choice between receiving $50 with certainty or possibly receiving the proceeds from a gamble. In the gamble a fair coin is tossed, and if it comes up heads, Jill will receive $100; if the coin comes up tails, she will receive nothing. Jill chooses the $50 instead of the gamble. Jill's behavior indicates __________________. A. B. C. D.

regret avoidance overconfidence that she has a diminishing marginal utility of wealth prospect theory loss aversion

41. When the market breaks through the moving average line from below, a technical analyst would probably suggest that it is a good time to ___________. A. B. C. D.

buy the stock hold the stock sell the stock short the stock

42. If you believed in the reversal effect, you should __________. A. B. C. D.

buy bonds this period if you held stocks last period buy stocks this period that performed poorly last period buy stocks this period that performed well last period do nothing if you held the stock last period

43. According to technical analysts, a shift in market fundamentals will __________. A. B. C. D.

be reflected in stock prices immediately lead to a gradual price change that can be recognized as a trend lead to high volatility in stock market prices leave prices unchanged

44. According to market technicians, a TRIN statistic of less than 1 is considered a __________. A. B. C. D.

bearish signal bullish signal volume decline signal reversal

45. It is difficult to test the Kondratieff wave theory because _________. A. B. C. D.

it applies to only Russian stocks its main proponent found contrary research results only two independent data points are generated each century the stock market is too volatile to generate smooth waves

46. A _________ is a value above which it is difficult for the market to rise. A. B. C. D.

book value resistance level support level confidence level

47. _____________ is a tool that can help identify the direction of a stock's price. A. B. C. D.

Prospect theory Framing A moving average Conservatism

48. If the utility you derive from your next dollar of wealth increases by less than a loss of a dollar reduces it, you are exhibiting __________. A. B. C. D.

loss aversion regret avoidance mental accounting framing bias

49. In technical analysis, __________ is a value below which the market is relatively unlikely to fall. A. B. C. D.

book value resistance level support level the Dow line

50. A possible limit on arbitrage activity that may allow behavioral biases to persist is _______. A. B. C. D.

technical trends in prices momentum effects fundamental risk trend reversals

51. If you are not a contrarian, you consider a high put/call ratio to be a __________. A. B. C. D.

bearish signal bullish signal trend confirmation signal signal to enter the options market

52. On day 1, the stock price of Ford was $12 and the automotive stock index was 127. On day 2, the stock price of Ford was $15 and the automotive stock index was 139. Consider the ratio of Ford to the automotive stock index at day 1 and day 2. Ford is __________ the automotive industry, and technical analysts who follow relative strength would advise __________ the stock. A. B. C. D.

outperforming; buying outperforming; selling underperforming; buying underperforming; selling

53. At the end of July, the average yields on 10 top-rated corporate bonds and 10 intermediate-grade bonds were 7.65% and 8.42%, respectively. At the end of Augus the average yields on 10 top-rated corporate bonds and 10 intermediate-grade bonds were 6% and 6.71%, respectively. The confidence index _________ durin August, and bond technical analysts are likely to be ________. A. B. C. D.

increased; bullish increased; bearish decreased; bullish decreased; bearish

54. On a particular day, there were 890 stocks that advanced on the NYSE and 723 that declined. The volume in advancing issues was 80,846,000, and the volume in declining issues was 70,397,000. The common measure of market breadth is __________. A. B. C. D.

-10,449,000 -167 167 10,449,000

55. On a particular day, there were 920 stocks that advanced on the NYSE and 723 that declined. The volume in advancing issues was 80,846,000, and the volume in declining issues was 70,397,000. The trin ratio is __________, and technical analysts are likely to be __________.

