Question 1

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.

Question 2

__________ effects can help explain momentum in stock prices.

Accepted Answer

A)  Conservatism 
B)  Regret avoidance 
C)  Prospect theory 
D)  Mental accounting 
E)  Model risk

Question 3

____________ 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

Accepted Answer

A)  I and II 
B)  I, II, and III 
C)  I, III, and V 
D)  IV and V 
E)  V

Question 4

________ 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.

Question 5

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

Accepted Answer

A)  Information processing errors 
B)  Framing errors 
C)  Mental accounting errors 
D)  Regret avoidance

Question 6

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

Question 7

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.

Accepted Answer

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

Question 8

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

Question 9

Some economists believe that the anomalies literature is consistent with investors'

Accepted Answer

A)  ability to always process information correctly, and therefore, they infer correct probability distributions about future rates of return; and 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; and 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; and 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; and given a probability distribution of returns, they often make inconsistent or suboptimal decisions.

Question 10

Errors in information processing can lead investors to misestimate

Accepted Answer

A)  true probabilities of possible events and associated rates of return. 
B)  occurrence of possible events. 
C)  only possible rates of return. 
D)  the effect of accounting manipulation. 
E)  fraud.

Question 11

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

Question 12

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)  Siamese twin companies and closed end funds 
E)  All of the options are correct.

Question 13

Forecasting errors are potentially important because

Accepted Answer

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)  research suggests that people either underweight recent information or overweight recent information depending on whether the information was good or bad. 
E)  None of the options are correct.

Question 14

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.

Question 15

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

Question 16

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.

Question 17

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.

Question 18

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

Accepted Answer

A)  earn higher returns than 
B)  earn lower returns than 
C)  earn about the same returns as 
D)  generate higher trading costs than

Question 19

Studies of closed end funds find __________, which __________ the EMH.

Accepted Answer

A)  prices at a premium to NAV; is consistent with 
B)  prices at a premium to NAV; is inconsistent with 
C)  prices at a discount to NAV; is consistent with 
D)  prices at a discount to NAV; is inconsistent with 
E)  prices at premiums and discounts to NAV; is inconsistent with

Question 20

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

Accepted Answer

A)  quick; overreact 
B)  quick; under react 
C)  slow; overreact 
D)  slow; under react

Exam 12: Behavioral Finance and Technical Analysis