Investments Global Edition 10th Edition Bodie Test Bank

Investments Global Edition 10th Edition
Bodie Test Bank

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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
B. are rational; may not be rational
C. are rational; are rational
D. may not be rational; may not be rational
E. may not be rational; are rational
12-1
Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
2. The premise of behavioral finance is that
A. conventional financial theory ignores how real people make decisions and that people
make a difference.
B. conventional financial theory considers how emotional people make decisions, but the
market is driven by rational utility maximizing investors.
C. conventional financial theory should ignore how the average person makes decisions
because the market is driven by investors who are much more sophisticated than the
average person.
D. conventional financial theory considers how emotional people make decisions, but the
market is driven by rational utility maximizing investors and should ignore how the average
person makes decisions because the market is driven by investors who are much more
sophisticated than the average person.
E. None of the options
3. Some economists believe that the anomalies literature is consistent with investors'
A. ability to always process information correctly and therefore they infer correct probability
distributions about future rates of return; and 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; and given a probability distribution of
returns, they always make consistent and optimal decisions.
C. ability to always process information correctly and therefore they infer correct probability
distributions about future rates of return; and given a probability distribution of returns,
they often make inconsistent or suboptimal decisions.
D. inability to always process information correctly and therefore they infer incorrect
returns, they often make inconsistent or suboptimal decisions.
12-2
4. Information processing errors consist of
I) forecasting errors.
II) overconfidence.
III) conservatism.
IV) framing.
A. I and II
B. I and III
C. III and IV
D. IV only
E. I, II, and III
5. Forecasting errors are potentially important because
A. research suggests that people underweight recent information.
B. research suggests that people overweight recent information.
C. research suggests that people correctly weight recent information.
D. research suggests that people either underweight recent information or overweight recent
information depending on whether the information was good or bad.
6. DeBondt and Thaler believe that high P/E result from investors'
A. earnings expectations that are too extreme.
B. earnings expectations that are not extreme enough.
C. stock price expectations that are too extreme.
D. stock price expectations that are not extreme enough.
12-3
7. If a person gives too much weight to recent information compared to prior beliefs, they would
make ________ errors.
A. framing
B. selection bias
C. overconfidence
D. conservatism
E. forecasting
8. Single men trade far more often than women. This is due to greater ________ among men.
A. framing
B. regret avoidance
C. overconfidence
D. conservatism
9. ____________ may be responsible for the prevalence of active versus passive investments
management.
A. Forecasting errors
B. Overconfidence
C. Mental accounting
D. Conservatism
E. Regret avoidance
12-4
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.
B. framing.
C. regret avoidance.
D. sample neglect.
11. ________ bias means that investors are too slow in updating their beliefs in response to
evidence.
A. Framing
B. Regret avoidance
C. Overconfidence
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.
B. framing.
C. mental accounting.
D. overconfidence.
E. obnoxicity.
12-5
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
B. regret avoidance
C. overconfidence
D. conservatism
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
B. regret avoidance
C. overconfidence
D. conservatism
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
C. overconfidence
D. conservatism
12-6
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
B. I, II, and III
C. I, II, III, and V
D. II, III, and IV
E. IV and V
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
B. I, II, and III
C. I, III, and V
D. IV and V
E. V
12-7
18. A trin ratio of less than 1.0 is considered as a
A. bearish signal.
B. bullish signal.
C. bearish signal by some technical analysts and a bullish signal by other technical analysts.
D. bullish signal by some fundamentalists.
E. bearish signal by some technical analysts, a bullish signal by other technical analysts, and
bullish signal by some fundamentalists.
19. On August 27, 2012, there were 1,455 stocks that advanced on the NYSE and 1,553 that
declined. The volume in advancing issues was 852,581 and the volume in declining issues
was 1,058,312. The trin ratio for that day was ________ and technical analysts were likely to
be ________.
A. 0.87, bullish
B. 0.87, bearish
C. 1.15, bullish
D. 1.15, bearish
20. 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
C. None of the options
D. bullish; above
12-8
21. Two popular moving average periods are
A. 90-day and 52 week.
B. 180-day and three year.
C. 180-day two year.
D. 200-day and 53 week.
E. 200-day and two year.
22. ____________ 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
C. Breadth
D. Confidence index
E. All of the options
23. The confidence index is computed from ____________, and higher values are considered
____________ signals.
A. bond yields; bearish
B. odd lot trades; bearish
C. odd lot trades; bullish
D. put/call ratios; bullish
E. bond yields; bullish
12-9
24. 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
B. the number of outstanding put options divided by outstanding call options; bullish
C. the number of outstanding put options divided by outstanding call options; bearish
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
25. The efficient market hypothesis
A. implies that security prices properly reflect information available to investors.
B. has little empirical validity.
C. implies that active traders will find it difficult to outperform a buy-and-hold strategy.
D. has little empirical validity and implies that active traders will find it difficult to outperform
a buy-and-hold strategy.
E. implies that security prices properly reflect information available to investors and that
active traders will find it difficult to outperform a buy-and-hold strategy.
26. Tests of market efficiency have focused on
A. the mean-variance efficiency of the selected market proxy.
B. strategies that would have provided superior risk-adjusted returns.
C. results of actual investments of professional managers.
