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Chapter12BehavioralFinanceandTechnicalAnalysis

MultipleChoiceQuestions

1.Conventionaltheoriespresumethatinvestorsandbehavioralfinance

presumesthatthey.

A)areirrational;areirrational

B)arerational;maynotberational

C)arerational;arerational

D)maynotberational;maynotberational

E)maynotberational;arerational

Answer:BDifficulty:Easy

2.Thepremiseofbehavioralfinanceisthat

A)conventionalfinancialtheoryignoreshowrealpeoplemakedecisionsandthat

peoplemakeadifference.

B)conventionalfinancialtheoryconsidershowemotionalpeoplemakedecisionsbut

themarketisdrivenbyrationalutilitymaximizinginvestors.

C)conventionalfinancialtheoryshouldignorehowtheaveragepersonmakes

decisionsbecausethemarketisdrivenbyinvestorsthataremuchmore

sophisticatedthantheaverageperson.

D)BandC

E)noneoftheabove

Answer:ADifficulty:Easy

3.Someeconomistsbelievethattheanomaliesliteratureisconsistentwithinvestors9

and.

A)abilitytoalwaysprocessinformationcorrectlyandthereforetheyinfercorrect

probabilitydistributionsaboutfutureratesofreturn;givenaprobabilitydistribution

ofreturns,theyalwaysmakeconsistentandoptimaldecisions

B)inabilitytoalwaysprocessinformationcorrectlyandthereforetheyinferincorrect

probabilitydistributionsaboutfutureratesofreturn;givenaprobabilitydistribution

ofreturns,theyalwaysmakeconsistentandoptimaldecisions

C)abilitytoalwaysprocessinformationcorrectlyandthereforetheyinfercorrect

probabilitydistributionsaboutfutureratesofreturn;givenaprobabilitydistribution

ofreturns,theyoftenmakeinconsistentorsuboptimaldecisions

D)inabilitytoalwaysprocessinformationcorrectlyandthereforetheyinferincorrect

probabilitydistributionsaboutfutureratesofreturn;givenaprobabilitydistribution

ofreturns,theyoftenmakeinconsistentorsuboptimaldecisions

E)noneoftheabove

Answer:DDifficulty:Moderate

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Chapter12BehavioralFinanceandTechnicalAnalysis

4.Informationprocessingerrorsconsistof

I)forecastingerrors

II)overconfidence

III)conservatism

IV)framing

A)IandII

B)IandIII

C)IIIandIV

D)IVonly

E)I,IIandIII

Answer:EDifficulty:Moderate

5.Forecastingerrorsarepotentiallyimportantbecause

A)researchsuggeststhatpeopleunderweightrecentinformation.

B)researchsuggeststhatpeopleoverweightrecentinformation.

C)researchsuggeststhatpeoplecorrectlyweightrecentinformation.

D)eitherAorBdependingonwhethertheinformationwasgoodorbad.

E)noneoftheabove.

Answer:BDifficulty:Moderate

6.DeBondtandThalerbelievethathighP/Eresultfrominvestors

A)earningsexpectationsthataretooextreme.

B)earningsexpectationsthatarenotextremeenough.

C)stockpriceexpectationsthataretooextreme.

D)stockpriceexpectationsthatarenotextremeenough.

E)noneoftheabove.

Answer:ADifficulty:Moderate

7.Ifapersongivestoomuchweighttorecentinformationcomparedtopriorbeliefs,they

wouldmakeerrors.

A)framing

B)selectionbias

C)overconfidence

D)conservatism

E)forecasting

Answer:EDifficulty:Moderate

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Chapter12BehavioralFinanceandTechnicalAnalysis

8.Singlementradefarmoreoftenthanwomen.Thisisduetogreateramong

men.

A

framing

Bx

—7regretavoidance

cx

—7overconfidence

D

conservatism

Ex

—7noneoftheabove

Answer:CDifficulty:Moderate

9.mayberesponsiblefortheprevalenceofactiveversuspassive

investmentsmanagement.

A

Forecastingerrors

Bx

—7Overconfidence

cx

—7Mentalaccounting

D\

)

zConservatism

Ex

—7Regretavoidance

Answer:BDifnculty:Moderate

10.BarberandOdean(2000)rankedportfoliosbyturnoverandreportthatthedifferencein

returnbetweenthehighestandlowestturnoverportfoliosis7%peryear.Theyattribute

?

H

thAto

Boverconfidence

)

/

cframing

\

Jregretavoidance

DX

ZHsampleneglect

Ex

7—alloftheabove

Answer:ADifficulty:Moderate

11.biasmeansthatinvestorsaretooslowinupdatingtheirbeliefsinresponseto

evidence.

