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TBChap 012 - Test Bank
Portfolio management (‫)دياز ةعماج‬
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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 who 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 should ignore how
the average person makes decisions because the market is driven by investors
who are much more sophisticated than the average person.
E. None of the
options
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3. Some economists believe that the anomalies literature is consistent with investors'
A. ability to always process information correctly and therefore they infer correct
probability distributions about future rates of return; and 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; and 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; and 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; and given a probability
distribution of returns, they often make inconsistent or suboptimal decisions.
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 the
options
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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.
7. If a person gives too much weight to recent information compared to prior beliefs,
they would make ________ errors.
A. framin
g
B. selection
bias
C. overconfiden
ce
D. conservatis
m
E. forecasti
ng
8. Single men trade far more often than women. This is due to greater ________ among
men.
A. framin
g
B. regret
avoidance
C. overconfiden
ce
D. conservatis
m
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9. ____________ may be responsible for the prevalence of active versus passive
investments management.
A. Forecasting
errors
B. Overconfiden
ce
C. Mental
accounting
D. Conservatis
m
E. Regret
avoidance
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. overconfidenc
e.
B. framin
g.
C. regret
avoidance.
D. sample
neglect.
11. ________ bias means that investors are too slow in updating their beliefs in response
to evidence.
A. Framin
g
B. Regret
avoidance
C. Overconfiden
ce
D. Conservatis
m
E. None of the
options
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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. framin
g.
C. mental
accounting.
D. overconfiden
ce.
E. obnoxicit
y.
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. framin
g
B. regret
avoidance
C. overconfiden
ce
D. conservatis
m
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. overconfiden
ce
D. conservatis
m
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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. overconfiden
ce
D. conservatis
m
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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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. 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.
19. On August 27, 2012, there were 1,455 stocks that advanced on the NYSE and 1,553
that declined. The volume in advancing issues was 852,581 and the volume in
declining issues was 1,058,312. 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
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20. 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. None of the
options
D. bullish;
above
21. 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.
22. ____________ 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. Breadt
h
D. Confidence
index
E. All of the
options
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23. The 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
24. 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
25. 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-andhold 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
that active traders will find it difficult to outperform a buy-and-hold strategy.
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26. Tests of market efficiency have focused on
A. the mean-variance efficiency of the selected
market proxy.
B. strategies that would have provided superior riskadjusted 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.
27. 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 the
options
28. 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 the
options
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29. Markets would be inefficient if irrational investors __________ and actions of
arbitragers were __________.
A. existed;
unlimited
B. did not exist;
unlimited
C. existed;
limited
D. did not exist;
limited
30. 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
31. __________ 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
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32. 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
33. 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. frau
d.
34. 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. forecasting errors and earnings expectations that are too
extreme.
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35. 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
36. 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
37. If information processing was 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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38. 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 losses relative to current wealth
B. convex and defined in terms of losses relative to current wealth; s-shaped (convex
to losses and concave to gains) and defined in terms of losses relative to current
wealth
C. s-shaped (convex to losses and concave to gains) and defined in terms of losses
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 losses relative to current wealth
E. convex and defined in terms of wealth; concave and defined in terms of gains
relative to current wealth
39. 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 carveouts
C. closed-end
funds
D. Siamese twin companies and closed-end
funds
E. All of the
options
40. 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
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41. 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. peopl
e
D. older
men
E. older
women
42. Barber and Odean (2001) report that men trade __________ frequently than women.
A. les
s
B. less in down
markets
C. more in up
markets
D. mor
e
43. Barber and Odean (2001) report that women trade __________ frequently than men.
A. les
s
B. less in down
markets
C. more in up
markets
D. mor
e
12-15
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44. Barber and Odean (2001) report that men __________ women.
A. earn higher returns
than
B. earn lower returns
than
C. earn about the same
returns as
D. generate lower trading costs
than
45. Barber and Odean (2001) report that women __________ men.
A. earn higher returns
than
B. earn lower returns
than
C. earn about the same
returns as
D. generate higher trading costs
than
46. __________ effects can help explain momentum in stock prices.
A. Conservatis
m
B. Regret
avoidance
C. Prospect
theory
D. Mental
accounting
E. Model
risk
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47. 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
48. 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
49. Studies of closed-end funds find __________, which __________ the EMH.
A. prices at a premium to NAV; is
consistent with
B. prices at a premium to NAV; is
inconsistent with
C. prices at a discount to NAV; is
consistent with
D. prices at a discount to NAV; is
inconsistent with
E. prices at premiums and discounts to NAV; is
inconsistent with
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50. ____________ measures the extent to which a security has outperformed or
underperformed either the market as a whole or its particular industry.
