Question 1

The tendency of investors to hold on to losing investments is called the ________.

Accepted Answer

A)  overweighting effect
B)  head-in-the-sand effect
C)  disposition effect
D)  prospector effectE) C) and D)
F) A) and C) C

Question 2

The tendency of poorly performing shares and well performing shares in one period to continue their performance into the next period is called the ________.

Accepted Answer

A)  fad effect
B)  martingale effect
C)  momentum effect
D)  reversal effectE) All of the above
F) A) and B)

Question 3

If investors overweight recent performance in forecasting the future they are exhibiting ________.

Accepted Answer

A)  representativeness bias
B)  framing error
C)  memory bias
D)  overconfidenceE) B) and D)
F) A) and B)

Question 4

The broadest information set is included in the

Accepted Answer

A)  weak form efficiency argument
B)  semi-strong form efficiency argument
C)  strong form efficiency argument
D)  technical analysis trading methodE) B) and D)
F) None of the above

Question 5

Which of the following beliefs would not preclude charting as a method of portfolio management?

Accepted Answer

A)  The market is strong form efficient.
B)  The market is semi-strong form efficient.
C)  The market is weak form efficient.
D)  Share prices follow recurring patterns.E) C) and D)
F) A) and D)

Question 6

You believe that you can earn 2% more on your portfolio if you engage in full time share research. However, the additional trading costs and tax liability from active management will cost you about 0.5%. You have a $800 000 share portfolio. What is the most you can afford to spend on your research?

Accepted Answer

A)  $4 000
B)  $8 000
C)  $12 000
D)  $16 000E) A) and C)
F) A) and B)

Question 7

Which of the following statements is/are correct?

Accepted Answer

A)  If a market is weak form efficient it is also semi- and strong form efficient
B)  If a market is semi-strong efficient it is also strong form efficient
C)  If a market is strong form efficient it is also semi-strong but not weak form efficient
D)  If a market is strong form efficient it is also semi- and weak form efficientE) A) and B)
F) None of the above

Question 8

A possible limit on arbitrage activity that may allow behavioural biases to persist is ________.

Accepted Answer

A)  technical trends in prices
B)  momentum effects
C)  fundamental risk
D)  trend reversalsE) A) and B)
F) A) and C)

Question 9

If investors are too slow to update their beliefs about a share's future performance when new evidence arises they are exhibiting ________.

Accepted Answer

A)  representativeness bias
B)  framing error
C)  conservatism
D)  memory biasE) B) and C)
F) A) and B)

Question 10

Someone who invests in the Vanguard Index 500 mutual fund could most accurately be described as using what approach?

Accepted Answer

A)  Active management
B)  Arbitrage
C)  Fundamental analysis
D)  Passive investmentE) B) and D)
F) None of the above

Question 11

Problems with behavioural finance include:
I. the behaviouralists tell us nothing about how to exploit any irrationality
II. the implications of behavioural patterns are inconsistent from case to case, sometimes suggesting overreaction, sometimes underreaction
III. like technical trading rules, behaviouralists can always find some pattern in past data that supports a behaviouralist trait

Accepted Answer

A)  I only
B)  II only
C)  I and III only
D)  I, II and IIIE) A) and B)
F) C) and D)

Question 12

An investor needs cash to pay some bills. He is willing to use his dividend income to pay the bills but he will not sell any shares to do so. He is engaging in ________.

Accepted Answer

A)  overconfidence
B)  representativeness
C)  forecast errors
D)  mental accountingE) All of the above
F) C) and D) D

Question 13

Models of financial markets that emphasize psychological factors affecting investor behaviour are called ________.

Accepted Answer

A)  data mining
B)  fundamental analysis
C)  charting
D)  behavioural financeE) A) and B)
F) A) and C)

Question 14

Evidence suggests that there may be ________ momentum and ________ reversal patterns in share price behaviour.

Accepted Answer

A)  short-run, short-run
B)  long-run, long-run
C)  long-run, short-run
D)  short-run, long runE) C) and D)
F) All of the above D

Question 15

The ________ effect may explain much of the small firm anomaly.
I. January effect
II. neglected effect
III. liquidity effect

Accepted Answer

A)  I only
B)  II only
C)  II and III only
D)  I, II and IIIE) A) and B)
F) B) and D)

Question 16

The tendency when the ________ performing shares in one period are the best performers in the next and the current ________ performers are lagging the market later is called the reversal effect.

Accepted Answer

A)  worst, best
B)  worst, worst
C)  best, worst
D)  best, bestE) B) and D)
F) A) and D)

Question 17

Which of the following would violate the efficient market hypothesis?

Accepted Answer

A)  Intel has consistently generated large profits for years.
B)  Prices for shares before share splits show on average consistently positive abnormal returns.
C)  Earning abnormal returns after a firm announces surprise earnings.
D)  High earnings growth shares fail to generate higher returns for investors than low earnings growth shares.E) B) and C)
F) A) and D)

Question 18

On day 1, the share price of Ford was $81 and the automotive share index was 324. On day 2, the share price of Ford was $85 and the automotive share index was 335. Consider the ratio of Ford to the automotive share index at day 1 and day 2. Ford is ________ the automotive industry and technical analysts who follow relative strength would advise ________ the share.

