___________________________________________________________________________
1.
Conventional cha12
Student: 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.
Cconventional financial theory should ignore how the average person makes decisions because the market
. is driven by investors that are much more sophisticated than the average person.
D. B and C
E. none of the above
3.
Some economists believe that the anomalies literature is consistent with investors ____________ and
____________.
Aability to always process information correctly and therefore they infer correct probability distributions
. about future rates of return; given a probability distribution of returns, they always make consistent and
optimal decisions
Binability to always process information correctly and therefore they infer incorrect probability
. distributions about future rates of return; given a probability distribution of returns, they always make
consistent and optimal decisions
Cability to always process information correctly and therefore they infer correct probability distributions
. about future rates of return; given a probability distribution of returns, they often make inconsistent or
suboptimal decisions
Dinability to always process information correctly and therefore they infer incorrect probability
. distributions about future rates of return; given a probability distribution of returns, they often make
inconsistent or suboptimal decisions
E. none of the above
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. either A or B depending on whether the information was good or bad.
E. none of the above.
6.
DeBondt and Thaler believe that high P/E result from investors
A. earnings expectations that are too extreme.
B. earnings expectations that are not extreme enough.
C. stock price expectations that are too extreme.
D. stock price expectations that are not extreme enough.
E. none of the above.
7.
If a person gives too much weight to recent information compared to prior beliefs, they would make
________ errors.
A. framing
B. selection bias
C. overconfidence
D. conservatism
E. forecasting
8.
Single men trade far more often than women. This is due to greater ________ among men.
A. framing
B. regret avoidance
C. overconfidence
D. conservatism
E. none of the above
9.
____________ may be responsible for the prevalence of active versus passive investments management.
A. Forecasting errors
B. Overconfidence
C. Mental accounting
D. Conservatism
E. Regret avoidance
10. Barber and Odean (2000) ranked portfolios by turnover and report that the difference in return between the
highest and lowest turnover portfolios is 7% per year. They attribute this to
A. overconfidence
B. framing
C. regret avoidance
D. sample neglect
E. all of the above
11. ________ bias means that investors are too slow in updating their beliefs in response to evidence.
A. framing
B. regret avoidance
C. overconfidence
D. conservatism
E. none of the above
12. Psychologists have found that people who make decisions that turn out badly blame themselves more when
that decision was unconventional. The name for this phenomenon is
A. regret avoidance
B. framing
C. mental accounting
D. overconfidence
E. obnoxicity
13. An example of ________ is that a person may reject an investment when it is posed in terms of risk
surrounding potential gains but may accept the same investment if it is posed in terms of risk surrounding
potential losses.
A. framing
B. regret avoidance
C. overconfidence
D. conservatism
E. none of the above
14. Statman (1977) argues that ________ is consistent with some investors' irrational preference for stocks
with high cash dividends and with a tendency to hold losing positions too long.
A. mental accounting
B. regret avoidance
C. overconfidence
D. conservatism
E. none of the above
15. An example of ________ is that it is not as painful to have purchased a blue-chip stock that decreases in
value, as it is to lose money on an unknown start-up firm.
A. mental accounting
B. regret avoidance
C. overconfidence
D. conservatism
E. none of the above
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
17. ____________ are good examples of the limits to arbitrage because they show that the law of one price is
violated.
I) Siamese Twin Companies
II) Unit trusts
III) Closed end funds
IV) Open end funds
V) Equity carve outs
A. I and II
B. I, II, and III
C. I, III, and V
D. IV and V
E. V
18. __________ was the grandfather of technical analysis.
