Finance 327: Chapter 9
b
25. Even though indexing is growing in popularity, only about _____ of equity in the mutual fund industry is held in indexed funds. This may be a sign that investors and managers __________. A. 5%; are excessively conservative B. 15%; overestimate their ability C. 20%; suffer from framing biases D. 25%; engage in mental accounting
c
26. If investors are too slow to update their beliefs about a stock's future performance when new evidence arises, they are exhibiting _______. A. representativeness bias B. framing error C. conservatism D. memory bias
a
27. If investors overweight recent performance in forecasting the future, they are exhibiting _______. A. representativeness bias B. framing error C. memory bias D. overconfidence
a
1. Testing many different trading rules until you find one that would have worked in the past is called _______. A. data mining B. perceived patterning C. pattern searching D. behavioral analysis
a
10. A high amount of short interest is typically considered as a __________ signal, and contrarians may consider it as a _________ signal. A. bearish; bullish B. bullish; bearish C. bearish; false D. bullish; false
b
11. Technical analysis focuses on _____________________. A. finding opportunities for risk-free investing B. finding repeating trends and patterns in prices C. changing prospects for earnings growth of particular firms or industries D. forecasting technical regulatory changes
a
12. Behavioralists point out that even if market prices are ____________, there may be _______________. A. distorted; limited arbitrage opportunities B. distorted; fundamental efficiency C. allocationally efficient; limitless arbitrage opportunities D. distorted; allocational efficiency
b
13. According to market technicians, it is time to sell stock in a head-and-shoulders formation when ___________. A. the price index pierces the left shoulder B. the price index pierces the right shoulder C. the price index pierces the head D. none of these options takes place
c
14. When a stock price breaks through the moving average from below, this is considered to be ______. A. the starting point for a new moving average B. a bearish signal C. a bullish signal D. none of these options
b
15. When the stock price falls below a moving average, a possible conclusion is that _____. A. market momentum has become positive B. market momentum has become negative C. there is no regular pattern for this stock's market momentum D. professional analysts' opinions are invalid until the stock price rises again
b
16. Following a period of falling prices, the moving average will _____. A. be below the current price B. be above the current price C. be equal to the current price D. become more volatile than it had been before prices fell
c
17. A moving average of stock prices _________________. A. always lies above the most recent price B. always lies below the most recent price C. is less volatile than the actual prices D. is more volatile than the actual prices
d
18. When the housing bubble burst in 2007, it set off the worst financial crisis _____. A. in 25 years. B. in 40 years. C. in 50 years. D. in 75 years.
b
19. A support level is ___________________. A. a level beyond which the market is unlikely to rise B. a level below which the market is unlikely to fall C. an equilibrium price level justified by characteristics such as earnings and cash flows D. the peak of a market wave or cycle
d
2. Models of financial markets that emphasize psychological factors affecting investor behavior are called _______. A. data mining B. fundamental analysis C. charting D. behavioral finance
d
20. According to Kondratieff, the macro economy moves in a series of waves that recur at intervals of approximately _________________. A. 18 months B. 4 years C. 8 years D. 50 years
c
21. According to Elliot's wave theory, stock market behavior can be explained as _________________. A. a series of medium-term wave cycles with no short-term trend B. a series of long-term wave cycles with no short-term trend C. a series of superimposed long-term and short-term wave cycles D. sine and cosine functions
a
22. Conventional finance theory assumes investors are _______, and behavioral finance assumes investors are _______. A. rational; irrational B. irrational; rational C. greedy; philanthropic D. philanthropic; greedy
b
23. The only way for behavioral patterns to persist in prices is if ______________. 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 time
c
24. In the context of a point and figure chart, a horizontal band of Xs and Os is a _____________. A. buy signal B. sell signal C. congestion area D. trend reversal
b
28. Trading activity and average returns in brokerage accounts tend to be _________. A. uncorrelated B. negatively correlated C. positively correlated D. positively correlated for women and negatively correlated for men
d
29. Your two best friends each tell you about a person they know who successfully started a small business. That's it, you decide; if they can do it, so can you. This is an example of _____________. A. mental accounting B. framing bias C. conservatism D. representativeness bias
a
3. The trin statistic is a ______ indicator. A. sentiment B. flow of funds C. market structure D. fundamental
c
30. Which of the following is not a sentiment indicator? A. Confidence index B. Short interest C. Odd-lot trading D. Put/call ratio
b
31. Which of the following is considered a sentiment indicator? A. A 200-day moving average B. Short interest C. Credit balances in brokerage accounts D. Relative strength
d