D. strategies that would have provided superior risk-adjusted returns and results of actual
investments of professional managers.
E. the mean-variance efficiency of the selected market proxy and strategies that would have
provided superior risk-adjusted returns.
12-10
27. The anomalies literature
A. provides a conclusive rejection of market efficiency.
B. provides conclusive support of market efficiency.
C. suggests that several strategies would have provided superior returns.
D. provides a conclusive rejection of market efficiency and suggests that several strategies
would have provided superior returns.
28. 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 efficiency.
C. investors are rational.
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.
29. Markets would be inefficient if irrational investors __________ and actions of arbitragers were
__________.
A. existed; unlimited
B. did not exist; unlimited
C. existed; limited
D. did not exist; limited
12-11
30. If prices are correct, __________, and if prices are not correct, __________.
A. there are no easy profit opportunities; there are no easy profit opportunities
B. there are no easy profit opportunities; there are easy profit opportunities
C. there are easy profit opportunities; there are easy profit opportunities
D. there are easy profit opportunities; there are no easy profit opportunities
31. __________ can lead investors to misestimate the true probabilities of possible events or
associated rates of return.
A. Information processing errors
B. Framing errors
C. Mental accounting errors
D. Regret avoidance
32. 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
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
C. people give too little weight to recent experience compared to prior beliefs; tend to make
forecasts that are not extreme enough given the uncertainty of their information
D. people give too much weight to recent experience compared to prior beliefs; tend to make
forecasts that are not extreme enough given the uncertainty of their information
12-12
33. Errors in information processing can lead investors to misestimate
A. true probabilities of possible events and associated rates of return.
B. occurrence of possible events.
C. only possible rates of return.
D. the effect of accounting manipulation.
E. fraud.
34. DeBondt and Thaler (1990) argue that the P/E effect can be explained by
A. forecasting errors.
B. earnings expectations that are too extreme.
C. earnings expectations that are not extreme enough.
D. regret avoidance.
E. forecasting errors and earnings expectations that are too extreme.
35. Barber and Odean (2001) report that men trade __________ frequently than women and the
frequent trading leads to __________ returns.
A. less; superior
B. less; inferior
C. more; superior
D. more; inferior
12-13
36. Conservatism implies that investors are too __________ in updating their beliefs in response
to new evidence and that they initially __________ to news.
A. quick; overreact
B. quick; under react
C. slow; overreact
D. slow; under react
37. If information processing was perfect, many studies conclude that individuals would tend to
make __________ decisions using that information due to __________.
A. less than fully rational; behavioral biases
B. fully rational; behavioral biases
C. less than fully rational; fundamental risk
D. fully rational; fundamental risk
E. fully rational; utility maximization
12-14
38. 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 losses relative to current wealth
B. convex and defined in terms of losses relative to current wealth; s-shaped (convex to
losses and concave to gains) and defined in terms of losses relative to current wealth
C. s-shaped (convex to losses and concave to gains) and defined in terms of losses relative
to current wealth; concave and defined in terms of wealth
D. s-shaped (convex to losses and concave to gains) and defined in terms of wealth; concave
and defined in terms of losses relative to current wealth
E. convex and defined in terms of wealth; concave and defined in terms of gains relative to
current wealth
39. 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
B. equity carve-outs
C. closed-end funds
D. Siamese twin companies and closed-end funds
12-15
40. 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
C. too much; framing
D. too much; memory bias
41. Kahneman and Tversky (1973) reported that __________ give too much weight to recent
experience compared to prior beliefs when making forecasts.
A. young men
B. young women
C. people
D. older men
E. older women
42. Barber and Odean (2001) report that men trade __________ frequently than women.
A. less
B. less in down markets
C. more in up markets
D. more
12-16
43. Barber and Odean (2001) report that women trade __________ frequently than men.
A. less
D. more
44. Barber and Odean (2001) report that men __________ women.
A. earn higher returns than
B. earn lower returns than
C. earn about the same returns as
D. generate lower trading costs than
45. Barber and Odean (2001) report that women __________ men.
D. generate higher trading costs than
46. __________ effects can help explain momentum in stock prices.
A. Conservatism
B. Regret avoidance
C. Prospect theory
D. Mental accounting
E. Model risk
12-17
47. Studies of Siamese twin companies find __________, which __________ the EMH.
A. correct relative pricing; supports
B. correct relative pricing; does not support
C. incorrect relative pricing; supports
D. incorrect relative pricing; does not support
48. 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
C. evidence against the law of one price; violates
D. evidence against the law of one price; supports
49. 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
C. prices at a discount to NAV; is consistent with
D. prices at a discount to NAV; is inconsistent with
E. prices at premiums and discounts to NAV; is inconsistent with
12-18
50. ____________ measures the extent to which a security has outperformed or underperformed
either the market as a whole or its particular industry.
A. Put-call ratio
B. Trin ratio
C. Breadth
D. Relative strength
Short Answer Questions
51. Compare and contrast the efficient market hypothesis with the school of thought termed
behavioral finance.
12-19
52. 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.
53. 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.
12-20
54. Discuss what technical analysis is, what technical analysts do, and the relationship between
technical analysis, fundamental analysis, and behavioral finance.
12-21
Chapter 12 Behavioral Finance and Technical Analysis Answer Key
Multiple Choice Questions
1. Conventional theories presume that investors ____________, and behavioral finance

