11
4) Loss aversion is the behavior of excessively conservative investors.
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: New Question
Learning Goal: Learning Goal 3
5) Most investors quickly sell their losers and hold on to their winners.
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 3
6) Most investors are slow to accept evidence that contradicts their strongly held beliefs.
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 3
7) Self-attribution bias causes investors to attribute their successes to skill and failures to
chance.
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 3
8) There is strong evidence that investors who trade frequently outperform the market.
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 3
12
9) Some behavioral characteristics cause investors to realize lower investment returns.
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 3
10) Investor overconfidence leads to
A) too little trading.
B) an overestimation of risk.
C) overly optimistic predictions.
D) narrow framing.
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 3
11) Four “decision traps ” identified by behavioral finance are
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.
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 3
12) The tendency of investors to blame others for their failures and take personal credit for their
successes is referred to as
A) loss aversion.
B) representativeness.
C) narrow framing.
D) self-attribution bias.
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 3
13
13) The most important lesson investors can learn from behavioral finance is
A) to understand psychological factors influencing long-term price movement.
B) to have the humility to let professionals manage their investments.
C) how to avoid letting their emotions and biases affect their investment decisions.
D) to have confidence in their instincts and first impressions.
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 3
14) 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
A) loss aversion.
B) representativeness.
C) narrow framing.
D) biased self-attribution.
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: New Question
Learning Goal: Learning Goal 3
15) Which of the following characteristics are referred to as representativeness?
I. hesitating to sell stocks at a loss
II. basing conclusions on small samples
III. underestimating the effects of random chance
IV. underestimating the level of risk in an investment
A) I and IV only
B) II and III only
C) I, II and III only
D) I, II, III and IV only
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 3
14
16) Which of the following are common but dysfunctional investor behaviors?
I. overinvesting in companies with familiar names
II. dividing their funds equally among available choices, even if several of the choices serve
the same purpose
III. holding on to a stock that has dropped in value because you would be willing to buy it at its
current price
IV. overestimating one’s ability to pick successful investments
A) I and IV only
B) II and III only
C) I, II and IV only
D) I, II, III and IV
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Revised
Learning Goal: Learning Goal 3
17) People tend to
A) ignore information that contradicts their current beliefs.
B) overestimate the effects of random chance.
C) be underconfident in their judgment of investments.
D) look at the entire situation when analyzing an individual security.
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 3
18) The tendency of investors to take greater risks after a large loss and fewer risks after a large
gain can be attributed to
A) overconfidence.
B) the “house money” effect.
C) loss aversion.
D) representativeness.
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 3
15
19) Investors who buy mutual funds that have had large gains over the last few years are
exhibiting a tendency known as
A) overconfidence.
B) narrow framing.
C) loss aversion.
D) representativeness.
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 3
20) Heather has the equivalent of one year’s income in an insured savings account. Her 401-K
fund offers a choice of a government bond fund, an S&P 500 Index fund, and a balanced fund
that holds roughly equal amounts of stocks and bonds. If she decided to allocate 1/3 of her
retirement investments to each fund, she may be a victim of
A) overconfidence.
B) narrow framing.
C) loss aversion.
D) representativeness.
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: New Question
Learning Goal: Learning Goal 3
21) 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.
A) I and II only
B) III and IV only
C) I, III and IV only
D) I, II, III and IV
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 3
16
22) Which of the following statements correctly present recommendations based on behavioral
finance?
I. Don’t hesitate to sell a losing stock.
II. Trade frequently.
III. Chase performance.
IV. Be humble and open-minded.
A) I and II only
B) I and IV only
C) II and III only
D) III and IV only
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 3
23) Evidence suggests that the price of a stock continues to move up or down for a period of
A) a decade or more.
B) 3 to 5 years.
C) 1 to 3 years.
D) 6 to 12 months.
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 3
24) Market bubbles such as the technology bubble of the 1990s and the housing bubble of
2004-2007 are best explained by
A) the efficient market hypothesis.
B) behavioral finance and economics.
C) rational expectations theory.
D) anomaly theory.
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 3
17
25) What are some of the more important disagreements between the efficient market
hypothesis and the findings of behavioral finance?
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 3
9.4 Learning Goal 4
1) Recent academic studies in behavioral finance confirm that markets are even more efficient
than previously believed.
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 4
2) The efficient market hypothesis has some trouble explaining the existence of market
anomalies.
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 4
3) Evidence suggests that growth stocks tend to outperform value stocks.
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 4
18
4) Stocks of small companies have a historical tendency to do especially well in the month of
January.
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 4
5) One of the calendar effect market anomalies indicates that ________ in value during
January.
A) large cap stocks tend to decline
B) equities in general tend to decline
C) small cap stocks tend to increase
D) equities in general tend to increase
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 4
6) The anomaly known as post-earnings announcement drift or momentum describes the
tendency of stock prices to rise or fall for several ________ after unexpectedly good or bad
earnings announcements.
A) months
B) weeks
C) days
D) hours
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 4
19
7) From a behavioral perspective, the anomaly known as post-earnings announcement drift or
momentum is best explained by
A) self attribution bias.
B) loss aversion.
C) representativeness.
D) familiarity bias.
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: New Question
Learning Goal: Learning Goal 4
8) Even after adjusting for risk, ________ firms have, over long periods of time, earned higher
returns than ________ firms.
A) small; large
B) large; small
C) new; old
D) old; new
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 4
9) The tendency of small firms to have higher returns than large firms , even after adjusting for
risk, may be attributable to
A) representativeness.
B) overconfidence.
C) familiarity bias.
D) loss aversion.
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 4
20
10) The tendency of naive investors to buy high (after prices have risen for several periods) and
sell low (after prices have dropped for several periods) can be explained by the behavioral
tendency known as
A) anchoring.
B) overconfidence.
C) familiarity bias.
D) loss aversion.
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: New Question
Learning Goal: Learning Goal 4
11) The stock of PHRM, the price declined by 30% when the FDA did not approve a promising
new therapy the company was developing. Patrick holds on to the stock and constantly
searches the internet looking for favorable stories about the company while ignoring a cascade
of negative reports. This is an example of
A) anchoring.
B) overconfidence.
C) belief perseverance.
D) loss aversion
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: New Question
Learning Goal: Learning Goal 4
12) Barb and Ken purchased a house for $300,000 in 2005. When they needed to sell because
of a job transfer in 2009, the house was appraised for $250,000 but they put it on the market for
$300,000 anyway. The house is still on the market. Behavioral tendencies at work here may
include
A) representativeness and narrow framing.
B) overconfidence and representativeness.
C) familiarity bias and self attribution bias.
D) loss aversion and anchoring.
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: New Question
Learning Goal: Learning Goal 4