fin 510 chapter 12

A financial analyst is hoping to determine which market has the stronger rally by comparing advances and declines. The US market in the farming sector has 21 advances and 6 declines, while the Canadian market has 9 advances to 7 declines. Which market is the analyst more likely to identify as being stronger? Multiple choice question. Canadian market US market

US market notes: Canadian market Reason: The Canadian market has only 2 more advances than declines so this might not even be considered a rally. US market Reason: The US market has 15 more advances than declines while the Canadian market has only 2 more. The US market should be considered to have the stronger rally.

A financial analyst observes the price of Red Line Company shares seems to be consistently $1.00 to $2.00 higher than its intrinsic value. This distortion is more likely to cause ______. Multiple choice question. a misallocation of capital market resources to Red Line and away from its competition an efficient allocation of resources across all firms in Red Line's industry

a misallocation of capital market resources to Red Line and away from its competition notes: a misallocation of capital market resources to Red Line and away from its competition Reason: Distorted prices can easily cause the markets to supply capital to an overvalued firm, with less capital going to undervalued firms. an efficient allocation of resources across all firms in Red Line's industry Reason: Efficient allocation requires that capital markets fairly price all stocks.

The ratio of the yield of top-rated corporate bonds to the yield on intermediate-grade bonds is the ___________ index.

confidence

The notion that investors are too slow to update their beliefs in response to new evidence is referred to as _____________ .

conservatism

The tendency of investors to hold on to losing investments is known as the ____________ effect.

disposition

The statement by John Maynard Keynes who knew from personal experience that "markets can remain irrational longer than you can remain solvent" is a description of ______. Multiple choice question. representativeness bias conservatism fundamental risk framing

fundamental risk

Suppose a market exists in which investors suffer from conservatism. The most likely divergence from traditional capital market theory would be ______. Multiple choice question. over-reaction to positive news momentum in stock prices high demand for index mutual funds

momentum in stock prices notes: over-reaction to positive news Reason: Conservatism would cause under-reaction. momentum in stock prices Reason: Because conservatism suggests that investors tend to under-react to new information, it is likely that there would only be a gradual change in stock prices over time to their intrinsic values.

Studies suggest that overconfidence leads investors to trade ______ and to receive ______ returns as a result. Multiple choice question. less; lower more; lower more; higher less; higher

more; lower

The average price over a given interval, where that interval is updated as time passes, is the ___________ average.

moving

Technicians typically believe that prices ______ intrinsic value. Multiple choice question. are unrelated to only gradually close in on have a fixed relationship to equal

only gradually close in on

The __________ / ___________ ratio refers to the ratio of outstanding put options to outstanding call options and typically hovers around ___________ %.

put call 65

A technical analyst who calculates the ratio of an individual security's price to a price index for the security's sector to identify trading opportunities is using a ______ strategy. Multiple choice question. trin-based relative strength breadth

relative strength notes: trin-based Reason: The trin is the ratio of volume and number of declines to advances. breadth Reason: Breadth is a ratio of advances to declines.

The tendency to believe that a small sample describes a broad population as well as a large one does, and therefore to infer patterns too quickly, is defined as ______. Multiple choice question. representativeness bias memory bias conservatism overconfidence

representativeness bias

Research to identify mispriced securities that focuses on recurrent and predictable stock price patterns and on proxies for buy or sell pressure in the market is ___________ analysis.

technical

Representativeness bias may lead investors to infer a pattern ______ based on a small sample and to extrapolate apparent trends ______ into the future. Multiple choice question. too quickly; too far too quickly; not far enough too slowly; not far enough

too quickly; too far

Which technical measure incorporates volume in its assessment? Multiple choice question. trin moving average relative strength breadth

trin

True or false: Individuals blame themselves more on decisions that turn out poorly when the decision was more _____________ .

unconventional

Which is the formula for the trin statistic? Multiple choice question. Volumeadvancing/NumberadvancingVolumedeclining/NumberdecliningVolumeadvancing/NumberadvancingVolumedeclining/Numberdeclining Numberadvancing/VolumeadvancingNumberdeclining/VolumedecliningNumberadvancing/VolumeadvancingNumberdeclining/Volumedeclining Volumedeclining/NumberdecliningVolumeadvancing/NumberadvancingVolumedeclining/NumberdecliningVolumeadvancing/Numberadvancing Numberdeclining/VolumedecliningNumberadvancing/Volumeadvancing

(Volumedeclining/Numberdeclining)/ (Volumeadvancing/Numberadvancing)

Models of financial markets that emphasize implications of psychological factors affecting investor behavior are the basis of _________ finance.

Behavioral

Until a losing stock is sold and the loss i realized, investors perceive only a ____________ ____________ , which is easier to ignore.

Blank 1: paper Blank 2: loss

The tendency for individuals to make decisions that are more conventional because they will feel less bad if such decisions turn out badly than they would if an unconventional decision turned out badly is referred to as ___________ ____________.

Blank 1: regret Blank 2: avoidance

The extent to which a security has outperformed or underperformed either the market as a whole or its particular industry is defined as its ____________ __________ .