presumes that they ____________.
A. are irrational; are irrational
B. are rational; may not be rational
C. are rational; are rational
D. may not be rational; may not be rational
E. may not be rational; are rational
Conventional theories presume that investors are rational, and behavioral finance
presumes that they may not be rational.
AACSB: Analytic
Blooms: Remember
Difficulty: Basic
Topic: Behavioral Critique
12-22
2. The premise of behavioral finance is that
A. conventional financial theory ignores how real people make decisions and that people
make a difference.
B. conventional financial theory considers how emotional people make decisions, but the
market is driven by rational utility maximizing investors.
C. conventional financial theory should ignore how the average person makes decisions
because the market is driven by investors who are much more sophisticated than the
average person.
D. conventional financial theory considers how emotional people make decisions, but the
market is driven by rational utility maximizing investors and should ignore how the
average person makes decisions because the market is driven by investors who are
much more sophisticated than the average person.
The premise of behavioral finance is that conventional financial theory ignores how real
people make decisions and that people make a difference.
AACSB: Analytic
Blooms: Remember
Difficulty: Basic
12-23
3. Some economists believe that the anomalies literature is consistent with investors'
A. ability to always process information correctly and therefore they infer correct
probability distributions about future rates of return; and 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
of returns, they always make consistent and optimal decisions.
C. ability to always process information correctly and therefore they infer correct
of returns, they often make inconsistent or suboptimal decisions.
D. inability to always process information correctly and therefore they infer incorrect
of returns, they often make inconsistent or suboptimal decisions.
Some economists believe that the anomalies literature is consistent with investors'
inability to always process information correctly and therefore they infer incorrect
returns, they often make inconsistent or suboptimal decisions.
AACSB: Analytic
Blooms: Remember
Difficulty: Intermediate
12-24
4. Information processing errors consist of
I) forecasting errors.
II) overconfidence.
III) conservatism.
IV) framing.
A. I and II
B. I and III
C. III and IV
D. IV only
E. I, II, and III
Information processing errors consist of forecasting errors, overconfidence, and

