投资学题库

Chapter 12

1. Conventional theories presume that investors ____________ and behavioral finance presumes that they ____________.

B. are rational; may not be 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.

3. Some economists believe that the anomalies literature is consistent with investors ____________ and ____________.

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

4. Information processing errors consist of

I) forecasting errors

II) overconfidence

III) conservatism

IV) framing

E. I, II and III

5. Forecasting errors are potentially important because

B. research suggests that people overweight recent information.

Forecasting errors are potentially important because research suggests that people overweight recent information.

6. DeBondt and Thaler believe that high P/E result from investors

A. earnings expectations that are too extreme.

DeBondt and Thaler believe that high P/E result from investors earnings expectations that are too extreme.

7. If a person gives too much weight to recent information compared to prior beliefs, they would make ________ errors.

E. forecasting

8. Single men trade far more often than women. This is due to greater ________ among men.

C. overconfidence

9. ____________ may be responsible for the prevalence of active versus passive investments management.

B. Overconfidence

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

11. ________ bias means that investors are too slow in updating their beliefs in response to evidence.

D. conservatism

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 avoidance13. 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

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

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.

B. regret avoidance

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

B. I, II, and III

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

C. I, III, and V

18. __________ was the grandfather of technical analysis.

C. Charles Dow

19. The goal of the Dow theory is to

E. identify long-term trends

20. A long-term movement of prices, lasting from several months to years is called _________.

B. a primary trend

21. A daily fluctuation of little importance is called ____________.

A. a minor trend

22. Price movements that are caused by short-term deviations of prices from the underlying trend line are called

B. secondary 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

D. I, II, and IV

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

E. A, B, and C

25. A trin ratio of less than 1.0 is considered as a _________.

B. bullish signal

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

27. In regard to moving averages, it is considered to be a ____________ signal when market price breaks through the moving average from ____________.

B. bullish: below

C. bearish; above

E. B and C

28. Two popular moving average periods are

D. 200-day and 53 week

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.

C. Breadth

30. Then confidence index is computed from ____________ and higher values are considered ____________ signals.

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

32. The efficient market hypothesis ____________.

A. implies that security prices properly reflect information available to investors

C. implies that active traders will find it difficult to outperform a buy-and-hold strategy

E. A and C

33. Tests of market efficiency have focused on ____________.

B. strategies that would have provided superior risk-adjusted returns

C. results of actual investments of professional managers

D. B and C

34. The anomalies literature ____________.

C. suggests that several strategies would have provided superior returns

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

D. A and B

36. Markets would be inefficient if irrational investors __________ and actions if arbitragers were __________. C. existed; limited

37. If prices are correct __________ and if prices are not correct __________.

A. there are no easy profit opportunities; there are no easy profit opportunities

38. __________ can lead investors to misestimate the true probabilities of possible events or associated rates of return.

A. Information processing errors

39. Kahneman and Tversky (1973) report that __________ and __________.

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

40. Errors in information processing can lead investors to misestimate __________.

A. true probabilities of possible events and associated rates of return

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

E. A and B

42. Barber and Odean (2001) report that men trade __________ frequently than women and the frequent trading leads to __________ returns.

D. more; inferior

43. Conservatism implies that investors are too __________ in updating their beliefs in response to new evidence and that they initially __________ react to news.

D. slow; under react

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

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

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.

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 __________.

D. too much; memory bias

48. Kahneman and Tversky (1973) reported that __________ give too weight to recent experience compared to prior beliefs when making forecasts.

C. people

49. Barber and Odean (2001) report that men trade __________ frequently than women.

D. more

50. Barber and Odean (2001) report that women trade __________ frequently than men.

A. less

51. Barber and Odean (2001) report that men __________ than women.

B. earn lower returns

52. Barber and Odean (2001) report that women __________ than men.

A. earn higher returns

53. __________ effects can help explain momentum in stock prices.

D. Mental accounting

54. Studies of Siamese twin companies find __________ which __________ the EMH.

D. incorrect relative pricing; does not support

55. Studies of equity carve-outs find __________ which __________ the EMH.

C. evidence against the Law of One Price; violates

56. Studies of closed-end funds find __________ which __________ the EMH.

B. prices at a premium to NAV; is inconsistent 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.

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.

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.

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.

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.