A

framing

B\

|

7regretavoidance

c\

l

7overconfidence

D\

l

zconservatism

E\

)

znoneoftheabove

Answer:DDifficulty:Moderate

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Chapter12BehavioralFinanceandTechnicalAnalysis

12.Psychologistshavefoundthatpeoplewhomakedecisionsthatturnoutbadlyblame

themselvesmorewhenthatdecisionwasunconventional.Thenameforthis

phenomenonis

A)regretavoidance

B)framing

C)mentalaccounting

D)overconfidence

E)obnoxicity

Answer:ADifficulty:Moderate

Rationale:Aninvestmentsexamplegiveninthetextisbuyingthestockofastart-up

firmthatshowssubsequentpoorperformance,versusbuyingbluechipstocksthat

performpoorly.Investorstendtohavemoreregretiftheychosethelessconventional

start-upstock.DeBondtandThalersaythatsuchregrettheoryisconsistentwiththe

sizeeffectandthebook-to-marketeffect.

13.Anexampleofisthatapersonmayrejectaninvestmentwhenitisposedin

termsofrisksurroundingpotentialgainsbutmayacceptthesameinvestmentifitis

posedintermsofrisksurroundingpotentiallosses.

A)framing

B)regretavoidance

C)overconfidence

D)conservatism

E)noneoftheabove

Answer:ADifficulty:Moderate

14.Statman(1977)arguesthatisconsistentwithsomeinvestors1irrational

preferenceforstockswithhighcashdividendsandwithatendencytoholdlosing

positionstoolong.

A)mentalaccounting

B)regretavoidance

C)overconfidence

D)conservatism

E)noneoftheabove

Answer:ADifficulty:Moderate

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Chapter12BehavioralFinanceandTechnicalAnalysis

15.Anexampleofisthatitisnotaspainfultohavepurchasedablue-chipstock

thatdecreasesinvalue,asitistolosemoneyonanunknownstart-upfirm.

A)mentalaccounting

B)regretavoidance

C)overconfidence

D)conservatism

E)noneoftheabove

Answer:BDifficulty:Moderate

16.Arbitrageursmaybeunabletoexploitbehavioralbiasesdueto.

D

fundamentalrisk

n)

mXimplementationcosts

-)

xmodelrisk

IV7—

v)conservatism

regretavoidance

A)IandIIonly

B)I,II,andIII

C)I,II,III,andV

D)II,III,andIV

E)IVandV

Answer:BDifficulty:Moderate

17.aregoodexamplesofthelimitstoarbitragebecausetheyshowthatthe

lawofonepriceisviolated.

D

SiameseTwinCompanies

n)

m\Unittrusts

zl

\Closedendfunds

IV/!

v)Openendfunds

Equitycarveouts

A)IandII

B)I,II,andIII

C)I,III,andV

D)IVandV

E)V

Answer:CDifficulty:Moderate

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Chapter12BehavioralFinanceandTechnicalAnalysis

8.

A-wasthegrandfatheroftechnicalanalysis.

HarryMarkowitz

Bx

7—WilliamSharpe

c^

7CharlesDow

DX

M

ZBenjaminGraham

Es

)

znoneoftheabove

Answer:CDifficulty:Easy

Rationale:CharlesDow,theoriginatoroftheDowTheory,wasthegrandfatherof

technicalanalysis.BenjaminGrahammightbeconsideredthegrandfatherof

fundamentalanalysis.HarryMarkowitzandWilliamSharpemightbeconsideredthe

grandfathersofmodernportfoliotheory.

19.ThegoaloftheDowtheoryisto

A)identifyheadandshoulderpatterns.

B)identifybreakawaypoints.

C)identifyresistancelevels.

D)identifysupportlevels.

E)identifylong-termtrends.

Answer:EDifficulty:Easy

Rationale:TheDowtheoryusestheDowJonesIndustrialAverageasanindicatorof

long-termtrendsinmarketprices.

20.Along-termmovementofprices,lastingfromseveralmonthstoyearsiscalled

A

aminortrend

BX

I

/aprimarytrend

cx

7—

Danintermediatetrend

trendanalysis

E\

l

7BandD

Answer:BDifnculty:Easy

Rationale:Minortrendsaremerelyday-to-daypricemovements;intermediatetrends

areoroffsettingmovementsinonedirectionafterlonger-termmovementsinanother

direction;trendslastingfortheperioddescribedaboveareprimarytrends.

