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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
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
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Chapter 12 Behavioral Finance and Technical Analysis
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
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.
C)
stock price expectations that are too extreme.
D)
stock price expectations that are not extreme enough.
E)
none of the above.
Answer: A Difficulty: Moderate
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
Answer: E Difficulty: Moderate
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Chapter 12 Behavioral Finance and Technical Analysis
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
Answer: C Difficulty: Moderate
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
Answer: B 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)
overconfidence
B)
framing
C)
regret avoidance
D)
sample neglect
E)
all of the above
Answer: A Difficulty: Moderate
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
Answer: D Difficulty: Moderate
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Chapter 12 Behavioral Finance and Technical Analysis
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
Answer: A Difficulty: Moderate
Rationale: 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.
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
Answer: A 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)
mental accounting
B)
regret avoidance
C)
overconfidence
D)
conservatism
E)
none of the above
Answer: A Difficulty: Moderate
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Chapter 12 Behavioral Finance and Technical Analysis
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
Answer: B 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)
I and II only
B)
I, II, and III
C)
I, II, III, and V
D)
II, III, and IV
E)
IV and V
Answer: B 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)
I and II
B)
I, II, and III
C)
I, III, and V
D)
IV and V
E)
V
Answer: C Difficulty: Moderate
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Chapter 12 Behavioral Finance and Technical Analysis
18.
__________ was the grandfather of technical analysis.
A)
Harry Markowitz
B)
William Sharpe
C)
Charles Dow
D)
Benjamin Graham
E)
none of the above
Answer: C Difficulty: Easy
Rationale: 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.
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.
Answer: E Difficulty: Easy
Rationale: The Dow theory uses the Dow Jones Industrial Average as an indicator of
long-term trends in market prices.
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
Answer: B Difficulty: Easy
Rationale: Minor trends are merely day-to-day price movements; intermediate trends
are or offsetting movements in one direction after longer-term movements in another
direction; trends lasting for the period described above are primary trends.
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Chapter 12 Behavioral Finance and Technical Analysis
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
Answer: A Difficulty: Easy
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.
Answer: B Difficulty: Easy
Rationale: The secondary trend is caused by these deviations, which are eliminated by
corrections that bring the prices back to the trend lines.
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
Answer: D Difficulty: Moderate
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Chapter 12 Behavioral Finance and Technical Analysis
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
Answer: E Difficulty: Easy
Rationale: 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.
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
Answer: B Difficulty: Easy
Rationale: 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.
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
Answer: A Difficulty: Moderate
Rationale: (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.
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