A. Harry Markowitz
B. William Sharpe
C. Charles Dow
D. Benjamin Graham
E. none of the above
19. The goal of the Dow theory is to
A. identify head and shoulder patterns.
B. identify breakaway points.
C. identify resistance levels.
D. identify support levels.
E. identify long-term trends.
20. A long-term movement of prices, lasting from several months to years is called _________.
A. a minor trend
B. a primary trend
C. an intermediate trend
D. trend analysis
E. B and D
21. A daily fluctuation of little importance is called ____________.
A. a minor trend
B. a primary trend
C. an intermediate trend
D. a market trend
E. none of the above
22. Price movements that are caused by short-term deviations of prices from the underlying trend line are
called
A. primary trends.
B. secondary trends.
C. tertiary trends.
D. Dow trends.
E. contrary trends.
23. The Dow theory posits that the three forces that simultaneously affect stock prices are ____________.
I) primary trend
II) intermediate trend
III) momentum trend
IV) minor trend
V) contrarian trend
A. I, II, and III
B. II, III, and IV
C. III, IV and V
D. I, II, and IV
E. I, III, and V
24. The Elliot Wave Theory ____________.
A. is a recent variation of the Dow Theory
B. suggests that stock prices can be described by a set of wave patterns
C. is similar to the Kondratieff Wave theory
D. A and B
E. A, B, and C
25. A trin ratio of less than 1.0 is considered as a _________.
A. bearish signal
B. bullish signal
C. bearish signal by some technical analysts and a bullish signal by other technical analysts
D. bullish signal by some fundamentalists
E. C and D
26. On October 29, 1991 there were 1,031 stocks that advanced on the NYSE and 610 that declined. The
volume in advancing issues was 112,866,000 and the volume in declining issues was 58,188,000. The trin
ratio for that day was ________ and technical analysts were likely to be ________.
A. 0.87, bullish
B. 0.87, bearish
C. 1.15, bullish
D. 1.15, bearish
E. none of the above
27. In regard to moving averages, it is considered to be a ____________ signal when market price breaks
through the moving average from ____________.
A. bearish; below
B. bullish: below
C. bearish; above
D. bullish above
E. B and C
28. Two popular moving average periods are
A. 90-day and 52 week
B. 180-day and three year
C. 180-day two year
D. 200-day and 53 week
E. 200-day and two year
29. ____________ is a measure of the extent to which a movement in the market index is reflected in the price
movements of all stocks in the market.
A. put-call ratio
B. trin ratio
C. Breadth
D. confidence index
E. all of the above
30. Then confidence index is computed from ____________ and higher values are considered ____________
signals.
A. bond yields; bearish
B. odd lot trades; bearish
C. odd lot trades; bullish
D. put/call ratios; bullish
E. bond yields; bullish
31. The put/call ratio is computed as ____________ and higher values are considered ____________ signals.
A. the number of outstanding put options divided by outstanding call options; bullish or bearish
B. the number of outstanding put options divided by outstanding call options; bullish
C. the number of outstanding put options divided by outstanding call options; bearish
D. the number of outstanding call options divided by outstanding put options; bullish
E. the number of outstanding call options divided by outstanding put options; bearish
32. The efficient market hypothesis ____________.
A. implies that security prices properly reflect information available to investors
B. has little empirical validity
C. implies that active traders will find it difficult to outperform a buy-and-hold strategy
D. B and C
E. A and C
33. Tests of market efficiency have focused on ____________.
A. the mean-variance efficiency of the selected market proxy
B. strategies that would have provided superior risk-adjusted returns
C. results of actual investments of professional managers
D. B and C
E. A and B
34. The anomalies literature ____________.
A. provides a conclusive rejection of market efficiency
B. provides a conclusive support of market efficiency
C. suggests that several strategies would have provided superior returns
D. A and C
E. none of the above
35. Behavioral finance argues that ____________.
A. even if security prices are wrong it may be difficult to exploit them
B. the failure to uncover successful trading rules or traders cannot be taken as proof of market efficiency
C. investors are rational
D. A and B
E. all of the above
36. Markets would be inefficient if irrational investors __________ and actions if arbitragers were
__________.
A. existed; unlimited
B. did not exist; unlimited
C. existed; limited
D. did not exist; limited
E. none of the above
37. If prices are correct __________ and if prices are not correct __________.
A. there are no easy profit opportunities; there are no easy profit opportunities
B. there are no easy profit opportunities; there are easy profit opportunities
C. there are easy profit opportunities; there are easy profit opportunities
D. there are easy profit opportunities; there are no easy profit opportunities
E. none of the above
38. __________ can lead investors to misestimate the true probabilities of possible events or associated rates of
return.
