Chapter 9
Some behavioral characteristics cause investors to realize lower investment returns.
True
The on-balance volume indicator is used as a means of evaluating the significance of price movements.
True
One of the most popular tools of technical analysis is A) charting. B) financial statement analysis. C) investor profiling. D) investor behavior analysis.
A
Even after adjusting for risk, ________ firms have, over long periods of time, earned higher returns than ________ firms. A) small; large B) large; small C) new; old D) old; new
A
If stock prices move randomly, charting and technical analysis are useful investment tools.
False
Investors should never combine fundamental analysis and technical analysis.
False
Recent academic studies in behavioral finance confirm that markets are even more efficient than previously believed.
False
Technical analysis is so called because it relies on sound scientific principles rather than intuition.
False
The apparent randomness of stock price movements is powerful evidence against market efficiency.
False
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 new high-new lows measure suggests that buying opportunities occur when new lows outnumber new highs.
False
The odd-lot theory supports buying into the market when the number of odd-lot trades rises.
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
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
Which of the following practices are typical of technical analysis? I. charting II. computing moving averages III. computing financial ratios IV. plotting advance-decline lines A) I and III only B) I, II and IV only C) I, II and III only D) I, II, III and IV
B
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
According to the semi-strong form of the efficient market hypothesis, which of the following might lead to extraordinary profits? A) studying charts of a stock's past price behavior B) thoroughly analyzing the state of the economy, the industry and the company's fundamentals C) possessing private information not available to other investors D) carefully timing trades to buy when the price is low and sell when the price is high
C
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
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
Believers in efficient markets tend to explain away market anomalies as I. random occurrences that create an illusion of causality. II. errors resulting from inaccurate measures of risk. III. the result of illegal price manipulation by corporate insiders. IV. the effect of normal human emotions such as fear and greed. A) I and II only B) I, II and III only C) I and III only D) I, II, III and IV
A
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
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
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 ARMS or TRIN for that day was A) 0.48. B) 0.70. C) 0.93. D) 3.50.
A
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 ARMS (a.k.a. TRIN) index value for the day? A) 0.31 B) 0.91 C) 1.10 D) 3.24
A
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
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
Which of the following is a contrary indicator? A) odd-lot trading B) breadth of market C) the advance/decline line D) the TRIN measure
A
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
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
Heather has the equivalent of one year's income in an insured savings account. Her 401-K fund offers a choice of a government bond fund, an S&P 500 Index fund, and a balanced fund that holds roughly equal amounts of stocks and bonds. If she decided to allocate 1/3 of her retirement investments to each fund, she may be a victim of A) overconfidence. B) narrow framing. C) loss aversion. D) representativeness.
B
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
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
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
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
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
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
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
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
From a behavioral perspective, the anomaly known as post-earnings announcement drift or momentum is best explained by A) self attribution bias. B) loss aversion. C) representativeness. D) familiarity bias.
C
Investor overconfidence leads to A) too little trading. B) an overestimation of risk. C) overly optimistic predictions. D) narrow framing.
C
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
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
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
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
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. holding on to a stock that has dropped in value because you would be willing to buy it at its current price IV. overestimating one's ability to pick successful investments A) I and IV only B) II and III only C) I, II and IV only D) I, II, III and IV
C
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
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
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
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
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
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
A relatively high level of short sales is an indicator of a current bull market.
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
Even if weak form market efficiency is true, it does not mean that studying charts of past prices and searching for repeating pattern is useless.
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
Loss aversion is the behavior of excessively conservative investors.
False
Even if the semi-strong form of the efficient market hypothesis is true, trading on illegal insider information may lead to abnormal profits.
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
The stock market is considered strong when the market volume decreases in a declining market.
True
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
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
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
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
A principal objective of technical analysis is trying to determine when to invest.
True
Charts are used as a means of spotting developing trends.
True
The relative strength index compares a security's price relative to itself over a period of time.
True
The tendency of naive investors to buy high (after prices have risen for several periods) and sell low (after prices have dropped for several periods) can be explained by the behavioral tendency known as A) anchoring. B) overconfidence. C) familiarity bias. D) loss aversion.
A
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
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
Even if the semi-strong version of the efficient market hypothesis is true, it might be possible to earn extraordinary returns from private information not available to other investors.
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
Stocks of small companies have a historical tendency to do especially well in the month of January.
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 process of buying an underpriced security and selling an equivalent overpriced security until the prices converge is known as arbitrage.
True
The purpose of moving averages is to reduce the effect of random, short-term market fluctuations.
True
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
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
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
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.
C
The simple moving average is a weighted average.
False
Which one of the following activities is likely to be useful if the market is only weak form efficient? A) attempting to find the best times to buy and sell B) attempting to find repeating pattern in stock price behavior C) attempting to determine if stock prices have upward or downward momentum D) None of the above would be useful.
D
There is strong evidence that investors who trade frequently outperform the market.
False
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
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
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
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
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
Jason has decided to sell his stock in an energy company because gas and oil prices as well the price of his stock have declined in 5 of the last 6 months. Jason has most likely fallen into the trap known as A) loss aversion. B) representativeness. C) narrow framing. D) biased self-attribution.
B
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
Over the last 14 trading days, the average price increase for Quincy Industries stock was $0.88 and the average drop on down days was $0.44. The relative strength index for Quincy is A) 2. B) 66.67. C) 50. D) 33.33.
B
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
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
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
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
The process that quickly eliminates price discrepancies in efficient markets is known as A) arbitration. B) market correction. C) arbitrage. D) random fluctuation.
C
The stock of PHRM, the price declined by 30% when the FDA did not approve a promising new therapy the company was developing. Patrick holds on to the stock and constantly searches the internet looking for favorable stories about the company while ignoring a cascade of negative reports. This is an example of A) anchoring. B) overconfidence. C) belief perseverance. D) loss aversion
C
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 greater than 12% is considered a bearish signal.
C
Barb and Ken purchased a house for $300,000 in 2005. When they needed to sell because of a job transfer in 2009, the house was appraised for $250,000 but they put it on the market for $300,000 anyway. The house is still on the market. Behavioral tendencies at work here may include A) representativeness and narrow framing. B) overconfidence and representativeness. C) familiarity bias and self attribution bias. D) loss aversion and anchoring.
D
Investors who buy mutual funds that have had large gains over the last few years are exhibiting a tendency known as A) overconfidence. B) narrow framing. C) loss aversion. D) representativeness.
D
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
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) II, III and IV only D) I, II, III and IV
D
The new highs-new lows measure typically looks at a period of A) 10 trading days. B) one month. C) 100 days. D) 52 weeks.
D
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
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) High 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