conservatism.
AACSB: Analytic
Blooms: Remember
12-25
5. Forecasting errors are potentially important because
A. research suggests that people underweight recent information.
B. research suggests that people overweight recent information.
C. research suggests that people correctly weight recent information.
D. research suggests that people either underweight recent information or overweight

recent information depending on whether the information was good or bad.
Forecasting errors are potentially important because research suggests that people
overweight recent information.
AACSB: Analytic
Blooms: Understand
6. DeBondt and Thaler believe that high P/E result from investors'
A. earnings expectations that are too extreme.
B. earnings expectations that are not extreme enough.
C. stock price expectations that are too extreme.
D. stock price expectations that are not extreme enough.
DeBondt and Thaler believe that high P/E result from investors' earnings expectations that
are too extreme.
AACSB: Analytic
Blooms: Remember
12-26
7. If a person gives too much weight to recent information compared to prior beliefs, they
would make ________ errors.
A. framing
B. selection bias
C. overconfidence
D. conservatism
E. forecasting
If a person gives too much weight to recent information compared to prior beliefs, they
would make forecasting errors.
AACSB: Analytic
Blooms: Understand
8. Single men trade far more often than women. This is due to greater ________ among men.
A. framing
B. regret avoidance
C. overconfidence
D. conservatism
Single men trade far more often than women. This is due to greater overconfidence among
men.
AACSB: Analytic
Blooms: Remember
12-27
9. ____________ may be responsible for the prevalence of active versus passive investments
management.
A. Forecasting errors
B. Overconfidence
C. Mental accounting
D. Conservatism
E. Regret avoidance
Overconfidence may be responsible for the prevalence of active versus passive

investments management.
AACSB: Analytic
Blooms: Remember
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.
B. framing.
C. regret avoidance.
D. sample neglect.
They attribute this to overconfidence.
AACSB: Analytic
Blooms: Remember
12-28
11. ________ bias means that investors are too slow in updating their beliefs in response to
evidence.
A. Framing
B. Regret avoidance
C. Overconfidence
D. Conservatism
Conservatism bias means that investors are too slow in updating their beliefs in response
to evidence.
AACSB: Analytic
Blooms: Remember
12-29
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.
B. framing.
C. mental accounting.
D. overconfidence.
E. obnoxicity.
An investments example given in the text is buying the stock of a start-up firm that shows
subsequent poor performance, versus buying blue chip stocks that perform poorly.
Investors tend to have more regret if they chose the less conventional start-up stock.
DeBondt and Thaler say that such regret theory is consistent with the size effect and the
book-to-market effect.
AACSB: Analytic
Blooms: Remember
12-30
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
B. regret avoidance
C. overconfidence
D. conservatism
An example of framing 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.
AACSB: Analytic
Blooms: Remember
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.
B. regret avoidance
C. overconfidence
D. conservatism
Statman (1977) argues that mental accounting is consistent with some investors' irrational
preference for stocks with high cash dividends and with a tendency to hold losing
positions too long.
AACSB: Analytic
12-31
Blooms: Remember
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
C. overconfidence
D. conservatism
An example of regret avoidance 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.
AACSB: Analytic
Blooms: Understand
12-32
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
B. I, II, and III
C. I, II, III, and V
D. II, III, and IV
E. IV and V
Arbitrageurs may be unable to exploit behavioral biases due to fundamental risk,