A. Put-call
ratio
B. Trin
ratio
C. Breadt
h
D. Relative
strength
E. All of the
options
Short Answer Questions
51. Compare and contrast the efficient market hypothesis with the school of thought
termed behavioral finance.
52. Behavioral finance posits that investors possess information processing errors.
Discuss the importance of information processing errors, then list and explain the
four information processing errors discussed in the text.
12-18
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53. Behavioral finance posits that investors possess behavioral biases. Discuss the
importance of behavioral biases, then list and explain the four behavioral biases
discussed in the text.
54. Discuss what technical analysis is, what technical analysts do, and the relationship
between technical analysis, fundamental analysis, and behavioral finance.
12-19
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Chapter 12 Behavioral Finance and Technical Analysis Answer
Key
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
Conventional theories presume that investors are rational, and behavioral finance
presumes that they may not be rational.
AACSB: Analytic
Blooms: Remember
Difficulty: Basic
Topic: Behavioral Critique
12-20
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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 who 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 should
ignore how the average person makes decisions because the market is driven
by investors who are much more sophisticated than the average person.
E. None of the
options
The premise of behavioral finance is that conventional financial theory ignores how
real people make decisions and that people make a difference.
AACSB: Analytic
Blooms: Remember
Difficulty: Basic
Topic: Behavioral Critique
12-21
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3.
Some economists believe that the anomalies literature is consistent with
investors'
A. ability to always process information correctly and therefore they infer correct
probability distributions about future rates of return; and 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; and 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; and 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; and given a
probability distribution of returns, they often make inconsistent or suboptimal
decisions.
Some economists believe that the anomalies literature is consistent with investors'
inability to always process information correctly and therefore they infer incorrect
probability distributions about future rates of return; and given a probability
distribution of returns, they often make inconsistent or suboptimal decisions.
AACSB: Analytic
Blooms: Remember
Difficulty: Intermediate
Topic: Behavioral Critique
12-22
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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
Information processing errors consist of forecasting errors, overconfidence, and
conservatism.
AACSB: Analytic
Blooms: Remember
Difficulty: Intermediate
Topic: Behavioral Critique
5.
Forecasting errors are potentially important because
A. research suggests
information.
B. research suggests
information.
C. research suggests
information.
D. research suggests
overweight recent
or bad.
E. None of the
options
that people underweight recent
that people overweight recent
that people correctly weight recent
that people either underweight recent information or
information depending on whether the information was good
Forecasting errors are potentially important because research suggests that people
overweight recent information.
AACSB: Analytic
Blooms: Understand
Difficulty: Intermediate
12-23
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Topic: Behavioral Critique
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.
DeBondt and Thaler believe that high P/E result from investors' earnings
expectations that are too extreme.
AACSB: Analytic
Blooms: Remember
Difficulty: Intermediate
Topic: Behavioral Critique
7.
If a person gives too much weight to recent information compared to prior beliefs,
they would make ________ errors.
A. framin
g
B. selection
bias
C. overconfiden
ce
D. conservatis
m
E. forecasti
ng
If a person gives too much weight to recent information compared to prior beliefs,
they would make forecasting errors.
AACSB: Analytic
Blooms: Understand
Difficulty: Intermediate
Topic: Behavioral Critique
12-24
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8.
Single men trade far more often than women. This is due to greater ________
among men.
A. framin
g
B. regret
avoidance
C. overconfiden
ce
D. conservatis
m
Single men trade far more often than women. This is due to greater
overconfidence among men.
AACSB: Analytic
Blooms: Remember
Difficulty: Intermediate
Topic: Behavioral Critique
9.
____________ may be responsible for the prevalence of active versus passive
investments management.
A. Forecasting
errors
B. Overconfiden
ce
C. Mental
accounting
D. Conservatis
m
E. Regret
avoidance
Overconfidence may be responsible for the prevalence of active versus passive
investments management.
AACSB: Analytic
Blooms: Remember
Difficulty: Intermediate
Topic: Behavioral Critique
12-25
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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. overconfidenc
e.
B. framin
g.
C. regret
avoidance.
D. sample
neglect.
They attribute this to overconfidence.
