Question 1

Followers of the random walk hypothesis believe that

Accepted Answer

A)  security analysis is the best tool to utilize when investing in the stock market. 
B)  the price movements of stocks are unpredictable, and therefore security analysis will not help to predict future market behavior. 
C)  that traders can earn higher than normal returns by exploiting market anomalies such as the small-firm effect. 
D)  support levels and resistance lines, when combined with basic chart formations, yield both buy and sell signals.

Question 2

On a given trading day, 1,200 stocks advanced and 700 stocks declined. The volume of advancing stocks was 530 million while the volume of declining stocks was 280 million. What is the ARMS (a.k.a. TRIN) index value for the day?

Accepted Answer

A)  0.31 
B)  0.91 
C)  1.10 
D)  3.24

Question 3

Stocks of small companies have a historical tendency to outperform large cap stocks in the month of January.

Accepted Answer

A) True 
 B)False

Question 4

Which of the following is true about index funds?

Accepted Answer

A)  They consistently outperform 75% of actively managed funds. 
B)  They make no effort to select the best performing stocks. 
C)  They consistently underperform 75% of actively managed funds. 
D)  They outperform the market by selling the weakest companies in the index and weighting the strongest companies more heavily.

Question 5

Evidence suggests that the price of a stock continues to move up or down for a period of

Accepted Answer

A)  a decade or more. 
B)  3 to 5 years. 
C)  1 to 3 years. 
D)  6 to 12 months.

Question 6

A principal objective of technical analysis is trying to determine when to invest.

Accepted Answer

A) True 
 B)False

Question 7

On-balance volume is a secondary indicator used to confirm price trends.

Accepted Answer

A) True 
 B)False

Question 8

In the last year, Bradley purchased 3 stocks on recommendations from his broker, Emily. All of the stocks have increased in value, so he decides to act on all of Emily's recommendations in the future. Over the same period, the S&P 500 was up 15%. Bradley exhibits the tendency known as

Accepted Answer

A)  overconfidence. 
B)  narrow framing. 
C)  loss aversion. 
D)  representativeness.

Question 9

Four "decision traps " identified by behavioral finance are

Accepted Answer

A)  overconfidence, representativeness, loss aversion, narrow framing. 
B)  lack of confidence, representativeness, overreaction, narrow framing. 
C)  overconfidence, representativeness, loss aversion, comprehensive framing. 
D)  overconfidence, unfamiliarity bias, loss aversion. narrow framing.

Question 10

The random walk hypothesis

Accepted Answer

A)  implies that security analysis is unable to predict future market behavior. 
B)  suggests that random patterns appear but only over long periods of time. 
C)  has been disproved based on recent computer simulations. 
D)  accounts for market anomalies such as calendar effects.

Question 11

What is the ten-day simple moving average if the latest daily closing prices are $15, $17, $18, $15, $14, $16, $17, $18, $19, $20?

Accepted Answer

A)  $16.00 
B)  $17.60 
C)  $16.90 
D)  $19.50

Question 12

Research in psychology indicates that most people have very little faith in their ability to perform complex tasks.

Accepted Answer

A) True 
 B)False

Question 13

According to the semi-strong form of the efficient market hypothesis, which of the following might lead to extraordinary profits?

Accepted Answer

A)  studying charts of a stock's past price behavior 
B)  thoroughly analyzing the state of the economy, the industry and the company's fundamentals 
C)  possessing private information not available to other investors 
D)  carefully timing trades to buy when the price is low and sell when the price is high

Question 14

Some behavioral characteristics cause investors to realize lower investment returns.

Accepted Answer

A) True 
 B)False

Question 15

Which of the following accurately reflect appropriate investment guidelines?
I. Always invest in last years best performing mutual fund.
II. Trade frequently to increase your investment returns.
III. Sell losing stocks unless you are willing to buy them at the current price.
IV. Take corrective action when so indicated.

Accepted Answer

A)  I and II only 
B)  III and IV only 
C)  I, III and IV only 
D)  I, II, III and IV

Question 16

Which one of the following statements concerning the random walk hypothesis is correct?

Accepted Answer

A)  Stock price movements are predictable but only over short periods of time. 
B)  Stock prices respond to new information. 
C)  Stock prices in general follow repetitive patterns but the actions of individual investors are random in nature. 
D)  Random price movements indicate that investors can earn abnormal profits on a routine basis.

Question 17

According to chartists, a breakout below a support level

Accepted Answer

A)  is a sell signal. 
B)  is a signal that the market is stagnant. 
C)  is a buy signal but only for value investors. 
D)  is a buy signal.

Question 18

An efficient market reflects

Accepted Answer

A)  only historical information. 
B)  only the information related to events that have already occurred. 
C)  all publicly known information related to past events and announced future events. 
D)  all information including predictions about future information.

Question 19

Jason has decided to sell his stock in an energy company because gas and oil prices as well the price of his stock have declined in 5 of the last 6 months. Jason has most likely fallen into the trap known as

Accepted Answer

A)  loss aversion. 
B)  representativeness. 
C)  narrow framing. 
D)  biased self-attribution.

Question 20

The theory behind the mutual fund cash ratio is

Accepted Answer

A)  mutual fund managers hold high levels of cash when they are optimistic about market conditions. 
B)  when mutual fund managers hold high levels of cash, they must eventually buy stocks with it. 
C)  when mutual fund managers hold low levels of cash they are pessimistic about market conditions. 
D)  when market conditions are favorable, shareholders remit more cash than the managers can invest.

Exam 9: Market Efficiency and Behavioral Finance

Followers of the random walk hypothesis believe that

On a given trading day, 1,200 stocks advanced and 700 stocks declined. The volume of advancing stocks was 530 million while the volume of declining stocks was 280 million. What is the ARMS (a.k.a. TRIN) index value for the day?

Stocks of small companies have a historical tendency to outperform large cap stocks in the month of January.

Which of the following is true about index funds?

Evidence suggests that the price of a stock continues to move up or down for a period of

A principal objective of technical analysis is trying to determine when to invest.

On-balance volume is a secondary indicator used to confirm price trends.

In the last year, Bradley purchased 3 stocks on recommendations from his broker, Emily. All of the stocks have increased in value, so he decides to act on all of Emily's recommendations in the future. Over the same period, the S&P 500 was up 15%. Bradley exhibits the tendency known as

Four "decision traps " identified by behavioral finance are

The random walk hypothesis

What is the ten-day simple moving average if the latest daily closing prices are $15, $17, $18, $15, $14, $16, $17, $18, $19, $20?

Research in psychology indicates that most people have very little faith in their ability to perform complex tasks.

According to the semi-strong form of the efficient market hypothesis, which of the following might lead to extraordinary profits?

Some behavioral characteristics cause investors to realize lower investment returns.

Which one of the following statements concerning the random walk hypothesis is correct?

According to chartists, a breakout below a support level

An efficient market reflects

Jason has decided to sell his stock in an energy company because gas and oil prices as well the price of his stock have declined in 5 of the last 6 months. Jason has most likely fallen into the trap known as

The theory behind the mutual fund cash ratio is