INVESTMENTS 1 - CHAPTER 9
The efficient market hypothesis means that trades can be executed quickly, easily, and inexpensively.
FALSE
The mutual fund cash ratio (MFCR) compares the percentage of an investor's portfolio held in cash to the percentage held in mutual funds.
FALSE
The odd-lot theory supports buying into the market when the number of odd-lot trades rises.
FALSE
The simple moving average is a weighted average.
FALSE
There is strong evidence that investors who trade frequently outperform the market.
FALSE
A type of mutual fund with particular appeal to investors who accept the efficient market hypothesis is A) index fund. B) asset allocation fund. C) growth opportunities fund. D) emerging markets fund.
A
One of the calendar effect market anomalies indicates that ________ in value during January. A) large cap stocks tend to decline B) equities in general tend to decline C) small cap stocks tend to increase D) equities in general tend to increase
C) small cap stocks tend to increase
On a given day, 200 of the S&P 500 stocks were up, 300 were down. Volume for up stocks was 500 million, volume for down stocks was 700 million. The Trading Index or TRIN for that day was A) .48. B) .70. C) .93. D) 3.5.
A) .48.
On a given trading day, 700 stocks advanced and 1,200 stocks declined. The volume of declining stocks was 280 million while the volume of advancing stocks was 530 million. What is the TRIN value for the day? A) 0.31 B) 0.91 C) 1.10 D) 3.24
A) 0.31
Which of the following are used as indicators of a strong market in the future? I. The advance-decline spread is increasing at a time when the advances outnumber the declines. II. The level of short interest is relatively high. III. The net difference of odd-lot purchases minus odd-lot sales begins increasing. IV. The trading volume increases in a declining market. A) I and II only B) III and IV only C) I, II and III only D) I, II, III and IV
A) I and II only I. The advance-decline spread is increasing at a time when the advances outnumber the declines. II. The level of short interest is relatively high.
Which one of the following combinations best signals a strong market? I. a greater number of advancing stocks than declining stocks II. a greater number of declining stocks than advancing stocks III. a greater volume in rising stocks than in declining stocks IV. a greater volume in declining stocks than in advancing stocks A) I and III B) I and IV C) II and III D) II and IV
A) I and III I. a greater number of advancing stocks than declining stocks III. a greater volume in rising stocks than in declining stocks
Which of the following activities would be most useful in an efficient market. A) buying and holding a diversified portfolio B) searching for patterns in charts based on stock price movements C) analyzing financial ratios based on accounting data D) buying only securities that have performed well in the recent past
A) buying and holding a diversified portfolio
One of the most popular tools of technical analysis is A) charting. B) financial statement analysis. C) investor profiling. D) investor behavior analysis.
A) charting.
The principal objective of technical analysis is A) determining the best time to get into or out of the market. B) maintaining the lowest level of risk possible. C) avoiding all unpleasant surprises in the market. D) increasing trading to improve overall profits.
A) determining the best time to get into or out of the market.
A technical analyst tends to A) employ multiple market measures in his/her analysis. B) concentrate on a sole market measure to determine market signals. C) concentrate solely on buy signals in the market. D) forward test their theories to validate their validity.
A) employ multiple market measures in his/her analysis.
Chartists advocate that A) history repeats itself. B) patterns appear that are very clear and distinctive. C) formations are less important than the direction of the latest price movement. D) a breakout below a support line is a buy signal.
A) history repeats itself.
People tend to A) ignore information that contradicts their current beliefs. B) overestimate the effects of random chance. C) be underconfident in their judgment of investments. D) look at the entire situation when analyzing an individual security.
A) ignore information that contradicts their current beliefs.
The random walk hypothesis A) implies that security analysis is unable to predict future market behavior. B) suggests that random patterns appear but only over long periods of time. C) has been disproved based on recent computer simulations. D) accounts for market anomalies such as calendar effects.
A) implies that security analysis is unable to predict future market behavior.
According to chartists, a breakout below a support level A) is a sell signal. B) is a signal that the market is stagnant. C) is a buy signal but only for value investors. D) is a buy signal.
A) is a sell signal.
The tendency to hold onto losing stocks in the hope that they will recoup is called A) loss aversion. B) representativeness. C) narrow framing. D) biased self-attribution.
A) loss aversion.
