True or False:
When a risk-free asset is available, investors maximize utility by combining the
risk-free asset with a fund of risky assets. This is referred to as two fund separation
True
The joint hypothesis problem refers to the fact that tests of market efficiency have
two theories tested at the same time. The two theories are
markets are efficient and a model of returns such as CAPM
Dan Ariely is a highly-regarded behavioral economist. In his TED presentation he
talked about differences in organ donation rates across countries. In related recent
news, it is reported that many Georgians do not register to vote. More are now
registered because the system automatically opts Georgians in when they get a
driver's license. True or False: From what Dan Ariely said, we can conclude that
people do not register to vote because they just do not care about who is elected.
False
True or False: I am offered a bet in which I pay $25 to predict whether a coin toss
gives heads or tails. If I predict correctly, I get $40 and, if I don't, I get nothing. If
am risk averse, I will never take this bet.
True
Consider a person with the following value function under prospect theory:
v(w) = w1/2 if w ≥ 0
v(w) = -(-w)1/2 if w < 0
where w = wealth. Is this individual loss averse?
No
With ___________ form market efficiency prices reflect all historical information
only, and not private or other public information.
weak
True or False: The weighting function in Prospect Theory is the same as the
probability in Expected Utility Theory.
False
True or False: In a risky situation you know the possible outcomes and you can
assign probabilities. In contrast, in an uncertain situation you can't assign
probabilities.
True
True or False: Every KSU student is responsible for upholding the Student Code of
Conduct. My integrity is important to me and I have not received help from or
given help to another individual.
True
Which of the following is not a key precept of Prospect Theory?
transitivity
True or False: Segregation of outcomes occurs when positions are lumped
together, while integration occurs when situations are viewed one at a time.
False
Stock X has a beta of 0.8 and the standard deviation of its returns is 24%. Stock Y
has a beta of 1.2 and the standard deviation of its returns is 18%. Which stock has
more total risk?
Stock X
The market risk premium is 6.0% and the risk-free rate is 2.0%. Stock A has a beta
of 1.1 and stock B has a beta of 0.9. What is the expected return for a portfolio
equally invested in the two stocks?
8%
An individual has the following utility function: u(w) = (w)^.5 or the square root
function where w = wealth in dollars. Using expected utility, which prospect is
preferred?
P1(.70, 10,000, 2,500)
P2(.60, 10,000, 4,900)
P2
True or False: The Allais paradox is a well-known contradiction of Prospect
Theory.
False
Laurie Santos studies problems in human psychology with primates. We watched a
TED film in class in which Laurie Santos described her research on
monkeynomics. Which statement best reflects her findings?
Primates have many of the same predictable irrationalities humans do.
In a WSJ article, Jason Zweig talks about how it is easy to mess up but hard to
admit a mistake. He applies his idea to investing. Suppose Breonna is thinking
about buying a stock and Bryan owns the same stock. Who is likely to value the
stock higher?
Bryan
True or False: The efficient frontier is the set of portfolios that maximize return for
a given level of risk.
True
For a person who is _________, a gain adds less to utility than an equal size loss
subtracts from it.
loss averse
You watched "Mind over money," a NOVA documentary. What was illustrated in
the production?
People will sometimes pay more than $20 for a $20 bill.
The expected utility of the prospect is greater than the utility of expected wealth
for a person who is _________. This person would accept a fair gamble.
a risk seeker
With __________ we observe negative correlation in returns.
reversal
Overconfidence can take different forms. Which of the below is NOT a form of
overconfidence?
anchoring
Correlated opinion on value that is not related to fundamental information and can
move markets is called ______________.
sentiment
Which is more likely?
Jamal is good at picking winning stocks.
We watched the film Dot Con. True or False: The film illustrated how analysts are
properly incentivized to give investors accurate information about the firms the
analysts follow.
false
The simultaneous purchase and sale of securities to lock in a risk-free profit is
called
arbitrage
Naomi does not have a university degree and is a struggling entrepreneur. Steve
has an MBA from Wharton and is a Wall Street investment banker. Who would
you guess to be less overconfident about the performance of his/her stock
portfolio?