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Chapter12BehavioralFinanceandTechnicalAnalysis

21.Adailyfluctuationoflittleimportanceiscalled

A

aminortrend

B\

l

zaprimarytrend

cx

—7anintermediatetrend

D

amarkettrend

Ex

—7noneoftheabove

Answer:ADifficulty:Easy

22.Pricemovementsthatarecausedbyshort-termdeviationsofpricesfromtheunderlying

trendlinearecalled

A)primarytrends.

B)secondarytrends.

C)tertiarytrends.

D)Dowtrends.

E)contrarytrends.

Answer:BDifficulty:Easy

Rationale:Thesecondarytrendiscausedbythesedeviations,whichareeliminatedby

correctionsthatbringthepricesbacktothetrendlines.

23.TheDowtheorypositsthatthethreeforcesthatsimultaneouslyaffectstockpricesare

D

primarytrend

intermediatetrend

n)\

ml

zmomentumtrend

\

!

IV/minortrend

v)contrariantrend

A)I,II,andIII

B)II,III,andIV

C)III,IVandV

D)I,II,andIV

E)I,III,andV

Answer:DDifficulty:Moderate

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Chapter12BehavioralFinanceandTechnicalAnalysis

24.TheElliotWaveTheory.

A)isarecentvariationoftheDowTheory

B)suggeststhatstockpricescanbedescribedbyasetofwavepatterns

C)issimilartotheKondratieffWavetheory

D)AandB

E)A,B,andC

Answer:EDifficulty:Easy

Rationale:BoththeElliotWaveTheoryandtheKondratieffWaveTheoryarerecent

variationsontheDowTheory,whichsuggeststhatstockpricesmoveinidentifiable

wavepatterns.

25.Atrinratiooflessthan1.0isconsideredasa.

A)bearishsignal

B)bullishsignal

C)bearishsignalbysometechnicalanalystsandabullishsignalbyothertechnical

analysts

D)bullishsignalbysomefundamentalists

E)CandD

Answer:BDifficulty:Easy

Rationale:Atrinratiooflessthan1.0isconsideredbullishbecausethedecliningstocks

haveloweraveragevolumethantheadvancingstocks,indicatingnetbuyingpressure.

26.OnOctober29,1991therewere1,031stocksthatadvancedontheNYSEand610that

declined.Thevolumeinadvancingissueswas112,866,000andthevolumeindeclining

issueswas58,188,000.Thetrinratioforthatdaywasandtechnicalanalysts

werelikelytobe.

A)0.87,bullish

B)0.87,bearish

C)1.15,bullish

D)1.15,bearish

E)noneoftheabove

Answer:ADifficulty:Moderate

Rationale:(1,031/610)/(112,866,000/58,388,000)=0.87.Atrinratiolessthan1is

consideredbullishbecauseadvancingstockshaveahighervolumethandeclining

stocks,indicatingabuyingpressure.

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Chapter12BehavioralFinanceandTechnicalAnalysis

27.Inregardtomovingaverages,itisconsideredtobeasignalwhen

marketpricebreaksthroughthemovingaveragefrom.

A)bearish;below

B)bullish:below

C)bearish;above

D)bullishabove

E)BandC

Answer:EDifficulty:Moderate

28.Twopopularmovingaverageperiodsare

A)90-dayand52week

B)180-dayandthreeyear

C)180-daytwoyear

D)200-dayand53week

E)200-dayandtwoyear

Answer:DDifficulty:Moderate

29.isameasureoftheextenttowhichamovementinthemarketindexis

reflectedinthepricemovementsofallstocksinthemarket.

A)put-callratio

B)trinratio

C)Breadth

D)confidenceindex

E)alloftheabove

Answer:CDifficulty:Moderate

30.Thenconfidenceindexiscomputedfromandhighervaluesare

consideredsignals.

A)bondyields;bearish

B)oddlottrades;bearish

C)oddlottrades;bullish

D)put/callratios;bullish

E)bondyields;bullish

Answer:EDifficulty:Moderate

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Chapter12BehavioralFinanceandTechnicalAnalysis

31.Theput/callratioiscomputedasandhighervaluesareconsidered

____________signals.

A)thenumberofoutstandingputoptionsdividedbyoutstandingcalloptions;bullish

orbearish

B)thenumberofoutstandingputoptionsdividedbyoutstandingcalloptions;bullish

C)thenumberofoutstandingputoptionsdividedbyoutstandingcalloptions;bearish

D)thenumberofoutstandingcalloptionsdividedbyoutstandingputoptions;bullish

E)thenumberofoutstandingcalloptionsdividedbyoutstandingputoptions;bullish

Answer:ADifficulty:Moderate

32.Theefficientmarkethypothesis.