Question Status: Previous Edition 21) Which of the following is a contrary indicator? A) odd-lot trading B) breadth of market and market volume C) short-interest and the advance/decline line D) new highs-new lows indicator and the TRIN measure
A) odd-lot trading
Four "decision traps " identified by behavioral finance are A) overconfidence, representativeness, loss aversion, narrow framing B) lack of confidence, representativeness, overreaction, narrow framing C) overconfidence, representativeness, loss aversion, comprehensive framing D) overconfidence, unfamiliarity bias, loss aversion. narrow framing
A) overconfidence, representativeness, loss aversion, narrow framing
The weak form of the efficient market theory contends that A) past price performance is useless in predicting future price movements. B) past performance can help determine the general direction of future price movements. C) any publicly available information is useless in predicting future price movements. D) price movements are not random but follow a general trend over a period of time.
A) past price performance is useless in predicting future price movements.
The confidence index indicates a strong stock market when the A) ratio of the average yield on high-grade corporate bonds to the average yield on low-grade corporate bonds rises. B) ratio between the average yield on S&P 500 stocks to the average yield on high-grade corporate bonds rises. C) consumer confidence index rises above its long-term trend. D) demand for bonds declines relative to the demand for equity securities.
A) ratio of the average yield on high-grade corporate bonds to the average yield on low-grade corporate bonds rises.
Even after adjusting for risk, ________ firms earn have, over long periods of time, earned higher returns than ________ firms. A) small, large B) large, small C) new, old D) old, new
A) small, large
The odd-lot trading theory advocates that small investors A) tend to buy high and sell low. B) react in a manner which generally forecasts the future direction of the market. C) are the first to react to market changes. D) tend to be the first to speculate on a bull market.
A) tend to buy high and sell low.
Behavioral finance would explain many market anomalies to A) the influence of human emotions and biases on securities markets. B) random price movements that only appear to have a rational explanation. C) poorly understood aspects of market efficiency. D) illegal manipulation of securities prices
A) the influence of human emotions and biases on securities markets.
In an efficient market, prices appear to move randomly because A) investors do not process new information correctly. B) only new information affects stock prices. C) insider trading has an unpredictable effect on stock prices. D) the number of investors who can forecast prices correctly is too small to have any effect.
B
Based on the semi-strong form of the efficient market theory, an investor reacting immediately to a news flash on the television generally A) can make an abnormal profit. B) is guaranteed to make a reasonable profit. C) is too late to make an exceptional profit. D) will suffer a loss.
C) is too late to make an exceptional profit.
What is the ten-day simple moving average if the latest daily closing prices are $5, $7, $8, $5, $4, $6, $7, $8, $9, $10? A) $6.00 B) $6.90 C) $7.67 D) $10.00
B) $6.90
Which of the following is true? A) Historically, high P/E or growth stocks have outperformed low P/E or value stocks. B) Historically, low P/E or value stocks have outperformed high P/E or growth stocks. C) After adjusting for risk, high P/E or growth stocks and low P/E or value stocks have performed about the same over time. D) the P/E effect is limited to U.S. stocks.
B) Historically, low P/E or value stocks have outperformed high P/E or growth stocks.
Which of the following statements correctly present recommendations based on behavioral finance? I. Don't hesitate to sell a losing stock. II. Trade frequently. III. Chase performance. IV. Be humble and open-minded. A) I and II only B) I and IV only C) II and III only D) III and IV only
B) I and IV only I. Don't hesitate to sell a losing stock. IV. Be humble and open-minded.
Which of the following characteristics are referred to as representativeness? I. hesitating to sell stocks at a loss II. basing conclusions on small samples III. underestimating the effects of random chance IV. underestimating the level of risk in an investment A) I and IV only B) II and III only C) I, II and III only D) I, II, III and IV only
B) II and III only II. basing conclusions on small samples III. underestimating the effects of random chance
Which of the following accurately reflect appropriate investment guidelines? I. Always invest in last years best performing mutual fund. II. Trade frequently to increase your investment returns. III. Sell losing stocks unless you are willing to buy them at the current price. IV. Take corrective action when so indicated. A) I and II only B) III and IV only C) I, III and IV only D) I, II, III and IV
B) III and IV only III. Sell losing stocks unless you are willing to buy them at the current price. IV. Take corrective action when so indicated.
Which one of the following best describes the term "efficient market"? A) The commissions on large transactions are smaller than the commissions on small transactions. B) New information is quickly reflected in security prices. C) Little time and effort are spent on marketing securities to the public. D) The cost of receiving, processing, executing, and reporting securities orders is small.
B) New information is quickly reflected in security prices.
Which one of the following statements concerning the random walk hypothesis is correct? A) Stock price movements are predictable but only over short periods of time. B) Random price movements support the weak form efficient market hypothesis. C) Stock prices in general follow repetitive patterns but the actions of individual investors are random in nature. D) Random price movements indicate that investors can earn abnormal profits on a routine basis.