A. Information processing errors
B. Framing errors
C. Mental accounting errors
D. Regret avoidance
E. all of the above
39. Kahneman and Tversky (1973) report that __________ and __________.
A people give too little weight to recent experience compared to prior beliefs; tend to make forecasts that
. are too extreme given the uncertainty of their information
B people give too much weight to recent experience compared to prior beliefs; tend to make forecasts that
. are too extreme given the uncertainty of their information
C people give too little weight to recent experience compared to prior beliefs; tend to make forecasts that
. are not extreme enough given the uncertainty of their information
D people give too much weight to recent experience compared to prior beliefs; tend to make forecasts that
. are not extreme enough given the uncertainty of their information
E. none of the above
40. Errors in information processing can lead investors to misestimate __________.
A. true probabilities of possible events and associated rates of return
B. true probabilities of possible events
C. rates of return
D. the ability to uncover accounting manipulation
E. fraud
41. DeBondt and Thaler (1990) argue that the P/E effect can be explained by __________.
A. forecasting errors
B. earnings expectations that are too extreme
C. earnings expectations that are not extreme enough
D. regret aviodance
E. A and B
42. Barber and Odean (2001) report that men trade __________ frequently than women and the frequent
trading leads to __________ returns.
A. less; superior
B. less; inferior
C. more; superior
D. more; inferior
E. none of the above
43. Conservatism implies that investors are too __________ in updating their beliefs in response to new
evidence and that they initially __________ react to news.
A. quick; overreact
B. quick; under react
C. slow; overreact
D. slow; under react
E. none of the above
44. If information processing were perfect, many studies conclude that individuals would tend to make
__________ decision 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
45. The assumptions concerning the shape of utility functions of investors differ between conventional theory
and prospect theory. Conventional theory assumes that utility functions are __________ whereas prospect
theory assumes that utility functions are __________.
A concave and defined in terms of wealth; s-shaped (convex to losses and concave to gains) and defined in
. terms of loses relative to current wealth
B convex and defined loses relative to current wealth; s-shaped (convex to losses and concave to gains) and
. defined in terms of loses relative to current wealth
C s-shaped (convex to losses and concave to gains) and defined in terms of loses relative to current wealth;
. concave and defined in terms of wealth
D s-shaped (convex to losses and concave to gains) and defined in terms of wealth; concave and defined in
. terms of loses relative to current wealth
E. convex and defined in terms of wealth; concave and defined in terms of gains relative to current wealth
46. The law-of-one-price posits that ability to arbitrage would force prices of identical goods to trade at equal
prices. However, empirical evidence suggests that __________ are often mispriced.
A. Siamese Twin Companies
B. equity carve outs
C. closed-end funds
D. A and C
E. all of the above
47. Kahneman and Tversky (1973) reported that people give __________ weight to recent experience
compared to prior beliefs when making forecasts. This is referred to as __________.
A. too little; hyper rationality
B. too little; conservatism
C. too much; framing
D. too much; memory bias
E. none of the above
48. Kahneman and Tversky (1973) reported that __________ give too weight to recent experience compared to
prior beliefs when making forecasts.
A. young men
B. young women
C. people
D. older men
E. older women
49. Barber and Odean (2001) report that men trade __________ frequently than women.
A. less
B. less in down markets
C. more in up markets
D. more
E. none of the above
50. Barber and Odean (2001) report that women trade __________ frequently than men.
A. less
B. less in down markets
C. more in up markets
D. more
E. none of the above
51. Barber and Odean (2001) report that men __________ than women.
A. earn higher returns
B. earn lower returns
C. earn about the same returns
D. generate lower trading costs
E. none of the above
52. Barber and Odean (2001) report that women __________ than men.
A. earn higher returns
B. earn lower returns
C. earn about the same returns
D. generate higher trading costs
E. none of the above
53. __________ effects can help explain momentum in stock prices.
A. Conservatism
B. Regret avoidance
C. Prospect theory
D. Mental accounting
E. Model risk
54. Studies of Siamese twin companies find __________ which __________ the EMH.
A. correct relative pricing; supports
B. correct relative pricing; does not support
C. incorrect relative pricing; supports
D. incorrect relative pricing; does not support
E. none of the above
55. Studies of equity carve-outs find __________ which __________ the EMH.
A. strong support for the Law of One Price; supports
B. strong support for the Law of One Price; violates
C. evidence against the Law of One Price; violates
D. evidence against the Law of One Price; supports
E. none of the above
56. 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. B and D
57. Compare and contrast the efficient market hypothesis with the school of thought termed behavioral finance.
58. 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.
59. 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.
60. Discuss what technical analysis is, what technical analysts do, and the relationship between technical
analysis, fundamental analysis, and behavioral finance.
cha12 Key
1.
Conventional theories presume that investors ____________ and behavioral finance presumes that they
____________.
A.
B.
C.
D.