Naomi
The __________ says that sometimes people are influenced by features that are
easy to assess, instead of by those that are important
evaluability hypothesis
People often bid too much for the asset in a common value auction with
incomplete information. An example is corporate takeovers. Which of the
following is a possible factor in explaining winner's curse?
overconfidence
A key trading rule relates to earnings announcements. The reaction to high or low
earnings announcements is slow. True or false: To profit from this I would buy
when a firm releases positive earnings news, and sell with negative news.
true
The Palm IPO in 2000 seemed to suggest investor irrationality. We concluded
there was another cause, in addition to irrationality. What was it?
limits to arbitrage
A market can be efficient if
the errors investors make are uncorrelated.
Recently the SEC reached an enforcement settlement with Robinhood because
Robinhood accepted inferior price improvement for its customers. Robinhood took
advantage of what is called
payment for order flow
True or False: The small firm effect predicts that small capitalization portfolios
beat large.
true
Aaron completes a survey that uses a confidence interval approach. He is asked to
construct 80% confidence intervals. Of the 100 questions on the survey, Aaron's
intervals include the true answer 87 times. We conclude that Aaron is
underconfident
Amanda describes her sister as smart, hard-working, and quiet. Later when you
think about Amanda's sister you recall that she was described as intelligent. This is
an example of
a primacy effecct
True or False: Researchers report short-term reversal in returns so that winners
become losers and losers become winners.
true
True or False: Value stocks have low price-to-earnings ratios.
true
I just tossed a coin three times and got tails every time. I think it is very likely that
tails will appear next. This is an example of
hot hand phenomenon
Zion is graduating this semester from KSU and she recently applied for a
management position at a local bank. The personnel officer is also a KSU grad and
he really believes students from KSU have great finance skills. So, he just knew he
would find Zion to be a great candidate for the position in all respects. This is an
example of a
halo effect
True or False: An information advantage cannot rationally explain home equity
bias, even for professional investors.
false
True or False: Evidence in finance research suggests that employee satisfaction is
irrelevant for long-run stock returns. Firms that are good companies to work for do
not perform better than average.
false
In 2002, ten of the nation's largest investment banks reached an agreement with
securities regulators. A goal was to resolve conflicts of interest. The NASD
brought a number of charges against research analysts and firms for IPO practices
including
spinning
Studies of employees who manage their own money find that
the majority are momentum chasers.
True or False: In a futureless language like Chinese, the present and future are
spoken about identically. As we saw in a TED talk, economist Keith Chen argues
that language significantly affects the propensity to spend. He argued that a
futureless language has a grammatical structure that encourages negative futureoriented behavior, like saving less.
false
After the 2008 financial crisis regulators attempted to fix some of the problems that
came to light, such as flaws in the rating process for new issues. Which of the
following is currently true about bond ratings?
Issuers pay for ratings so they shop around to find the most favorable one.
A Fortune survey of senior executives suggests that they believe that big firms and
high growth firms are good investments. Which is true?
The executives are not correct. The evidence we discussed in class on good
investment strategies is not consistent with executives' beliefs.
Jon Elster describes six observable features that allow us to define an emotion.
Which of the following is NOT a feature he included in the list of those important
in understanding the substance of emotion?
heuristics
George lives in Waterloo, Ontario, the headquarters of Blackberry, the
telecommunications company. He owns a popular restaurant in Waterloo, which
provides his primary source of income. George also invests most of his money in
the local favorite, Blackberry. George uses a Blackberry and so he feels
comfortable and knowledgeable about the firm. His investment strategy is likely a
good one.
false
Professional financial analysts tend to issue many more buy recommendations than
sell recommendations. True or false: There really is no good explanation for why
they might behave this way.
false
A nineteenth century construction foreman had a terrible accident and became an
important case study for scientists who study the brain. Who was it?