32. An investor holds a very conservative portfolio invested for retirement, but she takes some extra cash she earned from her year-end bonus and buys gold futures. She appears to be engaging in ___________. A. overconfidence B. representativeness C. forecast errors D. mental accounting
d
33. Which of the following analysts focus more on past price movements of a firm's stock than on the underlying determinants of its future profitability? A. Credit analysts B. Fundamental analysts C. Systems analysts D. Technical analysts
a
34. A trin ratio of greater than 1 is considered a __________. A. bearish signal B. bullish signal C. bearish signal by some technical analysts and a bullish signal by other technical analysts D. trend reversal signal
b
35. Contrarian investors consider a high put/call ratio a __________. A. bearish signal B. bullish signal C. trend confirmation signal D. signal to enter the options market
b
36. The ratio of the average yield on 10 top-rated corporate bonds to the average yield on 10 intermediate-grade bonds is called the __________. A. bond price index B. confidence index C. relative strength index D. trin ratio
b
38. Bill and Shelly are friends. Bill invests in a portfolio of hot stocks that almost all his friends are invested in. Shelly invests in a portfolio that is totally different from the portfolios of all her friends. Both Bill's and Shelly's stocks fall 15%. According to regret theory, _________________________________________. A. Bill will have more regret over the loss than Shelly B. Shelly will have more regret over the loss than Bill C. Bill and Shelly will have equal regret over their losses D. Bill's and Shelly's risk aversion will increase in the future
a
39. The most common measure of __________ is the spread between the number of stocks that advance in price and the number of stocks that decline in price. A. market breadth B. market volume C. odd-lot trading D. short interest
a
4. The put/call ratio is a ______ indicator. A. sentiment B. flow of funds C. market structure D. fundamental
c
40. Jill is offered a choice between receiving $50 with certainty or possibly receiving the proceeds from a gamble. In the gamble a fair coin is tossed, and if it comes up heads, Jill will receive $100; if the coin comes up tails, she will receive nothing. Jill chooses the $50 instead of the gamble. Jill's behavior indicates __________________. A. regret avoidance B. overconfidence C. that she has a diminishing marginal utility of wealth D. prospect theory loss aversion
a
41. When the market breaks through the moving average line from below, a technical analyst would probably suggest that it is a good time to ___________. A. buy the stock B. hold the stock C. sell the stock D. short the stock
b
42. If you believed in the reversal effect, you should __________. A. buy bonds this period if you held stocks last period B. buy stocks this period that performed poorly last period C. buy stocks this period that performed well last period D. do nothing if you held the stock last period
b
43. According to technical analysts, a shift in market fundamentals will __________. A. be reflected in stock prices immediately B. lead to a gradual price change that can be recognized as a trend C. lead to high volatility in stock market prices D. leave prices unchanged
b
44. According to market technicians, a trin statistic of less than 1 is considered a __________. A. bearish signal B. bullish signal C. volume decline D. signal reversal
c
45. It is difficult to test the Kondratieff wave theory because _________. A. it applies to only Russian stocks B. its main proponent found contrary research results C. only two independent data points are generated each century D. the stock market is too volatile to generate smooth waves
b
46. A _________ is a value above which it is difficult for the market to rise. A. book value B. resistance level C. support level D. confidence level
c
47. _____________ is a tool that can help identify the direction of a stock's price. A. Prospect theory B. Framing C. A moving average D. Conservatism
a
48. If the utility you derive from your next dollar of wealth increases by less than a loss of a dollar reduces it, you are exhibiting __________. A. loss aversion B. regret avoidance C. mental accounting D. framing bias
c
49. In technical analysis, __________ is a value below which the market is relatively unlikely to fall. A. book value B. resistance level C. support level D. the Dow line
c
5. Relative strength is ______ indicator. A. a fundamental B. an economic C. a technical D. an international
c
50. A possible limit on arbitrage activity that may allow behavioral biases to persist is _______. A. technical trends in prices B. momentum effects C. fundamental risk D. trend reversals
a
51. If you are not a contrarian, you consider a high put/call ratio to be a __________. A. bearish signal B. bullish signal C. trend confirmation signal D. signal to enter the options market
a Day 1 Ratio=12/127=0.09449 Day 2 Ratio=15/139=0.107914
52. On day 1, the stock price of Ford was $12 and the automotive stock index was 127. On day 2, the stock price of Ford was $15 and the automotive stock index was 139. Consider the ratio of Ford to the automotive stock index at day 1 and day 2. Ford is __________ the automotive industry, and technical analysts who follow relative strength would advise __________ the stock. A. outperforming; buying B. outperforming; selling C. underperforming; buying D. underperforming; selling Since the ratio is increasing, the relative strength of Ford is improving; it is outperforming and should be bought.