implementation costs, and model risk.
AACSB: Analytic
Blooms: Remember
Topic: Limits to Arbitrage
12-33
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
B. I, II, and III
C. I, III, and V
D. IV and V
E. V
Siamese twin companies, closed end funds, and equity carve-outs are good examples of
the limits to arbitrage because they show that the law of one price is violated.
AACSB: Analytic
Blooms: Remember
12-34
18. A trin ratio of less than 1.0 is considered as a
A. bearish signal.
B. bullish signal.
C. bearish signal by some technical analysts and a bullish signal by other technical
analysts.
D. bullish signal by some fundamentalists.
E. bearish signal by some technical analysts, a bullish signal by other technical analysts,
and bullish signal by some fundamentalists.
A trin ratio of less than 1.0 is considered bullish because the declining stocks have lower
average volume than the advancing stocks, indicating net buying pressure.
AACSB: Analytic
Blooms: Understand
Difficulty: Basic
Topic: Technical Analysis and Behavioral Finance
12-35
19. On August 27, 2012, there were 1,455 stocks that advanced on the NYSE and 1,553 that
declined. The volume in advancing issues was 852,581 and the volume in declining issues
was 1,058,312. The trin ratio for that day was ________ and technical analysts were likely
to be ________.
A. 0.87, bullish
B. 0.87, bearish
C. 1.15, bullish
D. 1.15, bearish
(1,058,312/1553)/(852,581/1455) = 1.16. A trin ratio more than 1 is considered bearish

because declining stocks have a higher volume than advancing stocks, indicating selling
pressure.
AACSB: Analytic
Blooms: Apply
20. 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
C. None of the options
D. bullish; above
In regard to moving averages, it is considered to be a bullish signal when market price

breaks through the moving average from below. In addition, it is considered to be a bearish
signal when market price breaks through the moving average from above.
AACSB: Analytic
12-36
Blooms: Understand
21. Two popular moving average periods are
A. 90-day and 52 week.
B. 180-day and three year.
C. 180-day two year.
D. 200-day and 53 week.
E. 200-day and two year.
Two popular moving average periods are 200-day and 53 week.
AACSB: Analytic
Blooms: Remember
22. ____________ 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
C. Breadth
D. Confidence index
Breadth 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.
AACSB: Analytic
12-37
Blooms: Remember
23. The confidence index is computed from ____________, and higher values are considered
____________ signals.
A. bond yields; bearish
B. odd lot trades; bearish
C. odd lot trades; bullish
D. put/call ratios; bullish
E. bond yields; bullish
The confidence index is computed from bond yields, and higher values are considered
bullish signals.
AACSB: Analytic
Blooms: Understand
12-38
24. 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
B. the number of outstanding put options divided by outstanding call options; bullish
C. the number of outstanding put options divided by outstanding call options; bearish
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
The put/call ratio is computed as the number of outstanding put options divided by
outstanding call options, and higher values are considered bullish or bearish signals.
AACSB: Analytic
Blooms: Understand
12-39
25. The efficient market hypothesis
A. implies that security prices properly reflect information available to investors.
B. has little empirical validity.
C. implies that active traders will find it difficult to outperform a buy-and-hold strategy.
D. has little empirical validity and implies that active traders will find it difficult to
outperform a buy-and-hold strategy.
E. implies that security prices properly reflect information available to investors and that
active traders will find it difficult to outperform a buy-and-hold strategy.
The efficient market hypothesis implies that security prices properly reflect information
available to investors and active traders will find it difficult to outperform a buy-and-hold
strategy.
AACSB: Analytic
Blooms: Remember
12-40
26. Tests of market efficiency have focused on
A. the mean-variance efficiency of the selected market proxy.
B. strategies that would have provided superior risk-adjusted returns.
C. results of actual investments of professional managers.
D. strategies that would have provided superior risk-adjusted returns and results of actual
investments of professional managers.
E. the mean-variance efficiency of the selected market proxy and strategies that would
have provided superior risk-adjusted returns.
Tests of market efficiency have focused on strategies that would have provided superior
risk-adjusted returns and results of actual investments of professional managers.
AACSB: Analytic
Blooms: Understand
27. The anomalies literature
A. provides a conclusive rejection of market efficiency.
B. provides conclusive support of market efficiency.
C. suggests that several strategies would have provided superior returns.
D. provides a conclusive rejection of market efficiency and suggests that several

