Deck 9: Behavioral Finance and Technical Analysis

Question 1

The cumulative tally of the number of advancing stocks minus declining stocks is called the ________.

A) market breadth
B) market volume
C) trin ratio
D) relative strength ratio

Answer 1

A

Question 2

Market breadth is a ________ indicator.

A) sentiment
B) flow of funds
C) technical
D) fundamental

Answer 2

C

Question 3

A moving average of stock prices ________.

A) always lies above the most recent price
B) always lies below the most recent price
C) is less volatile than the actual prices
D) is more volatile than the actual prices

Answer 3

C

Question 4

According to Kondratieff, the macro economy moves in a series of waves that recur at intervals of approximately ________.

A) 18 months
B) 4 years
C) 8 years
D) 50 years

Question 5

When a stock price breaks through the moving average from below, this is considered to be ________.

A) the starting point for a new moving average
B) a bearish signal
C) a bullish signal
D) none of these options

Question 6

According to market technicians, it is time to sell stock in a head-and-shoulders formation when ________.

A) the price index pierces the left shoulder
B) the price index pierces the right shoulder
C) the price index pierces the head
D) none of these options takes place

Question 7

Moving averages are ________ indicators.

A) sentiment
B) flow of funds
C) trend
D) fundamental

Question 8

When the stock price falls below a moving average, a possible conclusion is that ________.

A) market momentum has become positive
B) market momentum has become negative
C) there is no regular pattern for this stock's market momentum
D) professional analysts' opinions are invalid until the stock price rises again

Question 9

The TRIN statistic is a ________ indicator.

A) sentiment
B) flow of funds
C) market structure
D) fundamental

Question 10

The put/call ratio is a ________ indicator.

A) sentiment
B) flow of funds
C) market structure
D) fundamental

Question 11

Short interest is a ________ indicator.

A) sentiment
B) flow of funds
C) market structure
D) fundamental

Question 12

When the housing bubble burst in 2007, it set off the worst financial crisis ________.

A) in 25 years.
B) in 40 years.
C) in 50 years.
D) in 75 years.

Question 13

A support level is ________.

A) a level beyond which the market is unlikely to rise
B) a level below which the market is unlikely to fall
C) an equilibrium price level justified by characteristics such as earnings and cash flows
D) the peak of a market wave or cycle

Question 14

A high amount of short interest is typically considered as a ________ signal, and contrarians may consider it as a ________ signal.

A) bearish; bullish
B) bullish; bearish
C) bearish; false
D) bullish; false

Question 15

Relative strength is ________ indicator.

A) a fundamental
B) an economic
C) a technical
D) an international

Question 16

According to Elliot's wave theory, stock market behavior can be explained as ________.

A) a series of medium-term wave cycles with no short-term trend
B) a series of long-term wave cycles with no short-term trend
C) a series of superimposed long-term and short-term wave cycles
D) sine and cosine functions

Question 17

Technical analysis focuses on ________.

A) finding opportunities for risk-free investing
B) finding repeating trends and patterns in prices
C) changing prospects for earnings growth of particular firms or industries
D) forecasting technical regulatory changes

Question 18

Following a period of falling prices, the moving average will ________.

A) be below the current price
B) be above the current price
C) be equal to the current price
D) become more volatile than it had been before prices fell

Question 19

Models of financial markets that emphasize psychological factors affecting investor behavior are called ________.

A) data mining
B) fundamental analysis
C) charting
D) behavioral finance

Question 20

Behaviorists point out that even if market prices are ________, there may be ________.

A) distorted; limited arbitrage opportunities
B) distorted; fundamental efficiency
C) allocationally efficient; limitless arbitrage opportunities
D) distorted; allocational efficiency

Question 21

When the market breaks through the moving average line from below, a technical analyst would probably suggest that it is a good time to ________.

A) buy the stock
B) hold the stock
C) sell the stock
D) short the stock

Question 22

An investor holds a very conservative portfolio invested for retirement, but she takes some extra cash she earned from her year-end bonus and buys gold futures. She appears to be engaging in ________.

A) overconfidence
B) representativeness
C) forecast errors
D) mental accounting

Question 23

If investors are too slow to update their beliefs about a stock's future performance when new evidence arises, they are exhibiting ________.

