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25) You recently overheard your boss telling someone that if he'd actually crunched some
numbers and done some analysis instead of just going with his instincts, he never would have
opened the new store in Centre City. Which one of the following caused your boss to make a bad
decision?
A) Regret aversion
B) Endowment effect
C) Money illusion
D) Affect heuristic
E) Representativeness heuristic
26) Roger's Meat Market is a chain of retail stores that limits its sales to fresh-cut meats. The
stores have been very profitable in northern cities. However, when two stores were opened in the
south, both lost money and had to be closed. Roger, the owner, has now concluded that no
southern-based store should be opened as it would not be profitable. Which one of the following
applies to Roger?
A) Confirmation bias
B) Endowment effect
C) Money illusion
D) Affect heuristic
E) Representativeness heuristic
27) Up until three years ago, A.C. Dime opened an average of ten new retail stores a year. One
of every ten new stores had to be closed within two years due to poor sales. This 90 percent
success ratio was fairly steady for over 30 years. Starting three years ago, the firm has opened 40
new stores and every one had significant profits within six months. Management believes their
recent success is not just a random event and that all future stores will be profitable. Thus, the
managers have decided to open a minimum of 15 new stores each year. The managers are
suffering from:
A) arbitrage limitations.
B) anchoring and adjustment.
C) aversion to ambiguity.
D) the clustering illusion.
E) myopic aversion.
28) You are employed as a commission-based sales clerk for a cosmetics retail store. You know
that, on average, exactly 50 percent of the customers that enter your store will make at least one
purchase. Thus far this morning, you have waited on eight customers without making a single
sale. You are convinced that the next customer you wait on will buy something. This belief is
known as:
A) aversion to ambiguity.
B) the law of small numbers.
C) anchoring and adjusting.
D) gambler's fallacy.
E) false consensus.
29) The last six times you purchased a stock you earned high returns within one year. Thus, you
believe you will have the same result with your next stock purchase. This is an example of which
one of the following?
A) Recency bias
B) Anchoring and adjustment
C) Frame dependence
D) Aversion to ambiguity
E) Clustering illusion
30) You started an online business two weeks ago. Thus far, you have averaged ten sales a day,
which is one sale for every five hits. You are now considering giving up your day job and
becoming a full-time online retailer. You have calculated the amount of income you can earn
based on ten sales a day and know that level of income would support you in a comfortable
fashion. The belief that you will have ten sales per day if this becomes your full-time occupation
is based on which one of the following?
A) Mental accounting
B) Anchoring and adjustment
C) Law of small numbers
D) Bubble and crash theory
E) Confirmation bias
31) You are a hard-charging manager who doesn't really like to sit at a desk for too long. You
prefer to gather information quickly, make a decision, and move on to the next item on your
agenda. Which one of the following applies to you?
A) Availability bias
B) Arbitrage limits
C) Law of small numbers
D) Representativeness heuristic
E) Regret aversion
32) Your friends are all investing in a start-up company. You, on the other hand, refuse to invest
in the company because you don't know the odds of it becoming successful. Which behavioral
characteristic are you displaying?
A) Aversion to ambiguity
B) Recency bias
C) Sentiment-based risk aversion
D) Clustering illusion
E) Money illusion
33) 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 storewide sale and offer ten percent off all merchandise for
a three-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?
A) Recency bias
B) Law of small numbers
C) Gambler's fallacy
D) False consensus
E) Money illusion
34) The last two promotions within a firm involved individuals who completed the same
advanced managerial program. As a result, the company president has stipulated that all future
management hires must be graduates of that program. This behavior is typical of someone who
has which one of the following characteristics?
A) Endowment effect
B) Framing effect
C) Representativeness heuristic
D) Narrow framing
E) Affect heuristic
35) Which term refers to the reliance on stereotypes or limited samples to form opinions about an
entire class?