strategies would have provided superior returns.
The anomalies literature suggests that several strategies would have provided superior
returns.
AACSB: Analytic
Blooms: Remember
12-41
28. 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 efficiency.
C. investors are rational.
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.
Behavioral finance argues that 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.
AACSB: Analytic
Blooms: Understand
12-42
29. Markets would be inefficient if irrational investors __________ and actions of arbitragers
were __________.
A. existed; unlimited
B. did not exist; unlimited
C. existed; limited
D. did not exist; limited
Markets would be inefficient if irrational investors existed and actions if arbitragers were
limited.
AACSB: Analytic
Blooms: Understand
30. If prices are correct, __________, and if prices are not correct, __________.
A. there are no easy profit opportunities; there are no easy profit opportunities
B. there are no easy profit opportunities; there are easy profit opportunities
C. there are easy profit opportunities; there are easy profit opportunities
D. there are easy profit opportunities; there are no easy profit opportunities
If prices are correct, there are no easy profit opportunities and if prices are not correct,
there are no easy profit opportunities.
AACSB: Analytic
Blooms: Understand
12-43
31. __________ can lead investors to misestimate the true probabilities of possible events or
associated rates of return.
A. Information processing errors
B. Framing errors
C. Mental accounting errors
D. Regret avoidance
Information processing errors can lead investors to misestimate the true probabilities of
possible events or associated rates of return.
AACSB: Analytic
Blooms: Understand
32. 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
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
C. people give too little weight to recent experience compared to prior beliefs; tend to
make forecasts that are not extreme enough given the uncertainty of their information
D. people give too much weight to recent experience compared to prior beliefs; tend to
make forecasts that are not extreme enough given the uncertainty of their information
Kahneman and Tversky (1973) report that people give too much weight to recent
experience compared to prior beliefs and tend to make forecasts that are too extreme
given the uncertainty of their information.
AACSB: Analytic
12-44
Blooms: Understand
Difficulty: Challenge
33. Errors in information processing can lead investors to misestimate
A. true probabilities of possible events and associated rates of return.
B. occurrence of possible events.
C. only possible rates of return.
D. the effect of accounting manipulation.
E. fraud.
Errors in information processing can lead investors to misestimate true probabilities of