AACSB: Analytic
Blooms: Remember
Difficulty: Intermediate
Topic: Behavioral Critique
11.
________ bias means that investors are too slow in updating their beliefs in
response to evidence.
A. Framin
g
B. Regret
avoidance
C. Overconfiden
ce
D. Conservatis
m
E. None of the
options
Conservatism bias means that investors are too slow in updating their beliefs in
response to evidence.
AACSB: Analytic
Blooms: Remember
Difficulty: Intermediate
Topic: Behavioral Critique
12-26
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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. framin
g.
C. mental
accounting.
D. overconfidenc
e.
E. obnoxicit
y.
An investments example given in the text is buying the stock of a start-up firm
that shows subsequent poor performance, versus buying blue chip stocks that
perform poorly. Investors tend to have more regret if they chose the less
conventional start-up stock. DeBondt and Thaler say that such regret theory is
consistent with the size effect and the book-to-market effect.
AACSB: Analytic
Blooms: Remember
Difficulty: Intermediate
Topic: Behavioral Critique
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. framin
g
B. regret
avoidance
C. overconfiden
ce
D. conservatis
m
An example of framing 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.
AACSB: Analytic
Blooms: Remember
Difficulty: Intermediate
12-27
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Topic: Behavioral Critique
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. overconfiden
ce
D. conservatis
m
Statman (1977) argues that mental accounting is consistent with some investors'
irrational preference for stocks with high cash dividends and with a tendency to
hold losing positions too long.
AACSB: Analytic
Blooms: Remember
Difficulty: Intermediate
Topic: Behavioral Critique
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. overconfiden
ce
D. conservatis
m
An example of regret avoidance 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.
AACSB: Analytic
Blooms: Understand
Difficulty: Intermediate
Topic: Behavioral Critique
12-28
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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
Arbitrageurs may be unable to exploit behavioral biases due to fundamental risk,
implementation costs, and model risk.
AACSB: Analytic
Blooms: Remember
Difficulty: Intermediate
Topic: Limits to Arbitrage
12-29
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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
Siamese twin companies, closed end funds, and equity carve-outs are good
examples of the limits to arbitrage because they show that the law of one price is
violated.
AACSB: Analytic
Blooms: Remember
Difficulty: Intermediate
Topic: Limits to Arbitrage
18.
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.
A trin ratio of less than 1.0 is considered bullish because the declining stocks have
lower average volume than the advancing stocks, indicating net buying pressure.
AACSB: Analytic
Blooms: Understand
12-30
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Difficulty: Basic
Topic: Technical Analysis and Behavioral Finance
19.
On August 27, 2012, there were 1,455 stocks that advanced on the NYSE and
1,553 that declined. The volume in advancing issues was 852,581 and the volume
in declining issues was 1,058,312. 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
(1,058,312/1553)/(852,581/1455) = 1.16. A trin ratio more than 1 is considered
bearish because declining stocks have a higher volume than advancing stocks,
indicating selling pressure.
AACSB: Analytic
Blooms: Apply
Difficulty: Intermediate
Topic: Technical Analysis and Behavioral Finance
20.
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. None of the
options
D. bullish;
above
In regard to moving averages, it is considered to be a bullish signal when market
price breaks through the moving average from below. In addition, it is considered
to be a bearish signal when market price breaks through the moving average from
above.
AACSB: Analytic
Blooms: Understand
Difficulty: Intermediate
Topic: Technical Analysis and Behavioral Finance
12-31
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21.
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.
Two popular moving average periods are 200-day and 53 week.
AACSB: Analytic
Blooms: Remember
Difficulty: Intermediate
Topic: Technical Analysis and Behavioral Finance
22.
____________ 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. Breadt
h
D. Confidence
index
E. All of the
options
Breadth 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.
AACSB: Analytic
Blooms: Remember
Difficulty: Intermediate
Topic: Technical Analysis and Behavioral Finance
12-32
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23.
The 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
The confidence index is computed from bond yields, and higher values are
considered bullish signals.
AACSB: Analytic
Blooms: Understand
Difficulty: Intermediate
Topic: Technical Analysis and Behavioral Finance
24.
The put/call ratio is computed as ____________, and higher values are considered
____________ signals.
A. the number of outstanding
bullish or bearish
B. the number of outstanding
options; bullish
C. the number of outstanding
options; bearish
D. the number of outstanding
options; bullish
E. the number of outstanding
options; bearish
put options divided by outstanding call options;
put options divided by outstanding call
put options divided by outstanding call
call options divided by outstanding put
call options divided by outstanding put
The put/call ratio is computed as the number of outstanding put options divided by
outstanding call options, and higher values are considered bullish or bearish
signals.