B) Random price movements support the weak form efficient market hypothesis.
Market bubbles such as the technology bubble of the 1990s and the housing bubble of 2004-2007 are best explained by A) the efficient market hypothesis. B) behavioral finance and economics. C) rational expectations theory. D) anomaly theory.
B) behavioral finance and economics.
The confidence index indicates A) stock investors ' perceptions of risk in the economy. B) bond investors ' perceptions of risk in the economy. C) consumers' perceptions of risk in the economy. D) investors' trust in financial advisors.
B) bond investors ' perceptions of risk in the economy.
There is evidence to support the contention that company insiders A) cannot earn abnormal profits because they are not permitted to trade shares in their company's stock without a one-month advance notice to the SEC. B) can profit in a manner that counters the strong form of the efficient market hypothesis. C) generally earn a profit equal to that of public investors. D) have no distinct advantage when trading shares of their company's stock.
B) can profit in a manner that counters the strong form of the efficient market hypothesis.
A sell signal is indicated by a security's price A) rising above the moving average. B) falling below the moving average. C) equaling the moving average. D) running parallel to the moving average.
B) falling below the moving average.
Technical analysts consider the stock market to be strong when volume ________ in a rising market and ________ during a declining market. A) increases; increases B) increases; decreases C) decreases; increases D) decreases; decreases
B) increases; decreases
The on balance volume (OBV) indicator A) considers only the amount of daily trading volume. B) indicates an up market when heavy volume accompanies price increases. C) is divergent when the OBV is falling and prices are also falling. D) rises by 10,000 on a day when the trading volume is 5,000 shares and the price rises by $2.
B) indicates an up market when heavy volume accompanies price increases.
20) Investors who obsessively monitor their last few stock purchases while paying little attention to the rest of their portfolio are exhibiting the tendency known as A) overconfidence. B) narrow framing. C) loss aversion. D) representativeness.
B) narrow framing.
Technical analysis primarily monitors shifts in the ________ in the market. A) level of risk B) supply and demand forces C) volume of trading D) rate of return
B) supply and demand forces
Followers of the random walk hypothesis believe that A) security analysis is the best tool to utilize when investing in the stock market. B) the price movements of stocks are unpredictable, and therefore security analysis will not help to predict future market behavior. C) that traders can earn higher than normal returns by exploiting market anomalies such as the small-firm effect. D) support levels and resistance lines, when combined with basic chart formations, yield both buy and sell signals.
B) the price movements of stocks are unpredictable, and therefore security analysis will not help to predict future market behavior.
Which of the following signals that a market top or bottom is near? A) mutual fund cash ratio B) the relative strength index C) odd-lot volume D) on balance volume
B) the relative strength index
The anomaly known as post-earnings announcement drift or momentum describes the tendency of stock prices to rise or fall for several ________ after unexpectedly good or bad earnings announcements. A) months B) weeks C) days D) hours
B) weeks
The theory behind the mutual fund cash ratio is A) mutual fund managers hold high levels of cash when they are optimistic about market conditions. B) when mutual fund managers hold high levels of cash, they must eventually buy stocks with it. C) when mutual fund managers hold low levels of cash they are pessimistic about market conditions. D) when market conditions are favorable, shareholders remit more cash than the managers can invest.
B) when mutual fund managers hold high levels of cash, they must eventually buy stocks with it.
Investor overconfidence leads to A) too little trading. B) an overestimation of risk. C) overly optimistic predictions. D) narrow framing.
C) overly optimistic predictions.
The on balance volume (OBV) indicator A) indicates a market bottom when prices and volume are both falling. B) is optimistic when prices are rising on low volume. C) is optimistic when prices are rising on high volume. D) is neutral whenever prices and volume move in opposite directions.
C) is optimistic when prices are rising on high volume.
Which one of the following relative strength values would most indicate that a stock is oversold? A) 120 B) 80 C) 20 D) -20
C) 20
The new highs-new lows indicator is based on prices over the past A) week. B) 90 days. C) 52 weeks. D) calendar year.
C) 52 weeks.
Which one of the following statements is correct concerning the mutual fund cash ratio (MFCR)? A) The lower the value of the MFCR, the stronger the market will be in the future. B) The MFCR is equal to the cash inflows into money market funds divided by the cash flows out of money market funds. C) A low MFCR indicates that fund managers might be forced to sell securities should investors wish to withdraw funds. D) A MFCR value greater than 12 is considered a bearish signal.
C) A low MFCR indicates that fund managers might be forced to sell securities should investors wish to withdraw funds.