A) representativeness bias
B) framing error
C) conservatism
D) memory bias

Question 24

Contrarian investors consider a high put/call ratio a ________.

A) bearish signal
B) bullish signal
C) trend confirmation signal
D) signal to enter the options market

Question 25

Even though indexing is growing in popularity, only about ________ of equity in the mutual fund industry is held in indexed funds. This may be a sign that investors and managers ________.

A) 5%; are excessively conservative
B) 25%; overestimate their ability
C) 15%; suffer from framing biases
D) 25%; engage in mental accounting

Question 26

Which of the following is not a sentiment indicator?

A) confidence index
B) short interest
C) relative strength
D) put/call ratio

Question 27

Jill is offered a choice between receiving $50 with certainty or possibly receiving the proceeds from a gamble. In the gamble a fair coin is tossed, and if it comes up heads, Jill will receive $100; if the coin comes up tails, she will receive nothing. Jill chooses the $50 instead of the gamble. Jill's behavior indicates ________.

A) regret avoidance
B) overconfidence
C) that she has a diminishing marginal utility of wealth
D) prospect theory loss aversion

Question 28

A TRIN ratio of greater than 1 is considered a ________.

A) bearish signal
B) bullish signal
C) bearish signal by some technical analysts and a bullish signal by other technical analysts
D) trend reversal signal

Question 29

If investors overweight recent performance in forecasting the future, they are exhibiting ________.

A) representativeness bias
B) framing error
C) memory bias
D) overconfidence

Question 30

Conventional finance theory assumes investors are ________, and behavioral finance assumes investors are ________.

A) rational; irrational
B) irrational; rational
C) greedy; philanthropic
D) philanthropic; greedy

Question 31

The only way for behavioral patterns to persist in prices is if ________.

A) markets are not weak-form efficient
B) there are limits to arbitrage activity
C) there are no significant trading costs
D) market psychology is inconsistent over time

Question 32

Which of the following is considered a sentiment indicator?

A) a 200-day moving average
B) short interest
C) credit balances in brokerage accounts
D) relative strength

Question 33

Which of the following analysts focus more on past price movements of a firm's stock than on the underlying determinants of its future profitability?

A) credit analysts
B) fundamental analysts
C) systems analysts
D) technical analysts

Question 34

Your two best friends each tell you about a person they know who successfully started a small business. That's it, you decide; if they can do it, so can you. This is an example of ________.

A) mental accounting
B) framing bias
C) conservatism
D) representativeness bias

Question 35

Trading activity and average returns in brokerage accounts tend to be ________.

A) uncorrelated
B) negatively correlated
C) positively correlated
D) positively correlated for women and negatively correlated for men

Question 36

The ratio of the average yield on 10 top-rated corporate bonds to the average yield on 10 intermediate-grade bonds is called the ________.

A) bond price index
B) confidence index
C) relative strength index
D) TRIN ratio

Question 37

Bill and Shelly are friends. Bill invests in a portfolio of hot stocks that almost all his friends are invested in. Shelly invests in a portfolio that is totally different from the portfolios of all her friends. Both Bill's and Shelly's stocks fall 15%. According to regret theory, ________.

A) Bill will have more regret over the loss than Shelly
B) Shelly will have more regret over the loss than Bill
C) Bill and Shelly will have equal regret over their losses
D) Bill's and Shelly's risk aversion will increase in the future

Question 38

The most common measure of ________ is the spread between the number of stocks that advance in price and the number of stocks that decline in price.

A) market breadth
B) market volume
C) odd-lot trading
D) short interest

Question 39

An investor needs cash to pay some hospital bills. He is willing to use his dividend income to pay the bills, but he will not sell any stock to do so. He is engaging in ________.

A) overconfidence
B) representativeness
C) forecast errors
D) mental accounting

Question 40

In the context of a point and figure chart, a horizontal band of Xs and Os is a ________.

A) buy signal
B) sell signal
C) congestion area
D) trend reversal

Question 41

If the put/call ratio increases, market contrarians may interpret this as what kind of signal?

A) buy signal
B) sell signal
C) hold signal
D) this is not interpreted as a signal

Question 42

A possible limit on arbitrage activity that may allow behavioral biases to persist is ________.

