Question 1

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

Accepted Answer

A)  less; superior 
B)  less; inferior 
C)  more; superior 
D)  more; inferior 
A)  less; superior 
B)  less; inferior 
C)  more; superior 
D)  more; inferior D

Question 2

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.

Accepted Answer

A)  Siamese twin companies 
B)  equity carve-outs 
C)  closed-end funds 
D)  None of the options are correct. 
E)  All of the options are correct. 
A)  Siamese twin companies 
B)  equity carve-outs 
C)  closed-end funds 
D)  None of the options are correct. 
E)  All of the options are correct. E

Question 3

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 __________.

Accepted Answer

A)  concave and defined in terms of wealth; s-shaped (convex to losses and concave to gains) and defined in terms of losses relative to current wealth 
B)  convex and defined in terms of losses relative to current wealth; s-shaped (convex to losses and concave to gains) and defined in terms of losses relative to current wealth 
C)  s-shaped (convex to losses and concave to gains) and defined in terms of losses 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 losses relative to current wealth 
E)  convex and defined in terms of wealth; concave and defined in terms of gains relative to current wealth 
A)  concave and defined in terms of wealth; s-shaped (convex to losses and concave to gains) and defined in terms of losses relative to current wealth 
B)  convex and defined in terms of losses relative to current wealth; s-shaped (convex to losses and concave to gains) and defined in terms of losses relative to current wealth 
C)  s-shaped (convex to losses and concave to gains) and defined in terms of losses 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 losses relative to current wealth 
E)  convex and defined in terms of wealth; concave and defined in terms of gains relative to current wealth A

Question 4

Markets would be inefficient if irrational investors __________ and actions of arbitragers were __________.

Accepted Answer

A)  existed; unlimited 
B)  did not exist; unlimited 
C)  existed; limited 
D)  did not exist; limited 
A)  existed; unlimited 
B)  did not exist; unlimited 
C)  existed; limited 
D)  did not exist; limited

Question 5

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

Accepted Answer

A)  less 
B)  less in down markets 
C)  more in up markets 
D)  more 
A)  less 
B)  less in down markets 
C)  more in up markets 
D)  more

Question 6

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

Accepted Answer

A)  overconfidence. 
B)  framing. 
C)  regret avoidance. 
D)  sample neglect. 
A)  overconfidence. 
B)  framing. 
C)  regret avoidance. 
D)  sample neglect.

Question 7

If information processing was perfect, many studies conclude that individuals would tend to make __________ decisions using that information due to __________.

Accepted Answer

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 
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

Question 8

The premise of behavioral finance is that

Accepted Answer

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 who are much more sophisticated than the average person. 
D)  conventional financial theory considers how emotional people make decisions, but the market is driven by rational utility-maximizing investors and should ignore how the average person makes decisions because the market is driven by investors who are much more sophisticated than the average person. 
E)  None of the options are correct. 
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 who are much more sophisticated than the average person. 
D)  conventional financial theory considers how emotional people make decisions, but the market is driven by rational utility-maximizing investors and should ignore how the average person makes decisions because the market is driven by investors who are much more sophisticated than the average person. 
E)  None of the options are correct.

Question 9

Kahneman and Tversky (1973) reported that people give __________ weight to recent experience compared to prior beliefs when making forecasts. This is referred to as ____________.

Accepted Answer

A)  too little; hyper rationality 
B)  too little; conservatism 
C)  too much; framing 
D)  too much; memory bias 
A)  too little; hyper rationality 
B)  too little; conservatism 
C)  too much; framing 
D)  too much; memory bias

Question 10

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

Accepted Answer

A)  bearish; below 
B)  bullish; below 
C)  bullish; above 
D)  None of the options are correct. 
A)  bearish; below 
B)  bullish; below 
C)  bullish; above 
D)  None of the options are correct.

Question 11

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

Accepted Answer

A)  regret avoidance. 
B)  framing. 
C)  mental accounting. 
D)  overconfidence. 
E)  obnoxicity. 
A)  regret avoidance. 
B)  framing. 
C)  mental accounting. 
D)  overconfidence. 
E)  obnoxicity.

Question 12

A trin ratio of less than 1.0 is considered as a

Accepted Answer

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)  bearish signal by some technical analysts, a bullish signal by other technical analysts, and a bullish signal by some fundamentalists. 
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)  bearish signal by some technical analysts, a bullish signal by other technical analysts, and a bullish signal by some fundamentalists.