Technical analysis is used for which of the following purposes? I. deciding when to enter the market II. deciding whether to sell a stock III. deciding which stocks to buy IV. deciding whether basic economic conditions are favorable for investing A) I and II only B) II and III only C) I, II and III only D) I, II, III and IV
C) I, II and III only I. deciding when to enter the market II. deciding whether to sell a stock III. deciding which stocks to buy
Which of the following are common but dysfunctional investor behaviors? I. overinvesting in companies with familiar names II. dividing their funds equally among available choices, even if several of the choices serve the same purpose III. hastily disposing of stocks that have dropped in price in order to take advantage of tax breaks IV. exaggerating the role of luck and randomness in investment success or failure A) I and IV only B) II and III only C) I, II and III only D) I, II, III and IV only
C) I, II and III only I. overinvesting in companies with familiar names II. dividing their funds equally among available choices, even if several of the choices serve the same purpose III. hastily disposing of stocks that have dropped in price in order to take advantage of tax breaks
) Which one of the following statements is correct? A) The weekend effect states that security prices tend to rise between Friday afternoon and Monday morning. B) The market responds immediately to reflect the information contained in quarterly earnings reports. C) Low P/E stocks tend to outperform high P/E stocks on a risk-adjusted basis. D) The market fully anticipates the information contained in an earnings announcement prior to the actual announcement.
C) Low P/E stocks tend to outperform high P/E stocks on a risk-adjusted basis.
A high TRIN value is considered A) good for the market when the number of advancing stocks is declining. B) good for the market when the volume of advancing stocks is declining. C) bad for the market when the trading volume in the declining stocks is rising. D) bad for the market when the number of declining stocks is stable.
C) bad for the market when the trading volume in the declining stocks is rising.
The tendency of small firms to have higher returns than large firms , even after adjusting for risk, may be attributable to A) representativeness. B) overconfidence. C) familiarity bias. D) loss aversion.
C) familiarity bias.
The most important lesson investors can learn from behavioral finance is A) to understand psychological factors influencing long-term price movement. B) to have the humility to let professionals manage their investments. C) how to avoid letting their emotions and biases affect their investment decisions. D) to have confidence in their instincts and first impressions.
C) how to avoid letting their emotions and biases affect their investment decisions.
Followers of the efficient market hypothesis believe that A) very few investors actually analyze or evaluate stocks before they make a purchase decision. B) the needed information to assess the market is available only to corporate insiders. C) investors react quickly and accurately to new information. D) individual traders can have a significant impact on the price of a security.
C) investors react quickly and accurately to new information.
An efficient market reflects A) only historical information. B) only the information related to events that have already occurred. C) all publicly known information related to past events and announced future events. D) all information including predictions about future information.
D
Investors skilled in exploiting behavioral errors and market anomalies can consistently outperform the market by a wide margin.
FALSE
Most investors quickly sell their losers and hold on to their winners.
FALSE
Which of the following is used to identify long-term trends? A) odd-lot trading B) breadth of market and market volume C) 10 moving average D) 100 day moving average
D) 100 day moving average
Evidence suggests that the price of a stock continues to move up or down for a period of A) a decade or more. B) 3 to 5 years. C) 1 to 3 years. D) 6 to 12 months.
D) 6 to 12 months.
Which one of the following statements is correct concerning the mutual fund cash ratio (MFCR)? A) When mutual funds have a lot of cash it is a bearish signal because managers are not buying stocks. B) Low mutual fund cash is bullish because it means managers have been buying stocks. C) Low mutual fund cash indicates that fund managers might be forced to sell securities should investors wish to withdraw funds, a bearish signal. D) A high MFCR is like high short interest in that it indicates pent up demand.
D) A high MFCR is like high short interest in that it indicates pent up demand.
Which one of the following statements is correct concerning moving averages? A) The longer the time period under consideration, the more sensitive the moving average is to daily price fluctuations. B) A simple moving average is computed as the arithmetic mode. C) The shorter the time period under consideration, the easier it is to spot long-term price trends. D) A moving average helps remove short-term fluctuations from the analysis.
D) A moving average helps remove short-term fluctuations from the analysis.
Which of the following are included in technical analysis? I. charting price movements II. tracking trading volume III. determining the investor's risk tolerance IV. monitoring odd-lot trading A) I and II only B) II and III only C) I, II and III. D) I, II and IV
D) I, II and IV I. charting price movements II. tracking trading volume IV. monitoring odd-lot trading
The efficient market hypothesis rests on which of the following assumptions? I. Information is widely available to all investors almost simultaneously. II. Investors react quickly to new information. III. Investors correctly interpret all available information. IV. Events which affect the market occur randomly. A) I and II only B) I, II and III only C) I, III and IV only D) I, II, III and IV
D) I, II, III and IV I. Information is widely available to all investors almost simultaneously. II. Investors react quickly to new information. III. Investors correctly interpret all available information. IV. Events which affect the market occur randomly.