Accepted Answer

A)  outperforming, buying
B)  outperforming, selling
C)  underperforming, buying
D)  underperforming, sellingE) None of the above
F) B) and D)

Question 19

The only way for behavioural patterns to persist in prices is if ________.

Accepted Answer

A)  markets are not weak form efficient
B)  there are limits to arbitrage activity
C)  there are no significant trading costs
D)  market psychology is inconsistent over timeE) B) and C)
F) None of the above

Question 20

Conventional finance theory assumes investors are ________ and behavioural finance assumes investors are ________.

Accepted Answer

A)  rational; irrational
B)  irrational; rational
C)  greedy; philanthropic
D)  philanthropic; greedyE) All of the above
F) A) and C)

Exam 8: The Efficient Market Hypothesis and Behavioral Finance

The tendency of investors to hold on to losing investments is called the ________.

Correct Answer
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C

The tendency of poorly performing shares and well performing shares in one period to continue their performance into the next period is called the ________.

Correct Answer
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If investors overweight recent performance in forecasting the future they are exhibiting ________.

Correct Answer
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The broadest information set is included in the

Correct Answer
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Which of the following beliefs would not preclude charting as a method of portfolio management?

Correct Answer
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You believe that you can earn 2% more on your portfolio if you engage in full time share research. However, the additional trading costs and tax liability from active management will cost you about 0.5%. You have a $800 000 share portfolio. What is the most you can afford to spend on your research?

Correct Answer
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Which of the following statements is/are correct?

Correct Answer
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A possible limit on arbitrage activity that may allow behavioural biases to persist is ________.

Correct Answer
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If investors are too slow to update their beliefs about a share's future performance when new evidence arises they are exhibiting ________.

Correct Answer
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Someone who invests in the Vanguard Index 500 mutual fund could most accurately be described as using what approach?

Correct Answer
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Correct Answer
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An investor needs cash to pay some bills. He is willing to use his dividend income to pay the bills but he will not sell any shares to do so. He is engaging in ________.

Correct Answer
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D

Models of financial markets that emphasize psychological factors affecting investor behaviour are called ________.

Correct Answer
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Evidence suggests that there may be momentum and reversal patterns in share price behaviour.

Correct Answer
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D

The ________ effect may explain much of the small firm anomaly. I. January effect II. neglected effect III. liquidity effect

Correct Answer
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The tendency when the performing shares in one period are the best performers in the next and the current performers are lagging the market later is called the reversal effect.

Correct Answer
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Which of the following would violate the efficient market hypothesis?

Correct Answer
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Correct Answer
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The only way for behavioural patterns to persist in prices is if ________.

Correct Answer
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Conventional finance theory assumes investors are and behavioural finance assumes investors are .

Correct Answer
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Exam 8: The Efficient Market Hypothesis and Behavioral Finance

The tendency of investors to hold on to losing investments is called the ________.

Correct AnswerverifiedC

The tendency of poorly performing shares and well performing shares in one period to continue their performance into the next period is called the ________.

Correct AnswerverifiedShow Answer

If investors overweight recent performance in forecasting the future they are exhibiting ________.

Correct AnswerverifiedShow Answer

The broadest information set is included in the

Correct AnswerverifiedShow Answer

Which of the following beliefs would not preclude charting as a method of portfolio management?

Correct AnswerverifiedShow Answer

You believe that you can earn 2% more on your portfolio if you engage in full time share research. However, the additional trading costs and tax liability from active management will cost you about 0.5%. You have a $800 000 share portfolio. What is the most you can afford to spend on your research?

Correct AnswerverifiedShow Answer

Which of the following statements is/are correct?

Correct AnswerverifiedShow Answer

A possible limit on arbitrage activity that may allow behavioural biases to persist is ________.

Correct AnswerverifiedShow Answer

If investors are too slow to update their beliefs about a share's future performance when new evidence arises they are exhibiting ________.

Correct AnswerverifiedShow Answer

Someone who invests in the Vanguard Index 500 mutual fund could most accurately be described as using what approach?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

An investor needs cash to pay some bills. He is willing to use his dividend income to pay the bills but he will not sell any shares to do so. He is engaging in ________.

Correct AnswerverifiedD

Models of financial markets that emphasize psychological factors affecting investor behaviour are called ________.

Correct AnswerverifiedShow Answer

Evidence suggests that there may be ________ momentum and ________ reversal patterns in share price behaviour.

Correct AnswerverifiedD

The ________ effect may explain much of the small firm anomaly. I. January effect II. neglected effect III. liquidity effect

Correct AnswerverifiedShow Answer

The tendency when the ________ performing shares in one period are the best performers in the next and the current ________ performers are lagging the market later is called the reversal effect.

Correct AnswerverifiedShow Answer

Which of the following would violate the efficient market hypothesis?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

The only way for behavioural patterns to persist in prices is if ________.

Correct AnswerverifiedShow Answer

Conventional finance theory assumes investors are ________ and behavioural finance assumes investors are ________.

Correct AnswerverifiedShow Answer

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C

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D

Correct Answer
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Evidence suggests that there may be momentum and reversal patterns in share price behaviour.

Correct Answer
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D

Correct Answer
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The tendency when the performing shares in one period are the best performers in the next and the current performers are lagging the market later is called the reversal effect.

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Conventional finance theory assumes investors are and behavioural finance assumes investors are .

Correct Answer
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