E.
are irrational; are irrational
are rational; may not be rational
are rational; are rational
may not be rational; may not be rational
may not be rational; are rational
Conventional theories presume that investors are rational and behavioral finance presumes that they
may not be rational.
Bodie - Chapter 12 #1
Difficulty: Easy
2.
The premise of behavioral finance is that
A. conventional financial theory ignores how real people make decisions and that people make a
difference.
B.conventional financial theory considers how emotional people make decisions but the market is
driven by rational utility maximizing investors.
C conventional financial theory should ignore how the average person makes decisions because the
. market is driven by investors that are much more sophisticated than the average person.
D. B and C
E. none of the above
The premise of behavioral finance is that conventional financial theory ignores how real people make
decisions and that people make a difference.
Bodie - Chapter 12 #2
Difficulty: Easy
3.
Some economists believe that the anomalies literature is consistent with investors ____________ and
____________.
Aability to always process information correctly and therefore they infer correct probability distributions
. about future rates of return; given a probability distribution of returns, they always make consistent
and optimal decisions
Binability to always process information correctly and therefore they infer incorrect probability
. distributions about future rates of return; given a probability distribution of returns, they always make
consistent and optimal decisions
Cability to always process information correctly and therefore they infer correct probability distributions
. about future rates of return; given a probability distribution of returns, they often make inconsistent or
suboptimal decisions
Dinability to always process information correctly and therefore they infer incorrect probability
. distributions about future rates of return; given a probability distribution of returns, they often make
inconsistent or suboptimal decisions
E. none of the above
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.
Bodie - Chapter 12 #3
Difficulty: Moderate
4.
Information processing errors consist of
I) forecasting errors
II) overconfidence
III) conservatism
IV) framing
A.
B.
C.
D.
E.
I and II
I and III
III and IV
IV only
I, II and III
Information processing errors consist of forecasting errors, overconfidence, and conservatism.
Bodie - Chapter 12 #4
Difficulty: Moderate
5.
Forecasting errors are potentially important because
A.
B.
C.
D.
E.
research suggests that people underweight recent information.
research suggests that people overweight recent information.
research suggests that people correctly weight recent information.
either A or B depending on whether the information was good or bad.
none of the above.
Forecasting errors are potentially important because research suggests that people overweight recent
information.
Bodie - Chapter 12 #5
Difficulty: Moderate
6.
DeBondt and Thaler believe that high P/E result from investors
A.
B.
C.
D.
E.
earnings expectations that are too extreme.
earnings expectations that are not extreme enough.
stock price expectations that are too extreme.
stock price expectations that are not extreme enough.
none of the above.
DeBondt and Thaler believe that high P/E result from investors earnings expectations that are too
extreme.
Bodie - Chapter 12 #6
Difficulty: Moderate
7.
If a person gives too much weight to recent information compared to prior beliefs, they would make
________ errors.
A.
B.
C.
D.
E.
framing
selection bias
overconfidence
conservatism
forecasting
If a person gives too much weight to recent information compared to prior beliefs, they would make
forecasting errors.
Bodie - Chapter 12 #7
Difficulty: Moderate
8.
Single men trade far more often than women. This is due to greater ________ among men.
A.
B.
C.
D.
E.
framing
regret avoidance
overconfidence
conservatism
none of the above
Single men trade far more often than women. This is due to greater overconfidence among men.
Bodie - Chapter 12 #8
Difficulty: Moderate
9.
____________ may be responsible for the prevalence of active versus passive investments management.
A.
B.
C.
D.
E.
Forecasting errors
Overconfidence
Mental accounting
Conservatism
Regret avoidance
Overconfidence may be responsible for the prevalence of active versus passive investments
management.
Bodie - Chapter 12 #9
Difficulty: Moderate
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.
B.
C.
D.
E.
overconfidence
framing
regret avoidance
sample neglect
all of the above
They attribute this to framing.
Bodie - Chapter 12 #10
Difficulty: Moderate
11.
________ bias means that investors are too slow in updating their beliefs in response to evidence.
A.
B.
C.
D.
E.
framing
regret avoidance
overconfidence
conservatism
none of the above
Conservatism bias means that investors are too slow in updating their beliefs in response to evidence.
Bodie - Chapter 12 #11
Difficulty: Moderate
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.
B.
C.
D.
E.
regret avoidance
framing
mental accounting
overconfidence
obnoxicity
An investments example given in the text is buying the stock of a star\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.
Bodie - Chapter 12 #12
Difficulty: Moderate
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.