Which of the following patterns are used by chartists to predict future events in the markets? I. head and shoulders II. inverted saucers III. consolidation triangles IV. triple tops A) I, II and IV only B) I, III and IV only C) I, II and III only D) I, II, III and IV
D) I, II, III and IV I. head and shoulders II. inverted saucers III. consolidation triangles IV. triple tops
A technical analyst might have an interest in which of the following? I. level of short interest II. relative price level III. point-and-figure charts IV. odd-lot transactions A) I and III only B) I, II and IV only C) I, II and III only D) I, II, III and IV
D) I, II, III and IV I. level of short interest II. relative price level III. point-and-figure charts IV. odd-lot transactions
The strong form of the efficient market hypothesis contends that A) a select few institutional investors can earn abnormal profits. B) abnormal profits are randomly distributed. C) no one can consistently earn a profit. D) no one can consistently earn abnormal profits.
D) no one can consistently earn abnormal profits.
The tendency of investors to take greater risks after a large loss and fewer risks after a large gain can be attributed to A) overconfidence. B) the "house money" effect. C) loss aversion. D) representativeness.
D) representativeness.
The tendency of investors to blame others for their failures and take personal credit for their successes is referred to as A) loss aversion. B) representativeness. C) narrow framing. D) self-attribution bias.
D) self-attribution bias.
Market anomalies are caused by A) investors' efforts to avoid or postpone taxes. B) different levels of risk. C) statistical quirks. D) some poorly understood combination of factors.
D) some poorly understood combination of factors.
Recent academic studies in behavioral finance confirm that markets are even more efficient than previously believed.
FALSE
A relatively high level of short sells is an indicator of a current bull market.
FALSE
Advocates of the weak-form efficient market hypothesis claim that past price movements are the best predictors of future price movements.
FALSE
An oversold market is generally considered to be overvalued.
FALSE
Behavioral finance suggests that investors react to new information in an efficient manner such that security prices accurately reflect the new information.
FALSE
Charts are only used to confirm past trends.
FALSE
Evidence suggests that growth stocks tend to outperform value stocks.
FALSE
For most companies, the stock price follows the same seasonal pattern as revenues and earnings.
FALSE
Fund managers tend to have too little confidence in their abilities leading them to be excessively cautious.
FALSE
Historically higher returns on the stocks of small companies can be completely explained by their higher risk.
FALSE
If a company's revenues and earnings are highly predictable, it's stock price will also be highly predictable.
FALSE
If stock prices move randomly, charting and technical analysis are useful investment tools.
FALSE
Investors should never combine fundamental analysis and technical analysis.
FALSE
A principal objective of technical analysis is trying to determine when to invest.
TRUE
Analysts tend to issue similar recommendations on individual securities.
TRUE
Charts are useful as a means of spotting developing trends.
TRUE
Even if the semi-strong form of the efficient market hypothesis is true, trading on illegal insider information may lead to abnormal profits.
TRUE
For technical analysts, the forces of supply and demand have an important effect on the prices of securities.
TRUE
In an efficient market, the only means of achieving high returns is to invest in high-risk securities.
TRUE
Individuals tend to invest in mutual funds that have recently been performing well.
TRUE
Market volume is a function of market demand for and supply of stocks.
TRUE
Most investors are slow to accept evidence that contradicts their strongly held beliefs.
TRUE
Resources for technical analysis are readily available on the Internet.
TRUE
Self attribution bias causes investors to attribute their successes to skill and failures to chance.
TRUE
Some behavioral characteristics cause investors to realize lower investment returns.
TRUE
Stocks of small companies have a historical tendency to do especially well in the month of January.
TRUE
Technical analysis is a mechanical approach to investing.
TRUE
The advance/decline line is be used to time both the purchase and the sale of securities.
TRUE
The breadth of the market refers to the spread between the number of stocks advancing and those declining in value.
TRUE
The efficient market hypothesis has some trouble explaining the existence of market anomalies.
TRUE
The purpose of moving averages is to reduce the effect of random, short-term market fluctuations.
TRUE
The relative strength index compares a security's price relative to itself over a period of time.
TRUE
The stock market is considered strong when the market volume decreases in a declining market.
TRUE
You are most likely better off doing the opposite of what most investment newsletter experts advise doing.
TRUE