Chap012 - Multiple Choice Questions 1. Conventional...

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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 Answer: B 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 Answer: A Difficulty: Easy 3. Some economists believe that the anomalies literature is consistent with investors’ ____________ and ____________. A) ability 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 B) inability 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 C) ability 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 D) inability 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 Answer: D Difficulty: Moderate 1
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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 Answer: E Difficulty: Moderate 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. Answer: B Difficulty: Moderate 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.
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Chap012 - Multiple Choice Questions 1. Conventional...

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