A) Clustering illusion
B) Law of small numbers
C) Representativeness heuristic
D) False consensus
E) Recency bias
36) It is believed by some individuals that, in an efficient market, the actions of traders who
constantly buy and sell on any perceived market mispricing will in effect cause market prices to
correctly reflect asset values. A person who believes that the actions of these traders will not
result in correctly valued prices are most apt to believe in which one of the following?
A) Gambler's fallacy
B) Limits to arbitrage
C) Availability bias
D) False consensus
E) Clustering illusion
37) Which one of the following is an investment risk that investors face in addition to firm-based
risk and market-based risk?
A) Management-related risk
B) Inflation risk
C) Supply chain risk
D) Interest rate risk
E) Sentiment-based risk
38) Which word best describes the stock market during the month of October 1987?
A) Crash
B) Circle
C) Bubble
D) Limit
E) Flat
39) All of the following create limits to arbitrage except:
A) firm-specific risk.
B) noise traders.
C) thinly traded securities.
D) rational traders.
E) implementation costs.
40) 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?
A) $9
B) $10
C) $11
D) $12
E) $13
41) Approximately what percent of its total value did the stock market lose on "Black Monday"?
A) 19
B) 10
C) 23
D) 30
E) 38
42) Which one of the following statements related to market crashes is correct?
A) Financial market crashes are unique to the United States.
B) A market crash tends to occur within a week but have effects that last many years.
C) Once the market finally crashed in 1929, stock prices began a long period of steady increases.
D) The market crash of 1987 occurred on a day when trading volume was light indicating there
were a limited number of irrational investors involved.
E) Actions in Washington, D.C., may have helped contribute to the market crash in 1929 but not
to the 1987 crash.
43) Which one of the following statements is true?
A) Market crashes tend to be accompanied by low market volume.
B) The Asian market crash was followed by a quick recovery.
C) The market crashes of 1929 and 1987 are very similar in both the percentage decline in
market value and in the ensuing market recovery.
D) Market crashes tend to follow market bubbles.
E) Market bubbles and crashes prove that financial markets are inefficient.
44) Following the Crash of 1929, the stock market:
A) began to slowly, but steadily, increase in value.
B) was flat for about three years and then began a slow, steady rise to pre-crash values.
C) continued to decline slightly before increasing over a 3-year period to its pre-crash values.
D) temporarily increased in value and then began a 3-year decline to ten percent of its pre-crash
value.
E) recouped its 90 percent loss within the following three years.
45) Which one of these statements related to the Crash of 1987 is false?
A) Program trading is at least partially to blame for the market meltdown.
B) Between August and October 1987 the market declined over 40 percent.
C) In some cases, it became impossible to contact a market maker.
D) Trading volume exceeded the market's capacity to handle the order flows.
E) Following the Crash of 1987, the market continued to slowly decline over the following year.
46) Which one of the following is given as a key reason why many of the dot-com companies
failed following their IPO's?
A) Lack of a solid business model
B) Lack of internet access
C) Market crash in Asia
D) Change in government regulations
E) Program trading
47) Historical returns support which one of the following statements?
A) Financial markets are highly inefficient as suggested by behavioral finance.
B) Professional money managers tend to outperform the Vanguard 500 index fund about 60
percent of the time on average.
C) The longer the time span, the more likely a professional money manager will outperform an
index fund, such as the S&P 500.
D) Historical data supports the statement that arbitrage results in a 100 percent totally efficient
market.
E) The financial markets appear to be highly efficient because, on average, they outperform
professional money managers.
48) Which one of the following statements is correct?
A) In a totally efficient market every investment has a zero net present value.
B) Portfolio managers with tenures greater than 10 years, consistently outperform the market.
C) The performance of professional money managers improves the longer the investment period.
D) Mutual funds that are actively managed outperform index funds over the long term.
E) The number of mutual funds outperforming the Vanguard 500 Index Fund over a 10-year
period is steadily rising.