A) technical trends in prices
B) momentum effects
C) fundamental risk
D) trend reversals

Question 43

A ________ is a value above which it is difficult for the market to rise.

A) book value
B) resistance level
C) support level
D) confidence level

Question 44

At the end of July, the average yields on 10 top-rated corporate bonds and 10 intermediate-grade bonds were 7.65% and 8.42%, respectively. At the end of August, the average yields on 10 top-rated corporate bonds and 10 intermediate-grade bonds were 6% and 6.71%, respectively. The confidence index ________ during August, and bond technical analysts are likely to be ________.

A) increased; bullish
B) increased; bearish
C) decreased; bullish
D) decreased; bearish

Question 45

It is difficult to test the Kondratieff wave theory because ________.

A) it applies to only Russian stocks
B) its main proponent found contrary research results
C) only two independent data points are generated each century
D) the stock market is too volatile to generate smooth waves

Question 46

An important assumption underlying the use of technical analysis techniques is that ________.

A) security prices adjust rapidly to new information
B) security prices adjust gradually to new information
C) security dealers will provide enough liquidity to keep price changes relatively small
D) all investors have immediate and costless access to information

Question 47

On a particular day, there were 890 stocks that advanced on the NYSE and 723 that declined. The volume in advancing issues was 80,846,000, and the volume in declining issues was 70,397,000. The common measure of market breadth is ________.

A) -10,449,000
B) -167
C) 167
D) 10,449,000

Question 48

A point and figure chart:
I) Gives a sell signal when the stock price penetrates previous lows
II) Tracks significant upward or downward movements
III) Has no time dimension
IV) Indicates congestion areas

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

Question 49

On a particular day, there were 920 stocks that advanced on the NYSE and 723 that declined. The volume in advancing issues was 80,846,000, and the volume in declining issues was 70,397,000. The trin ratio is ________, and technical analysts are likely to be ________.

A) )90; bullish
B) )90; bearish
C) 1.11; bullish
D) 1.11; bearish

Question 50

The tendency of investors to hold on to losing investments is called the ________.

A) overweighting effect
B) head-in-the-sand effect
C) disposition effect
D) prospector effect

Question 51

According to market technicians, a TRIN statistic of less than 1 is considered a ________.

A) bearish signal
B) bullish signal
C) volume decline
D) signal reversal

Question 52

On day 1, the stock price of Ford was $12 and the automotive stock index was 127. On day 2, the stock price of Ford was $15 and the automotive stock index was 139. Consider the ratio of Ford to the automotive stock index at day 1 and day 2. Ford is ________ the automotive industry, and technical analysts who follow relative strength would advise ________ the stock.

A) outperforming; buying
B) outperforming; selling
C) underperforming; buying
D) underperforming; selling

Question 53

In technical analysis, ________ is a value below which the market is relatively unlikely to fall.

A) book value
B) resistance level
C) support level
D) the Dow line

Question 54

If you are not a contrarian, you consider a high put/call ratio to be a ________.

A) bearish signal
B) trend confirmation signal
C) signal to enter the options market

Question 55

________ is a tool that can help identify the direction of a stock's price.

A) Prospect theory
B) Framing
C) A moving average
D) Conservatism

Question 56

According to technical analysts, a shift in market fundamentals will ________.

A) be reflected in stock prices immediately
B) lead to a gradual price change that can be recognized as a trend
C) lead to high volatility in stock market prices
D) leave prices unchanged

Question 57

If you believed in the reversal effect, you should ________.

A) buy bonds this period if you held stocks last period
B) buy stocks this period that performed poorly last period
C) buy stocks this period that performed well last period
D) do nothing if you held the stock last period

Question 58

Technical traders view mutual fund investors as ________ market timers.

A) excellent
B) frequent
C) neutral
D) poor

Question 59

When technical analysts say a stock has good "relative strength," they mean that in the recent past ________.

A) it has performed well compared to its closest competitors
B) it has exceeded its own historical high
C) trading volume in the stock has exceeded the normal trading volume
D) it has outperformed the market index

Question 60

If the utility you derive from your next dollar of wealth increases by less than a loss of a dollar reduces it, you are exhibiting ________.

