Chapter 8 quiz

Which one of the following market sentiment index (MSI) values represents the best buying opportunity?

0.82

Which one of the following market sentiment index (MSI) values indicates that all polled investors were bearish?

1

Which one of the following Arms values is the most bearish?

1.26

According to technical analysis, which one of the following is best seen as a buying opportunity?

A breakout of a resistance level

Which one of the following is an example of mental accounting?

Associating a security's gains or losses based on its purchase price

If you are a proponent of the Elliott wave theory, you are most apt to do which one of the following?

Buy on wave 2

Which one of the following is the tendency to believe that random events that occur in clusters are not really random?

Clustering illusion

Representativeness heuristic is best explained as:

Concluding that casual factors cause random events when in fact they do not.

Bollinger bands:

Depict a 2-standard deviation bound around a moving average.

The tendency to overvalue an item because you own it is referred to as which one of the following?

Endowment effect

Yesterday, Krista stated that Overland stock was only worth $12 a share and since it was selling for $15 a share, she declared it overpriced and refused to buy any shares. This morning, she learned that she is inheriting 3,500 shares of Overland stock from her grandmother. Suddenly, she is saying that Overland stock is a great buy at $15 and is probably worth at least $17 a share. This is an example of which one of the following?

Endowment effect

Tricia has lost money on a particular stock for the past three years. Thus, she believes the stock will have a high positive rate of return this year because earning a good return is long overdue. This assumption is best described as the:

Gambler's fallacy

Technical analysis studies which of the following as the basis for trading?

Historical prices

Which one of the following defines frame dependence?

Investors react differently depending on how an opportunity is presented.

Which one of the following is the basis for prospect theory?

Investors react differently to prospective gains and losses.

The concept that well-capitalized, rational traders may be unable to correct a mispricing defines which one of the following terms?

Limits to arbitrage

Ted constantly ignores the effects of inflation on money. Ted is suffering from which one of the following?

Money illusion

Which one of the following is a trader whose trades are not based on meaningful financial analysis or information?

Noise trader

If the closing tick of the day is +32, this means that the:

Number of stocks closing on an uptick exceeded those closing on a downtick by 32.

Which one of the following statements appears to be correct based on current research?

Overconfidence tends to result in lower returns.

Mental accounting is the process of associating a stock with its:

Purchase price.

Peter hesitates when it comes to picking an individual stock to purchase as he feels that he will later realize that a different stock would have been a better investment. Peter is suffering from:

Regret aversion.

The maximum price at which a security is expected to trade is called the:

Resistance level.

According to technical analysts, pricing patterns such as the head and shoulders are indicators of potential:

Reversals from the main trend line.

Investors who use the MACD indicator as a signal for trading are most apt to buy a security when the MACD:

Rises above the signal line.

Prospect theory is based on the concept that investors are:

Risk-taking regarding losses.

Which one of the following best describes heuristics?

Rules of thumb

According to the concept of loss aversion, individual investors are most apt to do which one of the following?

Sell stocks with gains more frequently than stocks with losses

Which one of the following risks is related to irrational beliefs?

Sentiment-based

According to Elliott wave theory, market predictions should be based on which one of the following?

Series of historical market price swings

Which one of the following advance/decline lines is the most bullish signal?

Steeply upward sloping

The minimum price at which a security is expected to trade is called the:

Support level

Which one of the following is a characteristic of the self-attribution bias?

Taking credit for the wins and blaming the losses on bad luck

The belief that information you hold is superior to information held by other investors best describes:

The illusion of knowledge.

Assume the 50-day moving average is currently intersecting the 200-day moving average. Also assume the 50-day average is downward sloping and the 200-day average is upward sloping. Which one of the following statements is accurate based on this information?

The long-term trend may be preparing to change.

You recently heard a news announcer state that the market is approaching its support level. Which one of the following is the best interpretation of that statement?

The market is approaching the lowest level that is reasonably expected.

Loss aversion is defined as:

The reluctance to sell a security after it has decreased in value.

An unwillingness to take a risk after a loss describes:

The snakebite effect.

What is the primary purpose of Dow theory?

To signal changes in the market's primary direction

According to the concept of house money, individual investors are most apt to do which one of the following?

Value money differently depending upon its source