d CI(July)=0.0765/0.0842=0.91 CI(August)=0.0600/0.0671=.89
53. At the end of July, the average yields on 10 top-rated corporate bonds and 10 intermediate-grade bonds were 7.65% and 8.42%, respectively. At the end of August, the average yields on 10 top-rated corporate bonds and 10 intermediate-grade bonds were 6% and 6.71%, respectively. The confidence index _________ during August, and bond technical analysts are likely to be ________. A. increased; bullish B. increased; bearish C. decreased; bullish D. decreased; bearish Since the confidence index decreased, this would be considered a bearish signal.
c Market breadth = 890 - 723 = 167
54. On a particular day, there were 890 stocks that advanced on the NYSE and 723 that declined. The volume in advancing issues was 80,846,000, and the volume in declining issues was 70,397,000. The common measure of market breadth is __________. A. -10,449,000 B. -167 C. 167 D. 10,449,000
d Trin=70,397,000/723/80,846,000/920=1.11
55. On a particular day, there were 920 stocks that advanced on the NYSE and 723 that declined. The volume in advancing issues was 80,846,000, and the volume in declining issues was 70,397,000. The trin ratio is __________, and technical analysts are likely to be __________. A. .90; bullish B. .90; bearish C. 1.11; bullish D. 1.11; bearish
c
56. An accumulation of cash by mutual funds may be viewed by technical traders as a __________ indicator. A. bullish B. neutral C. bearish D. trend reversal
d
57. A point and figure chart: I. Gives a sell signal when the stock price penetrates previous lows II. Tracks significant upward or downward movements III. Has no time dimension IV. Indicates congestion areas A. I and II only B. II and III only C. I, III, and IV only D. I, II, III, and IV
d
58. When technical analysts say a stock has good "relative strength," they mean that in the recent past __________. A. it has performed well compared to its closest competitors B. it has exceeded its own historical high C. trading volume in the stock has exceeded the normal trading volume D. it has outperformed the market index
d
59. Technical traders view mutual fund investors as _________ market timers. A. excellent B. frequent C. neutral D. poor
a
6. Short interest is a ______ indicator. A. sentiment B. flow of funds C. market structure D. fundamental
b
60. An important assumption underlying the use of technical analysis techniques is that ___________________. A. security prices adjust rapidly to new information B. security prices adjust gradually to new information C. security dealers will provide enough liquidity to keep price changes relatively small D. all investors have immediate and costless access to information
a
61. If the put/call ratio increases, market contrarians may interpret this as what kind of signal? A. Buy signal B. Sell signal C. Hold signal D. This is not interpreted as a signal
c
62. The tendency of investors to hold on to losing investments is called the ________. A. overweighting effect B. head-in-the-sand effect C. disposition effect D. prospector effect
c
63. Which one of the following best describes fundamental risk? A. A stock is overpriced, but your fund does not allow you to engage in short sales. B. Your models indicate a stock is mispriced, but you are not sure if this is a real profit opportunity or a model input error. C. You buy a stock that you believe is underpriced, and the underpricing persists for a long time, hurting your short-term results. D. A stock is trading in two different markets at two different prices.
a
64. Day Advances 870 760 960 840 Declines 880 990 790 910 Volume↑ 580 620 480 510 Volume ↓ 670 580 720 520 Yiel@CB 6.8%6.7%6.7%6.6% The trin on day 2 is ___. A. .72 B. 1.04 C. .92 D. .55
d Breadth on day 3 = 960 - 790 = 170
66. The breadth on day 3 is _______. A. -70 B. 10 C. 90 D. 170
a Cumulative breadth, days 1 and 2 = (870 - 880) + (760 - 990) = -240
67. The cumulative breadth for the first 2 days is ___. A. -240 B. -50 C. 110 D. 250
b Cumulative breadth, days 1-4 = (870 - 880) + (760 - 990) + (960 - 790) + (840 - 910) = -140 Negative cumulative breadth is bearish.