possible events and associated rates of return.
AACSB: Analytic
Blooms: Understand
34. DeBondt and Thaler (1990) argue that the P/E effect can be explained by
A. forecasting errors.
B. earnings expectations that are too extreme.
C. earnings expectations that are not extreme enough.
D. regret avoidance.
E. forecasting errors and earnings expectations that are too extreme.
DeBondt and Thaler (1990) argue that the P/E effect can be explained by forecasting
errors and earnings expectations that are too extreme.
AACSB: Analytic
12-45
Blooms: Remember
35. Barber and Odean (2001) report that men trade __________ frequently than women and the
frequent trading leads to __________ returns.
A. less; superior
B. less; inferior
C. more; superior
D. more; inferior
Barber and Odean (2001) report that men trade more frequently than women and the
frequent trading leads to inferior returns.
AACSB: Analytic
Blooms: Understand
36. Conservatism implies that investors are too __________ in updating their beliefs in
response to new evidence and that they initially __________ to news.
A. quick; overreact
B. quick; under react
C. slow; overreact
D. slow; under react
Conservatism implies that investors are too slow in updating their beliefs in response to
new evidence and that they initially underreact to news.
AACSB: Analytic
Blooms: Understand
12-46
37. If information processing was perfect, many studies conclude that individuals would tend
to make __________ decisions using that information due to __________.
A. less than fully rational; behavioral biases
B. fully rational; behavioral biases
C. less than fully rational; fundamental risk
D. fully rational; fundamental risk
E. fully rational; utility maximization
If information processing was perfect, many studies conclude that individuals would tend
to make less than fully rational decisions using that information due to behavioral biases.
AACSB: Analytic
Blooms: Understand
12-47
38. 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 losses relative to current wealth
B. convex and defined in terms of losses relative to current wealth; s-shaped (convex to
losses and concave to gains) and defined in terms of losses relative to current wealth
C. s-shaped (convex to losses and concave to gains) and defined in terms of losses
relative to current wealth; concave and defined in terms of wealth
D. s-shaped (convex to losses and concave to gains) and defined in terms of wealth;
concave and defined in terms of losses relative to current wealth
E. convex and defined in terms of wealth; concave and defined in terms of gains relative
to current wealth
The assumptions concerning the shape of utility functions of investors differ between
conventional theory and prospect theory. Conventional theory assumes that utility
functions are concave and defined in terms of wealth whereas prospect theory assumes
that utility functions are s-shaped (convex to losses and concave to gains) and defined in
terms of losses relative to current wealth.
AACSB: Analytic
Blooms: Understand
12-48
39. 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
B. equity carve-outs
C. closed-end funds
D. Siamese twin companies and closed-end funds
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 Siamese twin companies,
equity carve-outs, and closed-end funds are often mispriced.
AACSB: Analytic
Blooms: Understand
12-49
40. Kahneman and Tversky (1973) reported that people give __________ weight to recent
____________.
A. too little; hyper rationality
B. too little; conservatism
C. too much; framing
D. too much; memory bias
Kahneman and Tversky (1973) reported that people give too much weight to recent
memory bias.
AACSB: Analytic
Blooms: Understand
41. Kahneman and Tversky (1973) reported that __________ give too much weight to recent
A. young men
B. young women
C. people
D. older men
E. older women
Kahneman and Tversky (1973) reported that people give too much weight to recent
AACSB: Analytic
Blooms: Remember
12-50
42. Barber and Odean (2001) report that men trade __________ frequently than women.
A. less
D. more
Barber and Odean (2001) report that men trade more frequently than women.
AACSB: Analytic
Blooms: Remember
43. Barber and Odean (2001) report that women trade __________ frequently than men.
A. less
D. more
Barber and Odean (2001) report that men trade more frequently than women.
AACSB: Analytic
Blooms: Remember
12-51
44. Barber and Odean (2001) report that men __________ women.
D. generate lower trading costs than
Barber and Odean (2001) report that men trade more frequently than women and have
lower returns.
AACSB: Analytic
Blooms: Remember
45. Barber and Odean (2001) report that women __________ men.
D. generate higher trading costs than
Barber and Odean (2001) report that men trade more frequently than women and have
lower returns.
AACSB: Analytic
Blooms: Remember
12-52
46. __________ effects can help explain momentum in stock prices.
A. Conservatism
B. Regret avoidance
C. Prospect theory
D. Mental accounting
E. Model risk
Mental accounting effects can help explain momentum in stock prices.
AACSB: Analytic
Blooms: Understand
47. Studies of Siamese twin companies find __________, which __________ the EMH.
A. correct relative pricing; supports
B. correct relative pricing; does not support
C. incorrect relative pricing; supports
D. incorrect relative pricing; does not support
Studies of Siamese twin companies find incorrect relative pricing, which does not support
the EMH.
AACSB: Analytic
Blooms: Understand
12-53
48. 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
C. evidence against the law of one price; violates
D. evidence against the law of one price; supports
Studies of equity carve-outs find evidence against the law of one price, which violates the
EMH.
AACSB: Analytic
Blooms: Understand
49. 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
C. prices at a discount to NAV; is consistent with
D. prices at a discount to NAV; is inconsistent with
E. prices at premiums and discounts to NAV; is inconsistent with
Studies of closed-end funds find prices at premiums and discounts to NAV, which is
inconsistent with the EMH.
AACSB: Analytic
Blooms: Understand
12-54
50. ____________ measures the extent to which a security has outperformed or
underperformed either the market as a whole or its particular industry.
A. Put-call ratio
B. Trin ratio
C. Breadth
D. Relative strength
Relative strength measures the extent to which a security has outperformed or

underperformed either the market as a whole or its particular industry. Relative strength is
computed by calculating the ratio of the price of the security to a price index for the
industry.
AACSB: Analytic
Blooms: Remember
Short Answer Questions
12-55
51. 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
profitable trading strategies may be taken as proof of market efficiency. Behavioral
finance argues that conventional theory ignores how real people make decisions and that
people make a difference. Behavioral finance says that investors possess two
"irrationalities." First, investors do not always process information correctly, and secondly
they often make systematically suboptimal decisions. Given less than perfectly rational
investors, prices may be wrong and it still may be hard to exploit them. Thus, failure to
uncover profitable trading strategies may not be taken as proof of market efficiency.
Feedback: This question tests the students understanding of the relationship between the
EMH and behavioral finance.
AACSB: Reflective Thinking