A) loss aversion
B) regret avoidance
C) mental accounting
D) framing bias

Question 61

A major problem with technical trading strategies is that ________.

A) it is very difficult to identify a true trend before the fact
B) it is very difficult to identify the correct trend after the fact
C) it is so easy to identify trends that all investors quickly do so
D) Kondratieff showed that you can't identify trends without 48 to 60 years of data

Question 62

The moving average generates buy signal(s) ________.

A) on days 3, 11, and 15
B) on days 2, 8, and 16
C) on days 5, 9, and 13
D) on no days

Question 63

Investors gravitate toward the latest hot stock even though it has never paid a dividend. Even though net income is projected to fall over the current and next several years, the price of the stock continues to rise. What behavioral concept may explain this price pattern?

A) Overconfidence
B) Loss aversion
C) Mental accounting
D) Calendar bias

Question 64

Identify the resistance-level stock price.

A) $40
B) $42
C) $44
D) $46

Question 65

The confidence index on day 1 is ________.

A) )82
B) )89
C) )92
D) 1.09

Question 66

The TRIN on day 2 is ________.

A) )72
B) 1.04
C) )92
D) )55

Question 67

The price of a stock fluctuates between $43 and $60. If the time frame referenced encompasses the primary trend, the $43 price may be considered the ________.

A) intermediate trend level
B) minor trend level
C) resistance level
D) support level

Question 68

An investor has her money segregated into checking, savings, and investments. The allocation among the categories is subjective, yet the investor spends freely from the checking account and not the others. This behavior can be explained as ________.

A) loss aversion
B) mental accounting
C) overreaction
D) winner's curse

Question 69

Which one of the following best describes fundamental risk?

A) A stock is overpriced, but your fund does not allow you to engage in short sales.
B) Your models indicate a stock is mispriced, but you are not sure if this is a real profit opportunity or a model input error.
C) You buy a stock that you believe is underpriced, and the underpricing persists for a long time, hurting your short-term results.
D) A stock is trading in two different markets at two different prices.

Question 70

In 1997 CSX successfully purchased a significant share of Conrail. Immediately after the first offer was announced and the acquisition eventually consummated, the price of CSX fell below preacquisition levels and took many years to recover. This may be an example of ________.

A) loss aversion
B) mental accounting
C) overreaction
D) managerial overconfidence

Question 71

The breadth on day 3 is ________.

A) -70
B) 10
C) 90
D) 170

Question 72

Identify the support level stock price.

A) $40
B) $42
C) $44
D) $46

Question 73

From day 1 to day 4, the confidence index has ________. This is ________.

A) increased; bullish
B) decreased; bullish
C) increased; bearish
D) decreased; bearish

Question 74

From day 1 to day 4, the TRIN has ________ and is ________.

A) increased; bullish
B) increased; bearish
C) decreased; bullish
D) decreased; bearish

Question 75

Problems with behavioral finance include:
I) The behavioralists tell us nothing about how to exploit any irrationality.
II) The implications of behavioral patterns are inconsistent from case to case, sometimes suggesting overreaction, sometimes underreaction.
III) As with technical trading rules, behavioralists can always find some pattern in past data that supports a behavioralist trait.

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

Question 76

Cumulative breadth for the 4 days is ________, which is ________.

A) -140; bullish
B) -140; bearish
C) -300; bullish
D) -300; bearish

Question 77

The Elliott wave theory gives a buy signal when you can identify a primary bull trend by identifying ________.

A) when the long-term direction of the market is positive
B) when the long-term direction of the market is negative
C) when the long-term direction of the market is stable
D) good stocks without regard to the long-term direction of the market

Question 78

The cumulative breadth for the first 2 days is ________.

A) -240
B) -50
C) 110
D) 250

Question 79

An investor purchases shares of an index fund. The investor could take on the same level of risk by taking out a loan and purchasing a higher-risk specialty fund. The Sharpe ratio on this complete portfolio is higher than her existing investment. What behavioral concept prevents the investor from taking out the loan and investing in the index fund?

A) Framing bias
B) Excessive volatility
C) Loss aversion
D) Mental accounting

Question 80

During a period when prices have been rising, the ________ will be ________ the current price.

A) relative strength index; declining with
B) relative strength index; declining faster than
C) moving average; above
D) moving average; below