B.
C.
D.
E.
framing
regret avoidance
overconfidence
conservatism
none of the above
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.
Bodie - Chapter 12 #13
Difficulty: Moderate
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.
B.
C.
D.
E.
mental accounting
regret avoidance
overconfidence
conservatism
none of the above
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
Bodie - Chapter 12 #14
Difficulty: Moderate
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.
B.
C.
D.
E.
mental accounting
regret avoidance
overconfidence
conservatism
none of the above
An example of regret avoidance is that it is not as painful to have purchased blue-chip a stock that
decreases in value, as it is to lose money on an unknown start-up firm.
Bodie - Chapter 12 #15
Difficulty: Moderate
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.
B.
C.
D.
E.
I and II only
I, II, and III
I, II, III, and V
II, III, and IV
IV and V
Arbitrageurs may be unable to exploit behavioral biases due to fundamental risk, implementation costs,
and model risk.
Bodie - Chapter 12 #16
Difficulty: Moderate
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.
B.
C.
D.
E.
I and II
I, II, and III
I, III, and V
IV and V
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.
Bodie - Chapter 12 #17
Difficulty: Moderate
18.
__________ was the grandfather of technical analysis.
A.
B.
C.
D.
E.
Harry Markowitz
William Sharpe
Charles Dow
Benjamin Graham
none of the above
Charles Dow, the originator of the Dow Theory, was the grandfather of technical analysis. Benjamin
Graham might be considered the grandfather of fundamental analysis. Harry Markowitz and William
Sharpe might be considered the grandfathers of modern portfolio theory.
Bodie - Chapter 12 #18
Difficulty: Easy
19.
The goal of the Dow theory is to
A.
B.
C.
D.
E.
identify head and shoulder patterns.
identify breakaway points.
identify resistance levels.
identify support levels.
identify long-term trends.
The Dow theory uses the Dow Jones Industrial Average as an indicator of long-term trends in market
prices.
Bodie - Chapter 12 #19
Difficulty: Easy
20.
A long-term movement of prices, lasting from several months to years is called _________.
A.
B.
C.
D.
E.
a minor trend
a primary trend
an intermediate trend
trend analysis
B and D
Minor trends are merely day-to-day price movements; intermediate trends are "corrections", or
offsetting movements in one direction after longer-term movements in another direction; trends lasting
for the period described above are primary trends.
Bodie - Chapter 12 #20
Difficulty: Easy
21.
A daily fluctuation of little importance is called ____________.
A.
B.
C.
D.
E.
a minor trend
a primary trend
an intermediate trend
a market trend
none of the above
A daily fluctuation of little importance is called a minor trend.
Bodie - Chapter 12 #21
Difficulty: Easy
22.
Price movements that are caused by short-term deviations of prices from the underlying trend line are
called
A.
B.
C.
D.
E.
primary trends.
secondary trends.
tertiary trends.
Dow trends.
contrary trends.
The secondary trend is caused by these deviations, which are eliminated by corrections that bring the
prices back to the trend lines.
Bodie - Chapter 12 #22
Difficulty: Easy
23.
The Dow theory posits that the three forces that simultaneously affect stock prices are ____________.
I) primary trend
II) intermediate trend
III) momentum trend
IV) minor trend
V) contrarian trend
A.
B.
C.
D.
E.
I, II, and III
II, III, and IV
III, IV and V
I, II, and IV
I, III, and V
The Dow theory posits that the three forces that simultaneously affect stock prices are primary trend,
intermediate trend, and minor trend.
Bodie - Chapter 12 #23
Difficulty: Moderate
24.
The Elliot Wave Theory ____________.
A.
B.
C.
D.
E.
is a recent variation of the Dow Theory
suggests that stock prices can be described by a set of wave patterns
is similar to the Kondratieff Wave theory
A and B
A, B, and C
Both the Elliot Wave Theory and the Kondratieff Wave Theory are recent variations on the Dow
Theory, which suggests that stock prices move in identifiable wave patterns.
Bodie - Chapter 12 #24
Difficulty: Easy
25.
A trin ratio of less than 1.0 is considered as a _________.
A.
B.
C.
D.
E.
bearish signal
bullish signal
bearish signal by some technical analysts and a bullish signal by other technical analysts
bullish signal by some fundamentalists
C and D
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.
Bodie - Chapter 12 #25
Difficulty: Easy
26.
