Chapter 12 – Behavioral Finance and Technical Analysis
12–14
31. The put/call ratio is computed as ____________ and higher values are considered
____________ signals.
D. the number of outstanding call options divided by outstanding put options; bullish
E. the number of outstanding call options divided by outstanding put options; bearish
Difficulty: Moderate
32. The efficient market hypothesis ____________.
A. implies that security prices properly reflect information available to investors
B. has little empirical validity
Difficulty: Moderate
33. Tests of market efficiency have focused on ____________.
A. the mean-variance efficiency of the selected market proxy
Difficulty: Moderate
Chapter 12 – Behavioral Finance and Technical Analysis
12–15
34. The anomalies literature ____________.
A. provides a conclusive rejection of market efficiency
B. provides a conclusive support of market efficiency
Difficulty: Moderate
35. Behavioral finance argues that ____________.
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
Difficulty: Moderate
36. Markets would be inefficient if irrational investors __________ and actions if arbitragers
were __________.
A. existed; unlimited
B. did not exist; unlimited
Difficulty: Moderate
Chapter 12 – Behavioral Finance and Technical Analysis
12–16
37. If prices are correct __________ and if prices are not correct __________.
D. there are easy profit opportunities; there are no easy profit opportunities
E. none of the above
Difficulty: Moderate
38. __________ can lead investors to misestimate the true probabilities of possible events or
associated rates of return.
D. Regret avoidance
E. all of the above
Difficulty: Moderate
Chapter 12 – Behavioral Finance and Technical Analysis
12–17
39. Kahneman and Tversky (1973) report that __________ and __________.
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
Difficulty: Difficult
40. Errors in information processing can lead investors to misestimate __________.
D. the ability to uncover accounting manipulation
E. fraud
Difficulty: Moderate
Chapter 12 – Behavioral Finance and Technical Analysis
12–18
41. DeBondt and Thaler (1990) argue that the P/E effect can be explained by __________.
A. forecasting errors
B. earnings expectations that are too extreme
Difficulty: Moderate
42. Barber and Odean (2001) report that men trade __________ frequently than women and
the frequent trading leads to __________ returns.
A. less; superior
B. less; inferior
Difficulty: Moderate
43. Conservatism implies that investors are too __________ in updating their beliefs in
response to new evidence and that they initially __________ react to news.
A. quick; overreact
B. quick; under react
Difficulty: Moderate
Chapter 12 – Behavioral Finance and Technical Analysis
12–19
44. If information processing were perfect, many studies conclude that individuals would tend
to make __________ decision using that information due to __________.
D. fully rational; fundamental risk
E. fully rational; utility maximization
Difficulty: Moderate
45. The assumptions concerning the shape of utility functions of investors differ between
conventional theory and prospect theory. Conventional theory assumes that utility functions
are __________ whereas prospect theory assumes that utility functions are __________.
Difficulty: Difficult
Chapter 12 – Behavioral Finance and Technical Analysis
12–20
46. 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.
A. Siamese Twin Companies
Difficulty: Difficult
47. Kahneman and Tversky (1973) reported that people give __________ weight to recent
experience compared to prior beliefs when making forecasts. This is referred to as
__________.
A. too little; hyper rationality
B. too little; conservatism
Difficulty: Moderate
Chapter 12 – Behavioral Finance and Technical Analysis
12–21
48. Kahneman and Tversky (1973) reported that __________ give too weight to recent
experience compared to prior beliefs when making forecasts.
A. young men
B. young women
Difficulty: Moderate
49. Barber and Odean (2001) report that men trade __________ frequently than women.
A. less
B. less in down markets
Difficulty: Moderate
50. Barber and Odean (2001) report that women trade __________ frequently than men.
D. more
E. none of the above
Difficulty: Moderate
Chapter 12 – Behavioral Finance and Technical Analysis
12–22
51. Barber and Odean (2001) report that men __________ than women.
A. earn higher returns
Difficulty: Moderate
52. Barber and Odean (2001) report that women __________ than men.
E. none of the above
Difficulty: Moderate
53. __________ effects can help explain momentum in stock prices.
A. Conservatism
B. Regret avoidance
Difficulty: Moderate
Chapter 12 – Behavioral Finance and Technical Analysis
12–23
54. Studies of Siamese twin companies find __________ which __________ the EMH.
A. correct relative pricing; supports
Difficulty: Moderate
55. Studies of equity carve-outs find __________ which __________ the EMH.
A. strong support for the Law of One Price; supports
B. strong support for the Law of One Price; violates
Difficulty: Moderate
56. Studies of closed-end funds find __________ which __________ the EMH.
A. prices at a premium to NAV; is consistent with
B. prices at a premium to NAV; is inconsistent with
Difficulty: Moderate
Chapter 12 – Behavioral Finance and Technical Analysis
12–24
Short Answer Questions
57. Compare and contrast the efficient market hypothesis with the school of thought termed
behavioral finance.
The efficient market hypothesis posits that investors are fully informed, rational, utility
maximizers. Thus, security prices will fully reflect all information available to the investors.
If any security becomes mispriced, the collective buying and selling actions of investors will
quickly cause prices to change. Given an efficient market, it would be difficult to find a
trading rule that would consistently outperform the market. Moreover, failure to uncover
Difficulty: Difficult
58. Behavioral finance posits that investors possess information processing errors. Discuss the
importance of information processing errors then list and explain the four information
processing errors discussed in the text.
Information processing errors are important because they can lead investors to misestimate
the true probabilities of possible events or associated rates of return. The four information
processing errors are forecasting errors, overconfidence, conservatism, and sample size
neglect. forecasting errors arise when people give too much weight to recent experience. This
Difficulty: Difficult
Chapter 12 – Behavioral Finance and Technical Analysis
12–25
59. Behavioral finance posits that investors possess behavioral biases. Discuss the importance
of behavioral biases then list and explain the four behavioral biases discussed in the text.
Behavioral biases are important because even if information processing was perfect,
individuals may tend to make less-than-fully rational decisions using that information. The
four behavioral biases are framing, mental accounting, regret avoidance, and prospect theory
(or loss aversion). Framing refers to the tendency of investors to change preferences due to
the way an investment is “framed”(i.e., in terms of risk or in terms of return). Mental
Difficulty: Difficult
60. Discuss what technical analysis is, what technical analysts do, and the relationship
between technical analysis, fundamental analysis, and behavioral finance.
Technical analysis attempts to exploit recurring and predictable patterns in stock prices to
generate superior portfolio performance. To determine recurring patterns, technical analysts
examine historical returns by means of charts and or time-series analysis (such as moving
averages). Technical analysts do not deny fundamental analysis but believe that prices adjust
Difficulty: Difficult