Question 1

Which of the following cognitive biases in finance suggests that people tend to be overconfident in their predictions of the future

Accepted Answer

Biased expectations refer to the tendency for people to be overconfident in their ability to predict the future, leading them to make decisions based on their optimistic expectations rather than objective probabilities. Mental accounting relates to how people categorize and prioritize their financial resources, Reference dependence is about how people make relative judgments based on what they perceive as their reference point, and Representativeness heuristic refers to the tendency to make decisions based on how well the situation matches a preconceived prototype.

Question 2

Which of the following outcomes of providing accounting information is an attempt to identify individual securities that are mispriced by reviewing all available financial information?

Accepted Answer

Fundamental analysis involves reviewing all available financial information in an attempt to identify individual securities that are mispriced. This is a common application of accounting information in investment analysis. Agency theory focuses on conflicts of interest between shareholders and management, efficient markets theory suggests that all available information is already reflected in security prices, and the capital asset pricing model is a method for estimating expected returns based on market risk.

Question 3

Which of the following anomalies are related to investing techniques that attempt to forecast security prices by studying past prices and other related statistics?

Accepted Answer

Technical anomalies are related to investing techniques that attempt to forecast security prices by studying past prices and other related statistics. Calendar anomalies relate to recurring patterns in the movement of security prices over time. Value anomalies may occur when the price of a security deviates from its fundamental value. "Other anomalies" is a vague and broad category that may include any number of different anomalies unrelated to investment techniques based on past prices and statistics.

Question 4

Which of the following is not viewed as a cost to the principal in an agency relationship?

Accepted Answer

Monitoring expenditures by the agent are not typically viewed as a cost to the principal in an agency relationship. Instead, costs to the principal usually include their own monitoring expenditures, bonding expenditures by the agent, and the residual loss.

Question 5

Which of the following anomalies are related to particular time periods?

Accepted Answer

Calendar anomalies are related to particular time periods such as days of the week, months, quarters, and holidays. For example, the January effect is a calendar anomaly where there tends to be a higher return on stocks in January. Value anomalies and technical anomalies are not necessarily related to particular time periods, and "other anomalies" is too general to be a valid answer.

Question 6

Which of the following is not a conclusion that has been drawn from human information processing research?

Accepted Answer

The conclusion that individuals are able to process and integrate large amounts of information simultaneously is supported by human information processing research. The other three conclusions (A, B, and D) are supported by research as well.

Question 7

Which of the following research approaches is based on the concept of utility or usefulness?

Accepted Answer

The pragmatic research approach is concerned with practical application and usefulness, and therefore is based on the concept of utility. Deductive and inductive approaches are based on theories and observations respectively, while the behavioral approach focuses on understanding and predicting behavior.

Question 8

Which of the following anomalies are related to strategies designed to outperform the market?

Accepted Answer

The answer of Which of the following anomalies are related...

Question 9

Which of the following research approaches emphasizes going from the specific to the general?

Accepted Answer

Inductive research approach involves going from specific observations to broader generalizations and theories.

Question 10

Which of the following cognitive biases in finance suggests that people tend to judge Event A to be more probable than Event B when A appears more representative than

Accepted Answer

The representativeness heuristic in finance suggests that people tend to judge Event A to be more probable than Event B when A appears more representative than B. This means that people make judgments based on how well an event or situation matches their prototype, or their preconceived ideas or stereotypes about that event or situation.

Question 11

Which of the following outcomes of providing accounting information is based on the supply and demand model?

Accepted Answer

Efficient markets is based on the supply and demand model, which suggests that the market will efficiently incorporate all available information into the price of an asset through the buying and selling decisions of market participants.

Question 12

Which of the following outcomes of providing accounting information is an attempt to deal with both risks and returns?

Accepted Answer

The Capital Asset Pricing Model (CAPM) attempts to deal with both risks and returns by providing a framework for pricing risky assets, taking into account the expected return and risk-free rate of investment. Agency theory pertains to the problem of monitoring agents who are hired to act on behalf of principals, while efficient markets suggest that securities' prices reflect all available information. Fundamental analysis requires evaluating a company's financial and economic health to estimate its stock's value. None of these entirely address risks and returns like CAPM does.

Question 13

The efficient market hypothesis holds that that financial markets price assets at their intrinsic worth, given all available information. Which of the following forms of the efficient market hypothesis defines all available information as knowledge of past security prices?

Accepted Answer

The weak form of the efficient market hypothesis states that all information contained in past security prices is reflected in current security prices. Therefore, if an investor has knowledge of past security prices, they cannot use this information to gain any advantage in the market as it is already priced in.

Question 14

The efficient market hypothesis holds that that financial markets price assets at their intrinsic worth, given all available information. Which of the following forms of the efficient market hypothesis defines all available information as all publicly available information including past stock prices?

Accepted Answer

The semi-strong form of the efficient market hypothesis posits that asset prices reflect all publicly available information, which includes past stock prices, financial statements, news releases, and other public disclosures.

Question 15

What theory on the outcomes of providing accounting information attempts to answer the question: What is an individual's expected benefit from a particular course of action?

Accepted Answer

Agency theory attempts to answer the question of what an individual's expected benefit is from a particular course of action by considering the relationship between the principal and the agent.

Question 16

What theory on the outcomes of providing accounting information rejects the view that knowledge of accounting is grounded in objective principles

Accepted Answer

The critical perspective rejects the view that knowledge of accounting is grounded in objective principles and instead asserts that accounting is intertwined with social and economic power structures. Agency theory, fundamental analysis, and the capital asset pricing model do not necessarily reject the idea of objective principles in accounting.

Question 17

Which of the following research approaches is attributed to DR Scott?

Accepted Answer

The answer of Which of the following research approaches is...

Question 18

The efficient market hypothesis holds that that financial markets price assets at their intrinsic worth, given all available information. Which of the following forms of the efficient market hypothesis defines all available information as information, including security price trends, publicly available information, and insider information?

Accepted Answer

The strong form of the efficient market hypothesis posits that all information, including public, private (insider information), and historical prices, is fully reflected in stock prices, meaning no one can consistently achieve higher returns.

Question 19

What theory on the outcomes of providing accounting information attempts to assess an individual's ability to use information?

Accepted Answer

The theory of human information processing attempts to assess an individual's ability to use accounting information effectively. It focuses on how individuals perceive, store, and utilize accounting information to make decisions. Agency theory is concerned with the relationship between principals and agents, efficient markets theory suggests that stock prices reflect all available information, and the capital asset pricing model is used to calculate expected returns on investments. None of these theories focus specifically on an individual's ability to use accounting information.

Question 20

Which of the following cognitive biases in finance suggests that the majority of people perceive a dividend dollar differently from a capital gains dollar?

Accepted Answer

Mental accounting refers to the tendency of people to separate their money into different categories based on subjective criteria, such as the source of the money or the purpose of the money. One aspect of mental accounting is the perception that dividend dollars are somehow different from capital gains dollars, even though they are both ultimately a form of return on investment. This bias can lead investors to make suboptimal decisions based on their categorization of the money.

Quiz 4: Research Methodology and Theories on the Uses of Accounting Information