Blank 1: relative Blank 2: strength

Use of the confidence index is based on the assumption that the ______ provides information about future equity returns. Multiple choice question. level of short selling ratio of puts to calls bond market

Bond market Notes: level of short selling Reason: The short interest ratio might reveal information about bearish equity returns. ratio of puts to calls Reason: The put/call ratio is likely to contain information about what the options market expects from the stock market. bond market Reason: Users of the confidence index assume that a low price of risk in the bond market will extend to equity markets.

The measure of the extent to which movement in a market index is reflected widely in the price movements of all the stocks in the market, typically measured as the spread between the number of stocks that advance and decline in price, is the market's _____________ .

Breadth

Jon Grimm is a (non-contrarian) technician who has observed an increase in the put/call ratio. Grimm is likely to view this change as a hedge against stock market volatility and to expect markets to ______. Multiple choice question. rise fall stay the same

Fall Notes: rise Reason: Bullish markets would be expected if the put/call ratio were to fall. fall Reason: Technicians view increases in the ratio as a hedge against market declines. stay the same Reason: Changes in put/call ratios indicate either a bearish or bullish market.

True or false: If prices are distorted, then capital markets will give important signals as to where the economy may best allocate resources. True false question. True False

False.

If an investor's decision of whether to purchase shares in a mutual fund were to differ based on the fund's returns being compared to the higher returns of the S&P 500 or the lower returns of Treasuries, it would be an example of ______. Multiple choice question. regret avoidance mental accounting framing loss aversion

Framing

When decisions are affected by how choices are described, for example, whether uncertainty is posed as potential gains from a low baseline level, or as losses from a higher baseline value, it is an example of _______________ .

Framing

The risk that even if an asset is mispriced, the mispricing can widen before price eventually converges to intrinsic value, is the limitation on arbitrage referred to as ______________ risk.

Fundamental

When individuals segregate assets into independent accounts, typically to be used for different purposes, rather than viewing them as part of a unified portfolio, they are engaging in __________ _________ .

Mental Accounting

If an investor creates an account to fund the purchase of a speedboat and purchases an asset much riskier than the rest of his portfolio for it, the investor is exhibiting ______. Multiple choice question. framing mental accounting overconfidence

Mental accounting notes: framing Reason: Framing occur when the manner in which a decision is described influences a decision. mental accounting Reason: Mental accounting involves having separate accounts with differing risk characteristics. overconfidence Reason: Overconfidence occurs when individuals think they know more than they actually do.

The tendency of people to overestimate the precision of their beliefs and forecasts and to overestimate their abilities is referred to as _______ .

Overconfidence

Investor utility depends on changes in wealth rather than levels of wealth in _______________ theory.

Prospect

The moving average share price of Potts Electric has shifted from being higher than the share price to being lower. A technical analyst would most likely view this as a sign of ______ stock prices. Multiple choice question. falling rising unchanging

Rising notes: falling Reason: Falling prices would result from just the opposite (if the MA was now above the share price). rising Reason: This trend signifies a bullish market.

Select all that apply Which are implications of the efficient market hypothesis? Multiple select question. Security prices properly reflect whatever information is available to investors. Securities will not over- or under-perform their expected values. Since securities are priced efficiently, one portfolio is not better than any other. Active traders will find it difficult to outperform passive strategies such as holding market indexes after adjusting for risk.

Security prices properly reflect whatever information is available to investors. Active traders will find it difficult to outperform passive strategies such as holding market indexes after adjusting for risk. note: Reason: Securities may do better or worse than expected because of unforeseen events. Reason: Diversification is still valuable because of firm-specific risk.

Select all that apply Which statements are true about testing the efficient market hypothesis? Multiple select question. Strategies have been found that apparently would have provided superior risk-adjusted returns. Analysis of whether professional managers have been able to beat the market is based on their historical performance. Apparent contradictions of the EMH may simply reflect data mining. The correct method of risk adjustment in assessing returns is generally clear.

Strategies have been found that apparently would have provided superior risk-adjusted returns. Analysis of whether professional managers have been able to beat the market is based on their historical performance. Apparent contradictions of the EMH may simply reflect data mining. note: Reason: This is done in the anomalies literature. Reason: It is typically open for debate.

Select all that apply Which statements are true under prospect theory as described by the figure? Define the reference point as where utility is zero. (Click to enlarge.) Multiple select question. Given a fixed reference point, an investor will prefer a large gain to a series of small gains with the same total return. The decision whether to accept a risk will depend on the reference point. Given a fixed reference point, an investor will prefer a large loss to a series of small losses with the same total return. Investors may take large risks after they have lost money.

The decision whether to accept a risk will depend on the reference point. Given a fixed reference point, an investor will prefer a large loss to a series of small losses with the same total return. Investors may take large risks after they have lost money. note: Reason: Because the increases in utility become smaller for any given gain, a series of small gains provides more utility.

Which statements are viewed as correct in behavioral finance? Multiple select question. If security prices are wrong, it should be easy to exploit them using standard active management techniques. If even some investors are rational, markets should be efficient. The failure to uncover obviously successful trading rules or traders cannot be taken as proof of market efficiency. Investors have information-processing and behavioral irrationalities.

The failure to uncover obviously successful trading rules or traders cannot be taken as proof of market efficiency. Investors have information-processing and behavioral irrationalities. note: Reason: It may still be difficult to exploit them. Reason: If the limits to arbitrage activity are severe, mispricing can survive even if some rational investors attempt to exploit it.