On October 29, 1991 there were 1,031 stocks that advanced on the NYSE and 610 that declined. The
volume in advancing issues was 112,866,000 and the volume in declining issues was 58,188,000. The
trin ratio for that day was ________ and technical analysts were likely to be ________.
A.
B.
C.
D.
E.
0.87, bullish
0.87, bearish
1.15, bullish
1.15, bearish
none of the above
(1,031/610) / (112,866,000/58,388,000) = 0.87. A trin ratio less than 1 is considered bullish because
advancing stocks have a higher volume than declining stocks, indicating a buying pressure.
Bodie - Chapter 12 #26
Difficulty: Moderate
27.
In regard to moving averages, it is considered to be a ____________ signal when market price breaks
through the moving average from ____________.
A.
B.
C.
D.
E.
bearish; below
bullish: below
bearish; above
bullish above
B and C
In regard to moving averages, it is considered to be a bullishsignal 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.
Bodie - Chapter 12 #27
Difficulty: Moderate
28.
Two popular moving average periods are
A.
B.
C.
D.
E.
90-day and 52 week
180-day and three year
180-day two year
200-day and 53 week
200-day and two year
Two popular moving average periods are 200-day and 53 week.
Bodie - Chapter 12 #28
Difficulty: Moderate
29.
____________ is a measure of the extent to which a movement in the market index is reflected in the
price movements of all stocks in the market.
A.
B.
C.
D.
E.
put-call ratio
trin ratio
Breadth
confidence index
all of the above
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.
Bodie - Chapter 12 #29
Difficulty: Moderate
30.
Then confidence index is computed from ____________ and higher values are considered
____________ signals.
A.
B.
C.
D.
E.
bond yields; bearish
odd lot trades; bearish
odd lot trades; bullish
put/call ratios; bullish
bond yields; bullish
Then confidence index is computed from bond yields and higher values are considered bullish signals.
Bodie - Chapter 12 #30
Difficulty: Moderate
31.
The put/call ratio is computed as ____________ and higher values are considered ____________
signals.
A.
B.
C.
D.
E.
the number of outstanding put options divided by outstanding call options; bullish or bearish
the number of outstanding put options divided by outstanding call options; bullish
the number of outstanding put options divided by outstanding call options; bearish
the number of outstanding call options divided by outstanding put options; bullish
the number of outstanding call options divided by outstanding put options; bearish
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.
Bodie - Chapter 12 #31
Difficulty: Moderate
32.
The efficient market hypothesis ____________.
A.
B.
C.
D.
E.
implies that security prices properly reflect information available to investors
has little empirical validity
implies that active traders will find it difficult to outperform a buy-and-hold strategy
B and C
A and C
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.
Bodie - Chapter 12 #32
Difficulty: Moderate
33.
Tests of market efficiency have focused on ____________.
A.
B.
C.
D.
E.
the mean-variance efficiency of the selected market proxy
strategies that would have provided superior risk-adjusted returns
results of actual investments of professional managers
B and C
A and B
Tests of market efficiency have focused on strategies that would have provided superior risk-adjusted
returns and results of actual investments of professional managers.
Bodie - Chapter 12 #33
Difficulty: Moderate
34.
The anomalies literature ____________.
A.
B.
C.
D.
E.
provides a conclusive rejection of market efficiency
provides a conclusive support of market efficiency
suggests that several strategies would have provided superior returns
A and C
none of the above
The anomalies literature suggests that several strategies would have provided superior returns.
Bodie - Chapter 12 #34
Difficulty: Moderate
35.
Behavioral finance argues that ____________.
A. even if security prices are wrong it may be difficult to exploit them
B. the failure to uncover successful trading rules or traders cannot be taken as proof of market
efficiency
C. investors are rational
D. A and B
E. all of the above
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.
Bodie - Chapter 12 #35
Difficulty: Moderate
36.
Markets would be inefficient if irrational investors __________ and actions if arbitragers were
__________.
A.
B.
C.
D.
E.
existed; unlimited
did not exist; unlimited
existed; limited
did not exist; limited
none of the above
Markets would be inefficient if irrational investors existed and actions if arbitragers were limited.
Bodie - Chapter 12 #36
Difficulty: Moderate
37.
If prices are correct __________ and if prices are not correct __________.
A.
B.
C.
D.