Question 13

Reliance on recent events could lead to _____________.

Accepted Answer

A)  heuristics. 
B)  overreaction. 
C)  underreaction. 
D)  anomalies. 
E)  bias effect. 
A)  heuristics. 
B)  overreaction. 
C)  underreaction. 
D)  anomalies. 
E)  bias effect.

Question 14

DeBondt and Thaler (1990) argue that the P/E effect can be explained by

Accepted Answer

A)  forecasting errors. 
B)  earnings expectations that are too extreme. 
C)  earnings expectations that are not extreme enough. 
D)  regret avoidance. 
E)  forecasting errors and earnings expectations that are too extreme. 
A)  forecasting errors. 
B)  earnings expectations that are too extreme. 
C)  earnings expectations that are not extreme enough. 
D)  regret avoidance. 
E)  forecasting errors and earnings expectations that are too extreme.

Question 15

Behavioral finance argues that

Accepted Answer

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)  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. 
E)  All of the options are correct. 
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)  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. 
E)  All of the options are correct.

Question 16

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

Accepted Answer

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 
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

Question 17

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.

Accepted Answer

A)  mental accounting 
B)  regret avoidance 
C)  overconfidence 
D)  conservatism 
A)  mental accounting 
B)  regret avoidance 
C)  overconfidence 
D)  conservatism

Question 18

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

Accepted Answer

A)  framing 
B)  regret avoidance 
C)  overconfidence 
D)  conservatism 
A)  framing 
B)  regret avoidance 
C)  overconfidence 
D)  conservatism

Question 19

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

Accepted Answer

A)  Framing 
B)  Regret avoidance 
C)  Overconfidence 
D)  Conservatism 
E)  None of the options are correct. 
A)  Framing 
B)  Regret avoidance 
C)  Overconfidence 
D)  Conservatism 
E)  None of the options are correct.

Question 20

Overconfidence about the precision of one's value-relevant information is consistent with what anomaly?

Accepted Answer

A)  heuristics 
B)  overreaction 
C)  value-versus-growth 
D)  bias effect 
E)  intrinsic value 
A)  heuristics 
B)  overreaction 
C)  value-versus-growth 
D)  bias effect 
E)  intrinsic value

Exam 12: Behavioral Finance and Technical Analysis

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

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.

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 __________.

Markets would be inefficient if irrational investors __________ and actions of arbitragers were __________.

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

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

If information processing was perfect, many studies conclude that individuals would tend to make __________ decisions using that information due to __________.

The premise of behavioral finance is that

Kahneman and Tversky (1973) reported that people give __________ weight to recent experience compared to prior beliefs when making forecasts. This is referred to as ____________.

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

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 trin ratio of less than 1.0 is considered as a

Reliance on recent events could lead to _____________.

DeBondt and Thaler (1990) argue that the P/E effect can be explained by

Behavioral finance argues that

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

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.

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

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

Overconfidence about the precision of one's value-relevant information is consistent with what anomaly?

The Investment Environment

Asset Classes and Financial Instruments

How Securities Are Traded

Mutual Funds and Other Investment Companies

Risk, Return, and the Historical Record

Capital Allocation to Risky Assets

Efficient Diversification

Index Models

The Capital Asset Pricing Model

Arbitrage Pricing Theory and Multifactor Models of Risk and Return

The Efficient Market Hypothesis

Empirical Evidence on Security Returns

Bond Prices and Yields

The Term Structure of Interest Rates

Managing Bond Portfolios

Macroeconomic and Industry Analysis

Equity Valuation Models

Financial Statement Analysis

Options Markets: Introduction

Option Valuation

Futures Markets

Futures, Swaps, and Risk Management

Portfolio Performance Evaluation

International Diversification

Hedge Funds

The Theory of Active Portfolio Management

Investment Policy and the Framework of the Cfa Institute

Filters

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

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 .

Markets would be inefficient if irrational investors and actions of arbitragers were .

If information processing was perfect, many studies conclude that individuals would tend to make decisions using that information due to .

Kahneman and Tversky (1973) reported that people give weight to recent experience compared to prior beliefs when making forecasts. This is referred to as __.

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

Kahneman and Tversky (1973) report that and .