Deck 9: Behavioral Finance and Technical Analysis

Question 1

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

Answer 1

A

Question 2

According to the Dow Theory,primary trends are _________________.

A) points of trend reversals
B) daily fluctuations which are of little importance
C) short-term deviations from the underlying price trend line
D) long-term price movements lasting from months to years

Answer 2

D

Question 3

According to the Dow Theory,tertiary trends are _________________.

A) points of trend reversals
B) daily fluctuations which are of little importance
C) short-term deviations from the underlying price trend line
D) long-term price movements lasting from months to years

Answer 3

B

Question 4

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

Question 5

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

Question 6

According to the Dow Theory,secondary trends are _________________.

A) points of trend reversals
B) daily fluctuations which are of little importance
C) short-term deviations from the underlying price trend line
D) long-term price movements lasting from months to years

Question 7

Short interest is a ______ indicator.

A) sentiment
B) flow of funds
C) market structure
D) fundamental

Question 8

Relative strength is a(n)______ indicator.

A) fundamental
B) economic
C) technical
D) international

Question 9

Market breadth is a ______ indicator.

A) sentiment
B) flow of funds
C) technical
D) fundamental

Question 10

The trin statistic is a ______ indicator.

A) sentiment
B) flow of funds
C) market structure
D) fundamental

Question 11

According to Kondratieff,the macroeconomy moves in a series of waves that recur at intervals of approximately _________________.

A) 18 months
B) 4 years
C) 8 years
D) 50 years

Question 12

The Dow Theory is a technique that attempts to identify ___________________.

A) only long-term trends in stock market prices
B) only short-term trends in stock market prices
C) both long-term and short-term trends in stock market prices
D) trends in arbitrage trading opportunities

Question 13

According to the Dow Theory there are ______ key forces which simultaneously affect stock prices.

A) 2
B) 3
C) 4
D) 5

Question 14

Moving averages are ______ indicators.

A) sentiment
B) flow of funds
C) trend
D) fundamental

Question 15

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 head
D) none of the above takes place.

Question 16

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

Question 17

Models of financial markets that emphasize psychological factors affecting investor behavior are called _______.

A) data mining
B) fundamental analysis
C) charting
D) behavioral finance

Question 18

The put/call ratio is a ______ indicator.

A) sentiment
B) flow of funds
C) market structure
D) fundamental

Question 19

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

Question 20

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

Question 21

The most common measure of __________ is the spread between the number of stocks which advance in price and the number of stocks which decline in price.

A) market breadth
B) market volume
C) odd-lot trading
D) short interest

Question 22

An investor needs cash to pay some hospital bills.He is willing to use his dividend income to pay the bills but he will not sell any stock to do so.He is engaging in ___________.

A) overconfidence
B) representativeness
C) forecast errors
D) mental accounting

Question 23

Contrarian investors consider a high put/call ratio as __________.

A) a bearish signal
B) a bullish signal
C) a trend confirmation signal
D) a signal to enter the options market

Question 24

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) 10%; overestimate their ability
C) 15%; suffer from framing biases
D) 20%; engage in mental accounting

Question 25

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

Question 26

Which of the following is not a sentiment indicator?

A) Confidence index
B) Short interest
C) Odd-lot trading
D) Put-call ratio

Question 27

If investors overweight recent performance in forecasting the future they are exhibiting _______.

A) representativeness bias
B) framing error
C) memory bias
D) overconfidence

Question 28

Your two best friends each tell you about a person they know who successively 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

Question 29

According to Elliot wave theory,the 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

Question 30

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

Question 31

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

Question 32

Jill is offered a choice between receiving $50 with certainty or 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

Question 33

Trading activity and average returns in brokerage accounts tends to be _________.

A) uncorrelated
B) negatively correlated
C) positively correlated
D) positively correlated for women and negatively correlated for men

Question 34

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 all her friends.Both Bill 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 and Shelly's risk aversion will increase in the future

Question 35

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

Question 36

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

Question 37

A trin ratio of less than 1.0 is considered as a __________.

A) bearish signal
B) bullish signal
C) bearish signal by some technical analysts and as a bullish signal by other technical analysts
D) trend reversal signal

Question 38

Which one of the following focuses 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

Question 39

Conventional finance theory assumes investors are _______ and behavioral finance assumes investors are _______.