E.
there are no easy profit opportunities; there are no easy profit opportunities
there are no easy profit opportunities; there are easy profit opportunities
there are easy profit opportunities; there are easy profit opportunities
there are easy profit opportunities; there are no easy profit opportunities
none of the above
If prices are correct there are no easy profit opportunities and if prices are not correct there are no easy
profit opportunities.
Bodie - Chapter 12 #37
Difficulty: Moderate
38.
__________ can lead investors to misestimate the true probabilities of possible events or associated
rates of return.
A.
B.
C.
D.
E.
Information processing errors
Framing errors
Mental accounting errors
Regret avoidance
all of the above
Information processing errors can lead investors to misestimate the true probabilities of possible events
or associated rates of return.
Bodie - Chapter 12 #38
Difficulty: Moderate
39.
Kahneman and Tversky (1973) report that __________ and __________.
A people give too little weight to recent experience compared to prior beliefs; tend to make forecasts
. that are too extreme given the uncertainty of their information
B people give too much weight to recent experience compared to prior beliefs; tend to make forecasts
. that are too extreme given the uncertainty of their information
C people give too little weight to recent experience compared to prior beliefs; tend to make forecasts
. that are not extreme enough given the uncertainty of their information
D people give too much weight to recent experience compared to prior beliefs; tend to make forecasts
. that are not extreme enough given the uncertainty of their information
E. none of the above
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.
Bodie - Chapter 12 #39
Difficulty: Difficult
40.
Errors in information processing can lead investors to misestimate __________.
A.
B.
C.
D.
E.
true probabilities of possible events and associated rates of return
true probabilities of possible events
rates of return
the ability to uncover accounting manipulation
fraud
Errors in information processing can lead investors to misestimate true probabilities of possible events
and associated rates of return.
Bodie - Chapter 12 #40
Difficulty: Moderate
41.
DeBondt and Thaler (1990) argue that the P/E effect can be explained by __________.
A.
B.
C.
D.
E.
forecasting errors
earnings expectations that are too extreme
earnings expectations that are not extreme enough
regret aviodance
A and B
DeBondt and Thaler (1990) argue that the P/E effect can be explained by forecasting errors and earnings
expectations that are too extreme.
Bodie - Chapter 12 #41
Difficulty: Moderate
42.
Barber and Odean (2001) report that men trade __________ frequently than women and the frequent
trading leads to __________ returns.
A.
B.
C.
D.
E.
less; superior
less; inferior
more; superior
more; inferior
none of the above
Barber and Odean (2001) report that men trade more frequently than women and the frequent trading
leads to inferior returns.
Bodie - Chapter 12 #42
Difficulty: Moderate
43.
Conservatism implies that investors are too __________ in updating their beliefs in response to new
evidence and that they initially __________ react to news.
A.
B.
C.
D.
E.
quick; overreact
quick; under react
slow; overreact
slow; under react
none of the above
Conservatism implies that investors are too slow in updating their beliefs in response to new evidence
and that they initially under react react to news.
Bodie - Chapter 12 #43
Difficulty: Moderate
44.
If information processing were perfect, many studies conclude that individuals would tend to make
__________ decision using that information due to __________.
A.
B.
C.
D.
E.
less-than-fully rational; behavioral biases
fully rational; behavioral biases
less-than-fully rational; fundamental risk
fully rational; fundamental risk
fully rational; utility maximization
If information processing were perfect, many studies conclude that individuals would tend to make lessthan-fully rational decision using that information due to behavioral biases.
Bodie - Chapter 12 #44
Difficulty: Moderate
45.
The assumptions concerning the shape of utility functions of investors differ between conventional
theory and prospect theory. Conventional theory assumes that utility functions are __________ whereas
prospect theory assumes that utility functions are __________.
A concave and defined in terms of wealth; s-shaped (convex to losses and concave to gains) and defined
. in terms of loses relative to current wealth
B convex and defined loses relative to current wealth; s-shaped (convex to losses and concave to gains)
. and defined in terms of loses relative to current wealth
C s-shaped (convex to losses and concave to gains) and defined in terms of loses relative to current
. wealth; concave and defined in terms of wealth
D s-shaped (convex to losses and concave to gains) and defined in terms of wealth; concave and defined
. in terms of loses relative to current wealth
E. convex and defined in terms of wealth; concave and defined in terms of gains relative to current
wealth
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 loses relative to current wealth.
Bodie - Chapter 12 #45
Difficulty: Difficult
46.
