Chapter 12 – Behavioral Finance and Technical Analysis
12-1
Chapter 12
Behavioral Finance and Technical Analysis
Multiple Choice Questions
1. Conventional theories presume that investors ____________ and behavioral finance
presumes that they ____________.
A. are irrational; are irrational
Difficulty: Easy
2. The premise of behavioral finance is that
C. conventional financial theory should ignore how the average person makes decisions
because the market is driven by investors that are much more sophisticated than the average
person.
D. B and C
Difficulty: Easy
Chapter 12 – Behavioral Finance and Technical Analysis
12-2
3. Some economists believe that the anomalies literature is consistent with investors
____________ and ____________.
A. ability to always process information correctly and therefore they infer correct probability
distributions about future rates of return; 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; given a probability distribution of
Difficulty: Moderate
4. Information processing errors consist of
I) forecasting errors
II) overconfidence
III) conservatism
IV) framing
A. I and II
Difficulty: Moderate
Chapter 12 – Behavioral Finance and Technical Analysis
12-3
5. Forecasting errors are potentially important because
A. research suggests that people underweight recent information.
Difficulty: Moderate
6. DeBondt and Thaler believe that high P/E result from investors
D. stock price expectations that are not extreme enough.
E. none of the above.
Difficulty: Moderate
7. If a person gives too much weight to recent information compared to prior beliefs, they
would make ________ errors.
A. framing
B. selection bias
Difficulty: Moderate
Chapter 12 – Behavioral Finance and Technical Analysis
12-4
8. Single men trade far more often than women. This is due to greater ________ among men.
A. framing
B. regret avoidance
Difficulty: Moderate
9. ____________ may be responsible for the prevalence of active versus passive investments
management.
A. Forecasting errors
Difficulty: Moderate
10. 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
E. all of the above
Difficulty: Moderate
Chapter 12 – Behavioral Finance and Technical Analysis
12-5
11. ________ bias means that investors are too slow in updating their beliefs in response to
evidence.
A. framing
B. regret avoidance
Difficulty: Moderate
12. 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
E. obnoxicity
Difficulty: Moderate
Chapter 12 – Behavioral Finance and Technical Analysis
12-6
13. An example of ________ is that a person may reject an investment when it is posed in
terms of risk surrounding potential gains but may accept the same investment if it is posed in
terms of risk surrounding potential losses.
D. conservatism
E. none of the above
Difficulty: Moderate
14. 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.
D. conservatism
E. none of the above
Difficulty: Moderate
Chapter 12 – Behavioral Finance and Technical Analysis
12-7
15. 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.
A. mental accounting
Difficulty: Moderate
16. Arbitrageurs may be unable to exploit behavioral biases due to ____________.
I) fundamental risk
II) implementation costs
III) model risk
IV) conservatism
V) regret avoidance
A. I and II only
Difficulty: Moderate
Chapter 12 – Behavioral Finance and Technical Analysis
12-8
17. ____________ 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
A. I and II
Difficulty: Moderate
18. __________ was the grandfather of technical analysis.
A. Harry Markowitz
B. William Sharpe
Difficulty: Easy
Chapter 12 – Behavioral Finance and Technical Analysis
12-9
19. The goal of the Dow theory is to
A. identify head and shoulder patterns.
B. identify breakaway points.
Difficulty: Easy
20. A long-term movement of prices, lasting from several months to years is called
_________.
A. a minor trend
Difficulty: Easy
21. A daily fluctuation of little importance is called ____________.
D. a market trend
E. none of the above
Difficulty: Easy
Chapter 12 – Behavioral Finance and Technical Analysis
12–10
22. Price movements that are caused by short-term deviations of prices from the underlying
trend line are called
A. primary trends.
Difficulty: Easy
23. The Dow theory posits that the three forces that simultaneously affect stock prices are
____________.
I) primary trend
II) intermediate trend
III) momentum trend
IV) minor trend
V) contrarian trend
A. I, II, and III
B. II, III, and IV
Difficulty: Moderate
Chapter 12 – Behavioral Finance and Technical Analysis
12–11
24. The Elliot Wave Theory ____________.
A. is a recent variation of the Dow Theory
Difficulty: Easy
25. A trin ratio of less than 1.0 is considered as a _________.
A. bearish signal
Difficulty: Easy
Chapter 12 – Behavioral Finance and Technical Analysis
12–12
26. On October 29, 1991 there were 1,031 stocks that advanced on the NYSE and 610 that
declined. The volume in advancing issues was 112,866,000 and the volume in declining
issues was 58,188,000. The trin ratio for that day was ________ and technical analysts were
likely to be ________.
D. 1.15, bearish
E. none of the above
Difficulty: Moderate
27. In regard to moving averages, it is considered to be a ____________ signal when market
price breaks through the moving average from ____________.
A. bearish; below
B. bullish: below
Difficulty: Moderate
Chapter 12 – Behavioral Finance and Technical Analysis
12–13
28. Two popular moving average periods are
A. 90-day and 52 week
B. 180-day and three year
Difficulty: Moderate
29. ____________ is a measure of the extent to which a movement in the market index is
reflected in the price movements of all stocks in the market.
A. put-call ratio
B. trin ratio
Difficulty: Moderate
30. Then confidence index is computed from ____________ and higher values are considered
____________ signals.
A. bond yields; bearish
B. odd lot trades; bearish
Difficulty: Moderate