Essentials of Investments, 11e (Bodie)
Chapter 9 Behavioral Finance and Technical Analysis
1) Models of financial markets that emphasize psychological factors affecting investor behavior
are called ________.
A) data mining
B) fundamental analysis
C) charting
D) behavioral finance
2) The TRIN statistic is a ________ indicator.
A) sentiment
B) flow of funds
C) market structure
D) fundamental
3) The put/call ratio is a ________ indicator.
A) sentiment
B) flow of funds
C) market structure
D) fundamental
4) Relative strength is ________ indicator.
A) a fundamental
B) an economic
C) a technical
D) an international
5) Short interest is a ________ indicator.
A) sentiment
B) flow of funds
C) market structure
D) fundamental
6) Moving averages are ________ indicators.
A) sentiment
B) flow of funds
C) trend
D) fundamental
7) Market breadth is a ________ indicator.
A) sentiment
B) flow of funds
C) technical
D) fundamental
8) 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
9) 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
10) 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
11) 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
12) 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
13) 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
14) 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
15) 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
16) 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
17) 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.
18) 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
19) 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
20) 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
21) Conventional finance theory assumes investors are ________, and behavioral finance
assumes investors are ________.
A) rational; irrational
B) irrational; rational
C) greedy; philanthropic
D) philanthropic; greedy
22) 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
23) 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
24) 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
25) 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
26) If investors overweight recent performance in forecasting the future, they are exhibiting
________.
A) representativeness bias
B) framing error
C) memory bias
D) overconfidence
27) 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
28) 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
29) Which of the following is not a sentiment indicator?
A) confidence index
B) short interest
C) relative strength
D) put/call ratio
30) 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
31) 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
32) 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
33) 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
34) 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
35) 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
36) 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
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
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
39) 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
40) 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
41) 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
42) 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
43) 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
44) 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
45) 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
46) ________ 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
47) 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
48) 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
49) 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
50) 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
51) 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
52) 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
53) 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