A)impliesthatsecuritypricesproperlyreflectinformationavailabletoinvestors

B)haslittleempiricalvalidity

C)impliesthatactivetraderswillfinditdifficulttooutperformabuy-and-holdstrategy

D)BandC

E)AandC

Answer:EDifficulty:Moderate

33.Testsofmarketefficiencyhavefocusedon.

A)themean-varianceefficiencyoftheselectedmarketproxy

B)strategiesthatwouldhaveprovidedsuperiorrisk-adjustedreturns

C)resultsofactualinvestmentsofprofessionalmanagers

D)BandC

E)AandB

Answer:DDifficulty:Moderate

34.Theanomaliesliterature.

A)providesaconclusiverejectionofmarketefficiency

B)providesaconclusivesupportofmarketefficiency

C)suggeststhatseveralstrategieswouldhaveprovidedsuperiorreturns

D)AandC

E)noneoftheabove

Answer:CDifficulty:Moderate

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Chapter12BehavioralFinanceandTechnicalAnalysis

35.Behavioralfinancearguesthat.

A)evenifsecuritypricesarewrongitmaybedifficulttoexploitthem

B)thefailuretouncoversuccessfultradingrulesortraderscannotbetakenasproofof

marketefficiency

C)investorsarerational

D)AandB

E)alloftheabove

Answer:DDifficulty:Moderate

36.Marketswouldbeinefficientifirrationalinvestorsandactionsif

arbitragerswere.

A

existed;unlimited

Bx

7—didnotexist;unlimited

cx

7—existed;limited

D\

)

zdidnotexist;limited

Ex

7—noneoftheabove

Answer:CDifficulty:Moderate

37.Ifpricesarecorrectandifpricesarenotcorrect.

A)therearenoeasyprofitopportunities;therearenoeasyprofitopportunities

B)therearenoeasyprofitopportunities;thereareeasyprofitopportunities

C)thereareeasyprofitopportunities;thereareeasyprofitopportunities

D)thereareeasyprofitopportunities;therearenoeasyprofitopportunities

E)noneoftheabove

Answer:ADifficulty:Moderate

38.canleadinvestorstomisestimatethetrueprobabilitiesofpossibleevents

orassociatedratesofreturn.

A)Informationprocessingerrors

B)Framingerrors

C)Mentalaccountingerrors

D)Regretavoidance

E)alloftheabove

Answer:ADifficulty:Moderate

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Chapter12BehavioralFinanceandTechnicalAnalysis

39.KahnemanandTversky(1973)reportthatpeopleand.

A)peoplegivetoolittleweighttorecentexperiencecomparedtopriorbeliefs;tendto

makeforecaststhataretooextremegiventheuncertaintyoftheirinformation

B)peoplegivetoomuchweighttorecentexperiencecomparedtopriorbeliefs;tendto

makeforecaststhataretooextremegiventheuncertaintyoftheirinformation

C)peoplegivetoolittleweighttorecentexperiencecomparedtopriorbeliefs;tendto

makeforecaststhatarenotextremeenoughgiventheuncertaintyoftheir

information

D)peoplegivetoomuchweighttorecentexperiencecomparedtopriorbeliefs;tendto

makeforecaststhatarenotextremeenoughgiventheuncertaintyoftheir

information

E)noneoftheabove

Answer:BDifficulty:Difficult

40.Errorsininformationprocessingcanleadinvestorstomisestimate.

A)trueprobabilitiesofpossibleeventsandassociatedratesofreturn

B)trueprobabilitiesofpossibleevents

C)ratesofreturn

D)theabilitytouncoveraccountingmanipulation

E)fraud

Answer:ADifficulty:Moderate

41.DeBondtandThaler(1990)arguethattheP/Eeffectcanbeexplainedby.

A)forecastingerrors

B)earningsexpectationsthataretooextreme

C)earningsexpectationsthatarenotextremeenough

D)regretaviodance

E)AandB

Answer:EDifficulty:Moderate

42.BarberandOdean(2001)reportthatmentradefrequentlythanwomenand

thefrequenttradingleadstoreturns.

A

less;superior

B\

|

7less;inferior

c

more;superior

D\

l

zmore;inferior

E\

)

znoneoftheabove

Answer:DDifficulty:Moderate

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Chapter12BehavioralFinanceandTechnicalAnalysis

43.Conservatismimpliesthatinvestorsaretooinupdatingtheirbeliefsin

responsetonewevidenceandthattheyinitiallyreacttonews.