68. Cumulative breadth for the 4 days is ___, which is ___. A. -140; bullish B. -140; bearish C. -300; bullish D. -300; bearish
c The trin has decreased, and this is bullish.
69. From day 1 to day 4, the trin has ___ and is ___. A. increased; bullish B. increased; bearish C. decreased; bullish D. decreased; bearish
c
7. Moving averages are ______ indicators. A. sentiment B. flow of funds C. trend D. fundamental
d
71. Problems with behavioral finance include: I. The behavioralists tell us nothing about how to exploit any irrationality. II. The implications of behavioral patterns are inconsistent from case to case, sometimes suggesting overreaction, sometimes underreaction. III. As with technical trading rules, behavioralists can always find some pattern in past data that supports a behavioralist trait. A. I only B. II only C. I and III only D. I, II, and III
a
72. A major problem with technical trading strategies is that ________. A. it is very difficult to identify a true trend before the fact B. it is very difficult to identify the correct trend after the fact C. it is so easy to identify trends that all investors quickly do so D. Kondratieff showed that you can't identify trends without 48 to 60 years of data
d
74. In 1997 CSX successfully purchased a significant share of Conrail. Immediately after the first offer was announced and the acquisition eventually consummated, the price of CSX fell below preacquisition levels and took many years to recover. This may be an example of ________________. A. loss aversion B. mental accounting C. overreaction D. managerial overconfidence
b
75. An investor has her money segregated into checking, savings, and investments. The allocation among the categories is subjective, yet the investor spends freely from the checking account and not the others. This behavior can be explained as _______________. A. loss aversion B. mental accounting C. overreaction D. winner's curse
d
76. Identify the resistance-level stock price. A. $40 B. $42 C. $44 D. $46
a
77. Identify the support level stock price. A. $40 B. $42 C. $44 D. $46
a
78. Investors gravitate toward the latest hot stock even though it has never paid a dividend. Even though net income is projected to fall over the current and next several years, the price of the stock continues to rise. What behavioral concept may explain this price pattern? A. Overconfidence B. Loss aversion C. Mental accounting D. Calendar bias
d
79. During a period when prices have been rising, the _________ will be _______ the current price. A. relative strength index; declining with B. relative strength index; declining faster than C. moving average; above D. moving average; below
c
8. Market breadth is a ______ indicator. A. sentiment B. flow of funds C. technical D. fundamental
d
81. The price of a stock fluctuates between $43 and $60. If the time frame referenced encompasses the primary trend, the $43 price may be considered the ___________. A. intermediate trend level B. minor trend level C. resistance level D. support level
b
82. The moving average generates buy signal(s) _____. A. on days 3, 11, and 15 B. on days 2 and 16 C. on days 5, 9, and 13 D. on no days
b
83. The moving average generates sell signals _____. A. on days 3, 11, and 15 B. on days 7, 15, and 18 C. on days 5, 9, and 13 D. on day 16
b
84. The price of a stock fluctuates over a period of 10 days. The movement of the stock price below the 10-day minimum price of $25 triggers a rash of selling. The $25 price might now be considered the _______________. A. congestion area B. penetration point C. resistance level D. support level
a
85. Trend analysts who follow bonds are most likely to monitor the ____________. A. confidence index B. odd-lot trading C. short interest D. trin statistic
c
86. You find that the confidence index is down, the market breadth is up, and the trin ratio is down. In total, how many bullish signs do you have? A. 0 B. 1 C. 2 D. 3
d
87. You find that the trin ratio is up, the market breadth is down, and the market has closed below its 50-day moving average. In total, how many bearish signs do you have? A. 0 B. 1 C. 2 D. 3
a
9. The cumulative tally of the number of advancing stocks minus declining stocks is called the ______________. A. market breadth B. market volume C. trin ratio D. relative strength ratio
c CI day 1=6.8/7.4=0.92
The confidence index on day 1 is _____. A. .82 B. .89 C. .92 D. 1.09 Confidence index on day 1 = 6.8/7.4 = .92
70. From day 1 to day 4, the confidence index has _____. This is _____. A. increased; bullish B. decreased; bullish C. increased; bearish D. decreased; bearish Confidence index, day 1 = 6.8/7.4 = .92 Confidence index, day 4 = 6.6/7.6 = .87 The CI is decreasing; this is bearish.
d
