Chapter 12 - Behavioral Finance and Technical Analysis

Chapter 12 - Behavioral Finance and Technical Analysis
1. Conventional theories presume that investors ____________ and behavioral finance

presumes that they ____________.
B. are rational; may not be rational
2. The premise of behavioral finance is that

A. conventional financial theory ignores how real people make decisions and that people
make a difference.
3. Some economists believe that the anomalies literature is consistent with investors'
____________ and ____________.
D. inability to always process information correctly and therefore they infer incorrect
probability distributions about future rates of return; given a probability distribution of
returns, they often make inconsistent or suboptimal decisions
4. Information processing errors consist of

I) forecasting errors
II) overconfidence
III) conservatism
IV) framing
E. I, II and III
5. Forecasting errors are potentially important because

B. research suggests that people overweight recent information.
6. DeBondt and Thaler believe that high P/E result from investors'
A. earnings expectations that are too extreme.
7. If a person gives too much weight to recent information compared to prior beliefs, they
would make ________ errors.
E. forecasting
8. Single men trade far more often than women. This is due to greater ________ among men.
C. overconfidence
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9. ____________ may be responsible for the prevalence of active versus passive investments
management.
B. Overconfidence
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
A. overconfidence
11. ________ bias means that investors are too slow in updating their beliefs in response to
evidence.
D. Conservatism
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
A. regret avoidance
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.
A. framing
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.
A. mental accounting
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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.
B. regret avoidance
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
B. I, II, and III
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
C. I, III, and V
18. __________ was the grandfather of technical analysis.

C. Charles Dow
19. The goal of the Dow theory is to

E. identify long-term trends.
20. A long-term movement of prices, lasting from several months to years is called
_________.
B. a primary trend
21. A daily fluctuation of little importance is called ____________.

A. a minor trend
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22. Price movements that are caused by short-term deviations of prices from the underlying
trend line are called
B. secondary trends.
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
D. I, II, and IV
24. The Elliot Wave Theory ____________.

E. is a recent variation of the Dow Theory, suggests that stock prices can be described by a set
of wave patterns, and is similar to the Kondratieff Wave theory
25. A trin ratio of less than 1.0 is considered as a _________.

B. bullish signal
26. On October 29, 2009 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 ________.
A. 0.87, bullish
27. In regard to moving averages, it is considered to be a ____________ signal when market

price breaks through the moving average from ____________.
E. both bullish; below and bearish; above
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28. Two popular moving average periods are
D. 200-day and 53 week
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.
C. Breadth
30. Then confidence index is computed from ____________ and higher values are considered
____________ signals.
E. bond yields; bullish
31. The put/call ratio is computed as ____________ and higher values are considered
____________ signals.
A. the number of outstanding put options divided by outstanding call options; bullish or
bearish
32. The efficient market hypothesis ____________.

E. implies that security prices properly reflect information available to investors and implies
that active traders will find it difficult to outperform a buy-and-hold strategy
33. Tests of market efficiency have focused on ____________.

D. strategies that would have provided superior risk-adjusted returns and results of actual
investments of professional managers
34. The anomalies literature ____________.

C. suggests that several strategies would have provided superior returns
35. Behavioral finance argues that ____________.

D. even if security prices are wrong it may be difficult to exploit them, and the failure to
uncover successful trading rules or traders cannot be taken as proof of market efficiency
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36. Markets would be inefficient if irrational investors __________ and actions if arbitragers
were __________.
C. existed; limited
37. If prices are correct __________ and if prices are not correct __________.
A. there are no easy profit opportunities; there are no easy profit opportunities
38. __________ can lead investors to misestimate the true probabilities of possible events or
associated rates of return.
A. Information processing errors
39. Kahneman and Tversky (1973) report that __________ and __________.
B. people give too much weight to recent experience compared to prior beliefs; tend to make
forecasts that are too extreme given the uncertainty of their information
40. Errors in information processing can lead investors to misestimate __________.

A. true probabilities of possible events and associated rates of return
41. DeBondt and Thaler (1990) argue that the P/E effect can be explained by __________.
E. both forecasting errors and earnings expectations that are too extreme
42. Barber and Odean (2001) report that men trade __________ frequently than women and
the frequent trading leads to __________ returns.
D. more; inferior
43. Conservatism implies that investors are too __________ in updating their beliefs in
response to new evidence and that they initially __________ to news.
D. slow; under react
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44. If information processing were perfect, many studies conclude that individuals would tend
to make __________ decisions using that information due to __________.
A. less-than-fully rational; behavioral biases
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 __________.
A. concave and defined in terms of wealth; s-shaped (convex to losses and concave to gains)
and defined in terms of loses relative to current wealth
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
E. All of these are correct.
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
__________.
D. too much; memory bias
48. Kahneman and Tversky (1973) reported that __________ give too much weight to recent
experience compared to prior beliefs when making forecasts.
C. people
49. Barber and Odean (2001) report that men trade __________ frequently than women.
D. more
50. Barber and Odean (2001) report that women trade __________ frequently than men.
A. less
51. Barber and Odean (2001) report that men __________ than women.
B. earn lower returns
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52. Barber and Odean (2001) report that women __________ than men.
A. earn higher returns
53. __________ effects can help explain momentum in stock prices.

D. Mental accounting
54. Studies of Siamese twin companies find __________ which __________ the EMH.
D. incorrect relative pricing; does not support
55. Studies of equity carve-outs find __________ which __________ the EMH.
C. evidence against the Law of One Price; violates
56. Studies of closed-end funds find __________ which __________ the EMH.
E. both prices at a premium to NAV; is inconsistent with and prices at a discount to NAV; is
inconsistent with
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Chapter 12 - Behavioral Finance and Technical Analysis

1. Conventional theories presume that investors ____________ and behavioral finance

2. The premise of behavioral finance is that

4. Information processing errors consist of

5. Forecasting errors are potentially important because

16. Arbitrageurs may be unable to exploit behavioral biases due to ____________.

18. __________ was the grandfather of technical analysis.

19. The goal of the Dow theory is to

21. A daily fluctuation of little importance is called ____________.

24. The Elliot Wave Theory ____________.

25. A trin ratio of less than 1.0 is considered as a _________.

27. In regard to moving averages, it is considered to be a ____________ signal when market

32. The efficient market hypothesis ____________.

33. Tests of market efficiency have focused on ____________.

34. The anomalies literature ____________.

35. Behavioral finance argues that ____________.

40. Errors in information processing can lead investors to misestimate __________.

53. __________ effects can help explain momentum in stock prices.

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