AACSB: Analytic
Blooms: Understand
Difficulty: Intermediate
Topic: Technical Analysis and Behavioral Finance
12-33
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25.
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-andhold 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 that active traders will find it difficult to outperform a buy-and-hold
strategy.
The efficient market hypothesis implies that security prices properly reflect
information available to investors and active traders will find it difficult to
outperform a buy-and-hold strategy.
AACSB: Analytic
Blooms: Remember
Difficulty: Intermediate
Topic: Behavioral Critique
26.
Tests of market efficiency have focused on
A. the mean-variance efficiency of the selected
market proxy.
B. strategies that would have provided superior riskadjusted 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.
Tests of market efficiency have focused on strategies that would have provided
superior risk-adjusted returns and results of actual investments of professional
managers.
AACSB: Analytic
Blooms: Understand
Difficulty: Intermediate
Topic: Behavioral Critique
12-34
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27.
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 the
options
The anomalies literature suggests that several strategies would have provided
superior returns.
AACSB: Analytic
Blooms: Remember
Difficulty: Intermediate
Topic: Behavioral Critique
28.
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 the
options
Behavioral finance argues that 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.
AACSB: Analytic
Blooms: Understand
Difficulty: Intermediate
Topic: Behavioral Critique
12-35
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29.
Markets would be inefficient if irrational investors __________ and actions of
arbitragers were __________.
A. existed;
unlimited
B. did not exist;
unlimited
C. existed;
limited
D. did not exist;
limited
Markets would be inefficient if irrational investors existed and actions if arbitragers
were limited.
AACSB: Analytic
Blooms: Understand
Difficulty: Intermediate
Topic: Limits to Arbitrage
30.
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
If prices are correct, there are no easy profit opportunities and if prices are not
correct, there are no easy profit opportunities.
AACSB: Analytic
Blooms: Understand
Difficulty: Intermediate
Topic: Limits to Arbitrage
12-36
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31.
__________ 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
Information processing errors can lead investors to misestimate the true
probabilities of possible events or associated rates of return.
AACSB: Analytic
Blooms: Understand
Difficulty: Intermediate
Topic: Limits to Arbitrage
32.
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
Kahneman and Tversky (1973) report that people give too much weight to recent
experience compared to prior beliefs and tend to make forecasts that are too
extreme given the uncertainty of their information.
AACSB: Analytic
Blooms: Understand
Difficulty: Challenge
Topic: Technical Analysis and Behavioral Finance
12-37
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33.
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. frau
d.
Errors in information processing can lead investors to misestimate true
probabilities of possible events and associated rates of return.
AACSB: Analytic
Blooms: Understand
Difficulty: Intermediate
Topic: Technical Analysis and Behavioral Finance
34.
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. forecasting errors and earnings expectations that are too
extreme.
DeBondt and Thaler (1990) argue that the P/E effect can be explained by
forecasting errors and earnings expectations that are too extreme.
AACSB: Analytic
Blooms: Remember
Difficulty: Intermediate
Topic: Behavioral Critique
12-38
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35.
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
Barber and Odean (2001) report that men trade more frequently than women and
the frequent trading leads to inferior returns.
AACSB: Analytic
Blooms: Understand
Difficulty: Intermediate
Topic: Behavioral Critique
36.
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
Conservatism implies that investors are too slow in updating their beliefs in
response to new evidence and that they initially underreact to news.
AACSB: Analytic
Blooms: Understand
Difficulty: Intermediate
Topic: Behavioral Critique
12-39
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37.
If information processing was 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
If information processing was perfect, many studies conclude that individuals
would tend to make less than fully rational decisions using that information due to
behavioral biases.
AACSB: Analytic
Blooms: Understand
Difficulty: Intermediate
Topic: Behavioral Critique
12-40
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38.
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 losses relative to current wealth
B. convex and defined in terms of losses relative to current wealth; s-shaped
(convex to losses and concave to gains) and defined in terms of losses relative
to current wealth
C. s-shaped (convex to losses and concave to gains) and defined in terms of losses
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 losses relative to current wealth
E. convex and defined in terms of wealth; concave and defined in terms of gains
relative to current wealth
The assumptions concerning the shape of utility functions of investors differ
between conventional theory and prospect theory. Conventional theory assumes
that utility functions are concave and defined in terms of wealth whereas prospect
theory assumes that utility functions are s-shaped (convex to losses and concave
to gains) and defined in terms of losses relative to current wealth.