Blooms: Understand
12-56
52. 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 leads to forecasts that are too extreme. Overconfidence refers to
traders believing that they are better than average. This belief that they are superior leads
to frequent trading (and, according to empirical evidence, lower returns). Conservatism
refers investors being slow in responding to new information rather than acting
immediately. Sample size neglect refers to investors ignoring the size of a sample and
making inferences based on a small sample.
Feedback: This question tests the students' understanding of information processing

errors.

Blooms: Understand
12-57
53. 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 accounting is a specific form of framing where an investor takes a lot of
risk with one investment account, but little risk with another account. Regret avoidance
refers to the tendency of investors to blame themselves more for an unconventional
investment that was unsuccessful than a conventional investment that was unsuccessful.
Prospect theory (loss avoidance) suggests that the investor's utility curve is not concave
and defined in terms of wealth. Instead, the investor's utility function would be defined in
terms of losses relative to current wealth. Thus, the utility curve is convex to losses and
concave to gains, giving rise to an s-shaped utility curve.
Feedback: This question tests the students' understanding of behavioral biases.

Blooms: Understand
12-58
54. 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 slowly to new information. Therefore, the key is to exploit the slow
adjustment to the correct new price when information is released. Technical analysts also
use volume and other data to assess market sentiment in an attempt to ascertain the
future direction of the market. Behaviorists believe that behavioral biases may be related
to both price and volume data. Thus, technical analysis can be related to behavioral
finance.
Feedback: This question tests the students understanding of technical analysis; and how
technical analysis relates to fundamental analysis and behavioral finance.

Blooms: Understand
12-59

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Investments Global Edition 10th Edition

Bodie Test Bank

Behavioral Finance and Technical Analysis

Multiple Choice Questions

A. are irrational; are irrational

B. are rational; may not be rational

C. are rational; are rational

D. may not be rational; may not be rational

E. may not be rational; are rational

E. None of the options

E. I, II, and III

5. Forecasting errors are potentially important because

A. research suggests that people underweight recent information.

B. research suggests that people overweight recent information.

C. research suggests that people correctly weight recent information.

E. None of the options

A. earnings expectations that are too extreme.

B. earnings expectations that are not extreme enough.

C. stock price expectations that are too extreme.

D. stock price expectations that are not extreme enough.

E. None of the options

B. I, II, and III

C. I, II, III, and V

D. II, III, and IV

I) Siamese twin companies

B. I, II, and III

D. bullish signal by some fundamentalists.

C. None of the options

A. 90-day and 52 week.

B. 180-day and three year.

C. 180-day two year.

D. 200-day and 53 week.

E. 200-day and two year.

E. All of the options

A. bond yields; bearish

B. odd lot trades; bearish

C. odd lot trades; bullish

D. put/call ratios; bullish

E. bond yields; bullish

25. The efficient market hypothesis

A. implies that security prices properly reflect information available to investors.

B. has little empirical validity.

26. Tests of market efficiency have focused on

A. the mean-variance efficiency of the selected market proxy.

B. strategies that would have provided superior risk-adjusted returns.

C. results of actual investments of professional managers.

A. provides a conclusive rejection of market efficiency.

B. provides conclusive support of market efficiency.

C. suggests that several strategies would have provided superior returns.

E. None of the options

28. Behavioral finance argues that

A. even if security prices are wrong, it may be difficult to exploit them.

C. investors are rational.

E. All of the options

B. did not exist; unlimited

D. did not exist; limited

A. Information processing errors

C. Mental accounting errors

A. true probabilities of possible events and associated rates of return.

B. occurrence of possible events.

C. only possible rates of return.

D. the effect of accounting manipulation.

B. earnings expectations that are too extreme.

C. earnings expectations that are not extreme enough.