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34.
You have saved a total of $200,000 over the past several years. Jane, a
trusted business associate, recently approached you with an offer. She has
offered you a partnership in a new firm that she expects to be exceedingly
profitable. Your initial investment in the partnership would be $125,000.
However, Jane cannot give you any odds on that success occurring. You
have decided to keep your $125,000 and forego this opportunity simply
because you don't know the probability of success. Which one of the
following behavior characteristics do you have?
35.
You are the manager of a retail store. You believe the economy is in a
recession and that sales for the month will be unusually slow. Since you
have complete discretion over the pricing at your location, you decide to
have a store-wide sale and offer 10 percent off all merchandise for a 3-day
period. You don't expect your superiors to criticize this decision as you
believe they, along with the majority of the other store managers, feel the
same way about the economy as you do. Which one of the following applies
to you?
36.
Which of the following create limits to arbitrage?
I. risks related to an individual firm
II. implementation costs
III. rational traders
IV. noise traders
37.
AB Industries is an all-equity firm that has $10 per share in cash and a book
value per share of $12. At which one of the following market prices would
you know with absolute certainty that the stock was mispriced?
38.
Which of the following have been offered as factors contributing to the
market crash of 1987?
I. requirement for only a 10 percent cash payment to purchase a stock
II. program trading
III. irrational investors
IV. preceeding bear market
39.
Which one of the following statements related to market crashes is
correct?
40.
Which one of the following statements is true?
41.
Historical returns support which one of the following statements?
42.
Which of the following statements are correct?
I. Many professional fund managers are paid well but fail to outperform as
expected.
II. Professional fund managers that have tenures in excess of ten years,
tend to consistently outperform the market on a long-term basis.
III. If a market is truly efficient, then all investments in that market are zero
net present value opportunities.
IV. Actively managing a fund appears to be the key to outperforming the
market.
Essay Questions
43.
Provide an example of a managerial decision that illustrates each one of the
following behaviors:
Behavior: Overconfidence
Example:
Behavior: Affect heuristic
Example:
Behavior: Loss aversion
Example:
44.
Explain 1) the concept of house money, 2) why the house money concept is
such a common behavior for so many individuals and 3) why house money
is an irrational behavior.
45.
Explain why a low-priced, low trading volume stock is more apt to present
limits to arbitrage than is a high-priced, high trading volume stock.