AACSB: Analytic
Blooms: Understand
Difficulty: Challenge
Topic: Behavioral Critique
12-41
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39.
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 carveouts
C. closed-end
funds
D. Siamese twin companies and closed-end
funds
E. All of the
options
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
Siamese twin companies, equity carve-outs, and closed-end funds are often
mispriced.
AACSB: Analytic
Blooms: Understand
Difficulty: Challenge
Topic: Limits to Arbitrage
40.
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
Kahneman and Tversky (1973) reported that people give too much weight to
recent experience compared to prior beliefs when making forecasts. This is
referred to as memory bias.
AACSB: Analytic
Blooms: Understand
Difficulty: Intermediate
Topic: Behavioral Critique
12-42
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41.
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. peopl
e
D. older
men
E. older
women
Kahneman and Tversky (1973) reported that people give too much weight to
recent experience compared to prior beliefs when making forecasts.
AACSB: Analytic
Blooms: Remember
Difficulty: Intermediate
Topic: Behavioral Critique
42.
Barber and Odean (2001) report that men trade __________ frequently than
women.
A. les
s
B. less in down
markets
C. more in up
markets
D. mor
e
Barber and Odean (2001) report that men trade more frequently than women.
AACSB: Analytic
Blooms: Remember
Difficulty: Intermediate
Topic: Behavioral Critique
12-43
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43.
Barber and Odean (2001) report that women trade __________ frequently than
men.
A. les
s
B. less in down
markets
C. more in up
markets
D. mor
e
Barber and Odean (2001) report that men trade more frequently than women.
AACSB: Analytic
Blooms: Remember
Difficulty: Intermediate
Topic: Behavioral Critique
44.
Barber and Odean (2001) report that men __________ women.
A. earn higher returns
than
B. earn lower returns
than
C. earn about the same
returns as
D. generate lower trading costs
than
Barber and Odean (2001) report that men trade more frequently than women and
have lower returns.
AACSB: Analytic
Blooms: Remember
Difficulty: Intermediate
Topic: Behavioral Critique
12-44
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45.
Barber and Odean (2001) report that women __________ men.
A. earn higher returns
than
B. earn lower returns
than
C. earn about the same
returns as
D. generate higher trading costs
than
Barber and Odean (2001) report that men trade more frequently than women and
have lower returns.
AACSB: Analytic
Blooms: Remember
Difficulty: Intermediate
Topic: Behavioral Critique
46.
__________ effects can help explain momentum in stock prices.
A. Conservatis
m
B. Regret
avoidance
C. Prospect
theory
D. Mental
accounting
E. Model
risk
Mental accounting effects can help explain momentum in stock prices.
AACSB: Analytic
Blooms: Understand
Difficulty: Intermediate
Topic: Behavioral Critique
12-45
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47.
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
Studies of Siamese twin companies find incorrect relative pricing, which does not
support the EMH.
AACSB: Analytic
Blooms: Understand
Difficulty: Intermediate
Topic: Limits to Arbitrage
48.
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
Studies of equity carve-outs find evidence against the law of one price, which
violates the EMH.
AACSB: Analytic
Blooms: Understand
Difficulty: Intermediate
Topic: Limits to Arbitrage
12-46
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49.
Studies of closed-end funds find __________, which __________ the EMH.
A. prices at a premium to NAV; is
consistent with
B. prices at a premium to NAV; is
inconsistent with
C. prices at a discount to NAV; is
consistent with
D. prices at a discount to NAV; is
inconsistent with
E. prices at premiums and discounts to NAV; is
inconsistent with
Studies of closed-end funds find prices at premiums and discounts to NAV, which is
inconsistent with the EMH.
AACSB: Analytic
Blooms: Understand
Difficulty: Intermediate
Topic: Limits to Arbitrage
50.
____________ measures the extent to which a security has outperformed or
underperformed either the market as a whole or its particular industry.
A. Put-call
ratio
B. Trin
ratio
C. Breadt
h
D. Relative
strength
E. All of the
options
Relative strength measures the extent to which a security has outperformed or
underperformed either the market as a whole or its particular industry. Relative
strength is computed by calculating the ratio of the price of the security to a price
index for the industry.