The law-of-one-price posits that ability to arbitrage would force prices of identical goods to trade at
equal prices. However, empirical evidence suggests that __________ are often mispriced.
A.
B.
C.
D.
E.
Siamese Twin Companies
equity carve outs
closed-end funds
A and C
all of the above
he 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 all of the above are often mispriced.
Bodie - Chapter 12 #46
Difficulty: Difficult
47.
Kahneman and Tversky (1973) reported that people give __________ weight to recent experience
compared to prior beliefs when making forecasts. This is referred to as __________.
A.
B.
C.
D.
E.
too little; hyper rationality
too little; conservatism
too much; framing
too much; memory bias
none of the above
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.
Bodie - Chapter 12 #47
Difficulty: Moderate
48.
Kahneman and Tversky (1973) reported that __________ give too weight to recent experience
compared to prior beliefs when making forecasts.
A.
B.
C.
D.
E.
young men
young women
people
older men
older women
Kahneman and Tversky (1973) reported that people give too much weight to recent experience
compared to prior beliefs when making forecasts.
Bodie - Chapter 12 #48
Difficulty: Moderate
49.
Barber and Odean (2001) report that men trade __________ frequently than women.
A.
B.
C.
D.
E.
less
less in down markets
more in up markets
more
none of the above
Barber and Odean (2001) report that men trade more frequently than women.
Bodie - Chapter 12 #49
Difficulty: Moderate
50.
Barber and Odean (2001) report that women trade __________ frequently than men.
A.
B.
C.
D.
E.
less
less in down markets
more in up markets
more
none of the above
Barber and Odean (2001) report that men trade more frequently than women.
Bodie - Chapter 12 #50
Difficulty: Moderate
51.
Barber and Odean (2001) report that men __________ than women.
A.
B.
C.
D.
E.
earn higher returns
earn lower returns
earn about the same returns
generate lower trading costs
none of the above
Barber and Odean (2001) report that men trade more frequently than women and have lower returns.
Bodie - Chapter 12 #51
Difficulty: Moderate
52.
Barber and Odean (2001) report that women __________ than men.
A.
B.
C.
D.
E.
earn higher returns
earn lower returns
earn about the same returns
generate higher trading costs
none of the above
Barber and Odean (2001) report that men trade more frequently than women and have lower returns.
Bodie - Chapter 12 #52
Difficulty: Moderate
53.
__________ effects can help explain momentum in stock prices.
A.
B.
C.
D.
E.
Conservatism
Regret avoidance
Prospect theory
Mental accounting
Model risk
Mental accounting effects can help explain momentum in stock prices.
Bodie - Chapter 12 #53
Difficulty: Moderate
54.
Studies of Siamese twin companies find __________ which __________ the EMH.
A.
B.
C.
D.
E.
correct relative pricing; supports
correct relative pricing; does not support
incorrect relative pricing; supports
incorrect relative pricing; does not support
none of the above
Studies of Siamese twin companies find incorrect relative pricing which does not support the EMH.
Bodie - Chapter 12 #54
Difficulty: Moderate
55.
Studies of equity carve-outs find __________ which __________ the EMH.
A.
B.
C.
D.
E.
strong support for the Law of One Price; supports
strong support for the Law of One Price; violates
evidence against the Law of One Price; violates
evidence against the Law of One Price; supports
none of the above
Studies of equity carve-outs find evidence against the Law of One Price which violates the EMH.
Bodie - Chapter 12 #55
Difficulty: Moderate
56.
Studies of closed-end funds find __________ which __________ the EMH.
A.
B.
C.
D.
E.
prices at a premium to NAV; is consistent with
prices at a premium to NAV; is inconsistent with
prices at a discount to NAV; is consistent with
prices at a discount to NAV; is inconsistent with
B and D
Studies of closed-end funds find prices at premiums and discounts to NAV which is inconsistent with
the EMH.
Bodie - Chapter 12 #56
Difficulty: Moderate
57.
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.
Bodie - Chapter 12 #57
Difficulty: Difficult
58.
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.
Bodie - Chapter 12 #58
Difficulty: Difficult
59.
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.
Bodie - Chapter 12 #59
Difficulty: Difficult
60.
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.
Bodie - Chapter 12 #60
Difficulty: Difficult
cha12 Summary
Category
Bodie - Chapter 12
Difficulty: Difficult
Difficulty: Easy
Difficulty: Moderate
# of
Questions
60
7
9
44