A. .90; bullish B. .90; bearish C. 1.11; bullish D. 1.11; bearish

56. A point and figure chart: I. Gives a sell signal when the stock price penetrates previous lows II. Tracks significant upward or downward movements III. Has no time dimension IV. Indicates congestion areas A. I and II only B. II and III only C. I, III, and IV only D. I, II, III, and IV 57. When technical analysts say a stock has good "relative strength," they mean that in the recent past __________. A. B. C. D.

it has performed well compared to its closest competitors it has exceeded its own historical high trading volume in the stock has exceeded the normal trading volume it has outperformed the market index

58. Technical traders view mutual fund investors as _________ market timers. A. B. C. D.

excellent frequent neutral poor

59. An important assumption underlying the use of technical analysis techniques is that ___________________. A. B. C. D.

security prices adjust rapidly to new information security prices adjust gradually to new information security dealers will provide enough liquidity to keep price changes relatively small all investors have immediate and costless access to information

60. If the put/call ratio increases, market contrarians may interpret this as what kind of signal? A. buy signal B. sell signal C. hold signal D.this is not interpreted as a signal 61. The tendency of investors to hold on to losing investments is called the ________. A. B. C. D.

overweighting effect head-in-the-sand effect disposition effect prospector effect

62. Which one of the following best describes fundamental risk? A. B. C. D.

A stock is overpriced, but your fund does not allow you to engage in short sales. Your models indicate a stock is mispriced, but you are not sure if this is a real profit opportunity or a model input error. You buy a stock that you believe is underpriced, and the underpricing persists for a long time, hurting your short-term results. A stock is trading in two different markets at two different prices.

63.

The TRIN on day 2 is ___.

A. .72 B. 1.04 C. .92 D. .55

64.

The confidence index on day 1 is _____.

A. .82 B. .89 C. .92 D. 1.09

65.

The breadth on day 3 is _______.

A. B. C. D.

-70 10 90 170

66.

The cumulative breadth for the first 2 days is ___.

A. B. C. D.

-240 -50 110 250

67.

Cumulative breadth for the 4 days is ___, which is ___.

A. B. C. D.

-140; bullish -140; bearish -300; bullish -300; bearish

68.

From day 1 to day 4, the TRIN has ___ and is ___.

A. B. C. D.

increased; bullish increased; bearish decreased; bullish decreased; bearish

69.

From day 1 to day 4, the confidence index has _____. This is _____.

A. B. C. D.

increased; bullish decreased; bullish increased; bearish decreased; bearish

70. Problems with behavioral finance include: I. The behavioralists tell us nothing about how to exploit any irrationality. II. The implications of behavioral patterns are inconsistent from case to case, sometimes suggesting overreaction, sometimes underreaction.

III. As with technical trading rules, behavioralists can always find some pattern in past data that supports a behavioralist trait. A. B. C. D.

I only II only I and III only I, II, and III

71. A major problem with technical trading strategies is that ________. A. B. C. D.

it is very difficult to identify a true trend before the fact it is very difficult to identify the correct trend after the fact it is so easy to identify trends that all investors quickly do so Kondratieff showed that you can't identify trends without 48 to 60 years of data

72. The Elliott wave theory gives a buy signal when you can identify a primary bull trend by identifying _________. A. B. C. D.

when the long-term direction of the market is positive when the long-term direction of the market is negative when the long-term direction of the market is stable good stocks without regard to the long-term direction of the market

73. In 1997 CSX successfully purchased a significant share of Conrail. Immediately after the first offer was announced and the acquisition eventually consummated, the price of CSX fell below preacquisition levels and took many years to recover. This may be an example of

________________. A. B. C. D.

loss aversion mental accounting overreaction managerial overconfidence

74. An investor has her money segregated into checking, savings, and investments. The allocation among the categories is subjective, yet the investor spends freely from the checking account and not the others. This behavior can be explained as _______________. A. B. C. D.

loss aversion mental accounting overreaction winner's curse

75.

Identify the resistance-level stock price.

A. B. C. D.

$40 $42 $44 $46

76.

Identify the support level stock price.

A. B. C. D.

$40 $42 $44 $46

77. Investors gravitate toward the latest hot stock even though it has never paid a dividend. Even though net income is projected to fall over the current and next severa years, the price of the stock continues to rise. What behavioral concept may explain this price pattern? A. B. C. D.

Overconfidence Loss aversion Mental accounting Calendar bias

78. During a period when prices have been rising, the _________ will be _______ the current price. A. B. C. D.

relative strength index; declining with relative strength index; declining faster than moving average; above moving average; below

79. An investor purchases shares of an index fund. The investor could take on the same level of risk by taking out a loan and purchasing a higher-risk specialty fund. The Sharpe r...