AACSB: Analytic
Blooms: Remember
Difficulty: Intermediate
Topic: Technical Analysis and Behavioral Finance
12-47
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Short Answer Questions
51.
Compare and contrast the efficient market hypothesis with the school of thought
termed behavioral finance.
The efficient market hypothesis posits that investors are fully informed, rational,
utility maximizers. Thus, security prices will fully reflect all information available to
the investors. If any security becomes mispriced, the collective buying and selling
actions of investors will quickly cause prices to change. Given an efficient market,
it would be difficult to find a trading rule that would consistently outperform the
market. Moreover, failure to uncover profitable trading strategies may be taken as
proof of market efficiency. Behavioral finance argues that conventional theory
ignores how real people make decisions and that people make a difference.
Behavioral finance says that investors possess two "irrationalities." First, investors
do not always process information correctly, and secondly they often make
systematically suboptimal decisions. Given less than perfectly rational investors,
prices may be wrong and it still may be hard to exploit them. Thus, failure to
uncover profitable trading strategies may not be taken as proof of market
efficiency.
Feedback: This question tests the students understanding of the relationship
between the EMH and behavioral finance.
AACSB: Reflective Thinking
Blooms: Understand
Difficulty: Challenge
Topic: Behavioral Critique
12-48
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52.
Behavioral finance posits that investors possess information processing errors.
Discuss the importance of information processing errors, then list and explain the
four information processing errors discussed in the text.
Information processing errors are important because they can lead investors to
misestimate the true probabilities of possible events or associated rates of return.
The four information processing errors are forecasting errors, overconfidence,
conservatism, and sample size neglect. Forecasting errors arise when people give
too much weight to recent experience. This leads to forecasts that are too
extreme. Overconfidence refers to traders believing that they are better than
average. This belief that they are superior leads to frequent trading (and,
according to empirical evidence, lower returns). Conservatism refers investors
being slow in responding to new information rather than acting immediately.
Sample size neglect refers to investors ignoring the size of a sample and making
inferences based on a small sample.
Feedback: This question tests the students' understanding of information
processing errors.
AACSB: Reflective Thinking
Blooms: Understand
Difficulty: Challenge
Topic: Behavioral Critique
12-49
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53.
Behavioral finance posits that investors possess behavioral biases. Discuss the
importance of behavioral biases, then list and explain the four behavioral biases
discussed in the text.
Behavioral biases are important because even if information processing was
perfect, individuals may tend to make less than fully rational decisions using that
information. The four behavioral biases are framing, mental accounting, regret
avoidance, and prospect theory (or loss aversion). Framing refers to the tendency
of investors to change preferences due to the way an investment is "framed" (i.e.,
in terms of risk or in terms of return). Mental accounting is a specific form of
framing where an investor takes a lot of risk with one investment account, but
little risk with another account. Regret avoidance refers to the tendency of
investors to blame themselves more for an unconventional investment that was
unsuccessful than a conventional investment that was unsuccessful. Prospect
theory (loss avoidance) suggests that the investor's utility curve is not concave
and defined in terms of wealth. Instead, the investor's utility function would be
defined in terms of losses relative to current wealth. Thus, the utility curve is
convex to losses and concave to gains, giving rise to an s-shaped utility curve.
Feedback: This question tests the students' understanding of behavioral biases.
AACSB: Reflective Thinking
Blooms: Understand
Difficulty: Challenge
Topic: Behavioral Critique
12-50
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54.
Discuss what technical analysis is, what technical analysts do, and the relationship
between technical analysis, fundamental analysis, and behavioral finance.
Technical analysis attempts to exploit recurring and predictable patterns in stock
prices to generate superior portfolio performance. To determine recurring patterns,
technical analysts examine historical returns by means of charts and or time-series
analysis (such as moving averages). Technical analysts do not deny fundamental
analysis but believe that prices adjust slowly to new information. Therefore, the
key is to exploit the slow adjustment to the correct new price when information is
released. Technical analysts also use volume and other data to assess market
sentiment in an attempt to ascertain the future direction of the market.
Behaviorists believe that behavioral biases may be related to both price and
volume data. Thus, technical analysis can be related to behavioral finance.
Feedback: This question tests the students understanding of technical analysis;
and how technical analysis relates to fundamental analysis and behavioral finance.
AACSB: Reflective Thinking
Blooms: Understand
Difficulty: Challenge
Topic: Technical Analysis and Behavioral Finance
12-51
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McGraw-Hill Education.
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