A)quick;overreact

B)quick;underreact

C)slow;overreact

D)slow;underreact

E)noneoftheabove

Answer:DDifficulty:Moderate

44.Ifinformationprocessingwereperfect,manystudiesconcludethatindividualswould

tendtomakedecisionusingthatinformationdueto.

A)less-than-fullyrational;behavioralbiases

B)fullyrational;behavioralbiases

C)less-than-fullyrational;fundamentalrisk

D)fullyrational;fundamentalrisk

E)fullyrational;utilitymaximization

Answer:ADifficulty:Moderate

45.Theassumptionsconcerningtheshapeofutilityfunctionsofinvestorsdifferbetween

conventionaltheoryandprospecttheory.Conventionaltheoryassumesthatutility

functionsarewhereasprospecttheoryassumesthatutilityfunctionsare

A)concaveanddefinedintermsofwealth;s-shaped(convextolossesandconcaveto

gains)anddefinedintermsoflosesrelativetocurrentwealth

B)convexanddefinedlosesrelativetocurrentwealth;s-shaped(convextolossesand

concavetogains)anddefinedintermsoflosesrelativetocurrentwealth

C)s-shaped(convextolossesandconcavetogains)anddefinedintermsofloses

relativetocurrentwealth;concaveanddefinedintermsofwealth

D)s-shaped(convextolossesandconcavetogains)anddefinedintermsofwealth;

concaveanddefinedintermsoflosesrelativetocurrentwealth

E)convexanddefinedintermsofwealth;concaveanddefinedintermsofgains

relativetocurrentwealth

Answer:ADifficulty:Difficult

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Chapter12BehavioralFinanceandTechnicalAnalysis

46.Thelaw-of-one-pncepositsthatabilitytoarbitragewouldforcepricesofidentical

goodstotradeatequalprices.However,empiricalevidencesuggeststhat

areoftenmispriced.

A

SiameseTwinCompanies

B\

l

7equitycarveouts

cx

—7closed-endfunds

D

AandC

Ex

—7alloftheabove

Answer:EDifficulty:Difficult

EssayQuestions

47.Compareandcontrasttheefficientmarkethypothesiswiththeschoolofthoughttermed

behavioralfinance.

Difficulty:Difficult

Answer:

Theefficientmarkethypothesispositsthatinvestorsarefullyinformed,rational,utility

maximizers.Thus,securitypriceswillfullyreflectallinformationavailabletothe

investors.Ifanysecuritybecomesmispriced,thecollectivebuyingandsellingactions

ofinvestorswillquicklycausepricestochange.Givenanefficientmarket,itwouldbe

difficulttofindatradingrulethatwouldconsistentlyoutperformthemarket.Moreover,

failuretouncoverprofitabletradingstrategiesmaybetakenasproofofmarket

efficiency.Behavioralfinancearguesthatconventionaltheoryignoreshowrealpeople

makedecisionsandthatpeoplemakeadifference.Behavioralfinancesaysthat

investorspossesstwo“irrationalities”.First,investorsdonotalwaysprocess

informationcorrectlyandsecondlytheyoftenmakesystematicallysuboptimal

decisions.Givenlessthanperfectlyrationalinvestors,pricesmaybewronganditstill

maybehardtoexploitthem.Thus,failuretouncoverprofitabletradingstrategiesmay

notbetakenasproofofmarketefficiency.

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Chapter12BehavioralFinanceandTechnicalAnalysis

48.Behavioralfinancepositsthatinvestorspossessinformationprocessingerrors.Discuss

theimportanceofinformationprocessingerrorsthenlistandexplainthefour

informationprocessingerrorsdiscussedinthetext.

Difficulty:Difficult

Answer:

Informationprocessingerrorsareimportantbecausetheycanleadinvestorsto

misestimatethetrueprobabilitiesofpossibleeventsorassociatedratesofreturn.The

fourinformationprocessingerrorsareforecastingerrors,overconfidence,conservatism,

andsamplesizeneglect.Forecastingerrorsarisewhenpeoplegivetoomuchweightto

recentexperience.Thisleadstoforecaststhataretooextreme.Overconfidencerefersto

tradersbelievingthattheyarebetterthanaverage.Thisbeliefthattheyaresuperior

leadstofrequenttrading(andaccordingtoempiricalevidence,lowerreturns).

Conservatismrefersinvestorsbeingslowinrespondingtonewinformationratherthan

actingimmediately.Samplesizeneglectreferstoinve