A) rational; irrational
B) irrational; rational
C) greedy; philanthropic
D) philanthropic; greedy

Question 40

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

Question 41

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

Question 42

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

Question 43

When the market breaks through the moving average line from below,a technical analyst would probably suggest it is a good time to ___________.

A) buy the stock
B) hold the stock
C) sell the stock
D) short the stock

Question 44

Technical traders view mutual fund investors as _________ market timers.

A) excellent
B) frequent
C) neutral
D) poor

Question 45

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

Question 46

The advance-decline line is constructed by plotting ________________.

A) the number of advancing stocks against the number of declining stocks
B) the number of advancing stocks and the number of declining stocks against time
C) the number of advancing stocks minus the number of declining stocks against time
D) the cumulative total of advances minus declines against time

Question 47

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

Question 48

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

Question 49

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

Question 50

On a particular day,there were odd-lot sales of 830,000 on the NYSE and 746,000 odd-lot purchases.The odd-lot trading index is __________.

A) 0.43
B) 0.90
C) 0.77
D) 1.11

Question 51

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 6.00% 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

Question 52

Which one of the following statements on the Dow Theory is correct?

A) The Elliot wave theory is the only recent variation of the Dow Theory.
B) The theory of Kondratieff waves is the only recent variation of the Dow Theory.
C) Both the Elliot wave theory and the theory of Kondratieff waves are recent variations of the Dow Theory.
D) Neither the Elliot wave theory nor the theory of Kondratieff waves are recent variations of the Dow Theory.

Question 53

On a particular day,there were 920 stocks which advanced on the NYSE and 723 which 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) 0.90, bullish
B) 0.90, bearish
C) 1.11, bullish
D) 1.11, bearish

Question 54

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

Question 55

__________ is considered the grandfather of technical analysis.

A) Fischer Black
B) John Bratton
C) Charles Dow
D) Stanley Shapiro

Question 56

According to market technicians a trin statistic of less than 1.0 is considered as a __________.

A) bearish signal
B) bullish signal
C) volume decline
D) signal reversal

Question 57

On day 1,the stock price of Ford was $81 and the automotive stock index was 324.On day 2,the stock price of Ford was $85 and the automotive stock index was 335.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

Question 58

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

Question 59

On a particular day,there were 890 stocks which advanced on the NYSE and 723 which 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

Question 60

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

Question 61

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

Question 62

Cumulative Breadth for the four days is ___ which is ___.

A) -140, bullish
B) -140, bearish
C) -300, bullish
D) -300, bearish

Question 63

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 pre-acquisition levels and took many years to recover.This may be an example of ________________.

A) loss aversion
B) mental accounting
C) overreaction
D) managerial overconfidence

Question 64

The Trin on day two is ___.

A) 0.72
B) 1.04
C) 0.92
D) 0.55

Question 65

The Cumulative Breadth for the first two days is ___.

A) -240
B) -50
C) 110
D) 250

Question 66

Investors gravitate towards 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

Question 67

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.

Question 68

An investor purchases shares of an index fund.The investor could take on the same level of risk by taking out a loan and purchasing a higher risk specialty fund.The Sharpe measure on this complete portfolio is higher than her existing investment.What behavioral concept prevents the investor from taking out the loan and investing in the index fund?

A) Framing bias
B) Excessive volatility
C) Loss aversion
D) Mental accounting

Question 69

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)like 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

Question 70

Identify the resistance level stock price.

A) $40
B) $42
C) $44
D) $46

Question 71

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

Question 72

From day one to day four,the Trin has ___ and is ___.

A) increased, bullish
B) increased, bearish
C) decreased, bullish
D) decreased, bearish

Question 73

Identify the support level stock price.

A) $40
B) $42
C) $44
D) $46

Question 74

If mutual fund portfolios are heavy in cash,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

Question 75

From day one to day four the Confidence Index has _____.This is _____.

A) increased; bullish
B) decreased; bullish
C) increased; bearish
D) decreased; bearish

Question 76

The Dow Theory gives a buy signal when you can identify a primary bull trend by identifying _________.

A) a pattern of upward moving tops and bottoms
B) a pattern of declining oscillators
C) declining volume on up moves and increasing volume on down moves
D) tertiary trends that support the primary trend

Question 77

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

Question 78

The Confidence Index on day one is _____.

A) 0.82
B) 0.89
C) 0.92
D) 1.09

Question 79

The Breadth on day three is _______.

A) -70
B) 10
C) 90
D) 170

Question 80

An investor has her money segregated into checking,savings and investments.The allocation between each category 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