Phineas Gage
According to Dr. John Coates: "We don't think biochemistry explains what starts a
bubble or a crash. We do think, however, that steroids can exaggerate a bull market
and turn it into a bubble. A bull market can almost be seen as a market with roid
rage." As we saw in an Australian television production, "Risky Business," some
behavioralists like Dr. Coates believe that traders take more risk when
higher levels of testosterone elevate confidence.
You are advising a client who is convinced that a good company is a good
investment. This is an example of
representativeness
Which of the following statements is true?
An emotion is not the same as a mood.
The confidence of traders can be contagious. When traders are optimistic, other
traders are more likely to be optimistic too.
True
People often make decisions based on emotions relating to possible future
emotions. Which of the following is a likely example of this?
Eric keeps holding onto a stock even though it has performed very badly.
Some people do not believe in climate change but the stock market does care. For
example, there is evidence that stocks that report negative climate change news
underperform compared to stock market indexes.
True
Barber and Odean examined trading histories for 60,000 investors during the
1990s. Which of the following is true?
The evidence indirectly relates trading activity and overconfidence.
Clearly the process of evolution has given humans a big advantage. What is the
biggest advantage humans have over other vertebrate animals?
The ability to plan for the future.
AT&T was forced into a divesture creating seven regional bell companies in 1984.
Suppose that at that time, your aunt lived here in Atlanta, was a manager at the
firm, and was very optimistic about the future of the company. She chose to move
all of her investment from AT&T stock into BellSouth. If you had been able to
advise her at that time, based on what you have learned in Behavioral Finance what
would you have told her?
I would have advised her against putting all in BellSouth.
Stanley Milgram's experiments are famous around the world because the results
were shocking. Which of the following is a true statement regarding Milgram's
results?
Many subjects reported that loyalty drove their behavior.
The "flash crash" led to new trading restrictions in the U.S. and refers to
a U.S. market disruption in 2010 that was not caused by a change in fundamentals.
Recent research reports on financial misconduct rates across major U.S. cities.
Atlanta is one of the worst when it comes to financial misconduct.
false
In 2020 a judge in Chicago convicted Navinder Sarao who was implicated in
playing a role in the "flash crash" of 2010. What was his illegal behavior?
Spoofing or placing orders to create demand then canceling them before execution
Groupthink is a psychological phenomenon in which people strive for consensus
within a group. In many cases, people will set aside their own personal beliefs or
adopt the opinion of the rest of the group. Groupthink is more likely to take place
when
All of the above.
(a) the group has illusions of invulnerability.
(b) a powerful leader commands the group.
(c) members of the group have unquestioned beliefs.
An example of social conformity is
All of the above.
(a) the Standing Experiment.
(b) the Milgram Experiment.
(c) Asch's experiments.
Research shows that preschool children from less wealthy families are more
charitable than children from wealthier families.
True
You observe that your client, Philandro, tends to hold on to stocks that have been
winners and sell stocks that have been losers. His behavior is consistent with the
disposition effect.
false
Angel is a financial analyst who works for Morgan Stanley, the large full-service
investment bank, and generates reports for the firm's clients. She would like to
attract business for her firm and is a(n)
sell-side analyst.
Psychologists have a clear understanding of the relationship between mood and
risk attitude. For example, sad people are always more willing to take gambles.
False
In "Dishonesty: The Truth about Lies" it was argued that cheating increases as the
distance from money decreases.
False
Martina just won $100,000 in Las Vegas. Now she is doubling-up on her bets and
making even bigger wagers than previously. This is an example of
the house money effect.
Your aunt is upset because she lost a lot of money in the stock market after the last
financial crisis. She is nervous about investing in the stock market and has moved
her money to less risky investments like certificates of deposit. What is this an
example of?
the snake-bit effect.
Herding is never rational.
False
The Securities and Exchange Commission put in place a market-wide circuit
breaker rule in response to Black Monday, the market crash in 1987. Later they
added a limit up-limit down mechanism. True or false: Trades are rarely prevented
due to the limit up-limit down mechanism.
False
Terrance Odean provided evidence of the disposition effect using a database of
discount brokerage trading accounts. He computed the proportion of gains realized
(PGR) and the proportion of losses realized (PLR) and found that
PLR < PGR.
In the trust game the responder (or trustee) can choose to send some money back to
the proposer (also called the investor). Which of the following is true
Trust may not pay for some investors in that many trustees keep more than they
return.
Bernie Madoff was once chairman of the NASDAQ stock market. He was a highly
respected and trusted investment advisor who committed the largest financial fraud
in U.S. history. His firm's period of growth resulted from _________.
a Ponzi scheme
A researcher named Solomon Asch put students in groups and asked them to pick a
line (from a set of three) that was the same length as a line given initially. Which is
correct?
The correct answer was obvious, but students often conformed to an incorrect
majority.
Who is the primary provider of internal discipline to managers?
corporate board
A recent Financial Times article warned that there may be exuberance in the
pricing of
all of the above.
(a) housing markets.
(b) cryptos.
(c) junk bonds.
Questionnaires are often used to assess a client's risk tolerance. A problem is that
sometimes when a question is asked slightly differently, clients change their
answers. This is a problem with
questionnaire reliability.
At long horizons, bonds almost always outperform stocks.
False
To be assured of reaching retirement savings targets, the author of an article we
read recommended that you should save a total of ____ times the annual income
you want when you retire.
twenty two
According to the __________ people buy assets at prices they know are too high
because they believe someone else will pay even more.
greater fool theory
A behavioral explanation for the equity premium puzzle is called myopic loss
aversion. With myopic loss aversion investors
are loss averse and evaluate their wealth position about once a year.
Housing prices in the United States fell during the 2007-2008 financial crisis. True
or False: Current home prices in Atlanta are persistently low and never recovered.
False
When Ahmal started at his current job, his company did not automatically enroll
him in a retirement savings plan and he still has not enrolled. When Sarah started
hers, she was enrolled in an automatic savings plan and has stayed in the plan.
Ahmal and Sarah's choices are probably driven by
status quo bias.
Which of the following is a benefit of a defined benefit plan?
avoidance of longevity risk
A goal of a scheduled deferral increase program (SDIP) is to convince employees
to commit to future contribution increases at regular intervals. True or False:
Research indicates that they can be successful in increasing savings rates.
True
According to recent data, the percentage of employees who hold company stock in
their retirement plan is now virtually zero.
False
Many people do not save enough for retirement. This could be due to
All of the above.
(a) limited self-control.
(b) status quo bias.
(c) present bias.
In the United States, it is very difficult to open an IRA (individual retirement
account). If you want to open an IRA you have to make an appointment to see an
adviser in person and, in addition, you need at least $20,000 to get started. This can
explain why many people do not invest.
False
An investor's risk tolerance has two aspects that are important to a wealth manager
when giving advice. They are
risk attitude and capacity.
One market puzzle is the finding that stock prices move too much to be predicted
by the present value of future dividends. This is called
excess volatility.
In an experimental bubbles market, participants trade assets with a fixed life. We
typically see prices rise well above fundamental value but crash near the end of
trading. Which of the following is true?
Bubbles are smaller when traders are experienced in the experiment.
We look at price/earnings ratios as a gauge of the appropriateness of market
valuations. True or False: These days market overvaluation is at an all-time high.
False
The equity premium is the extra return demanded by investors to compensate for
the risk of investing in stocks.
True
Ahmaud started with his firm 30 years ago when he was 25 years old. At that time,
he opened a retirement savings plan and allocated 85% of the contributions to a
stock fund and 15% to a bond fund. Since then, his allocations have not changed.
What is(are) the potential problem(s)?
(d) Both a and b.
(a) If he really wanted to keep the same risk exposure, he needed to rebalance as
the value of his investments changed over time.
(b) As he got older, he probably should have tilted away from stocks and increased
his allocation to the bond fund.
(c) Today (at age 55) he should really be putting more money into stocks to ensure
a well-funded retirement.
(d) Both a and b.
(e) There is no problem with Ahmaud's decisions, and he could suffer if he
reevaluated his portfolio too frequently.
Money Illusion means that people base decisions on nominal rather than real
values.
True