Question 1

Investors should never combine fundamental analysis and technical analysis.

Accepted Answer

Combining fundamental analysis and technical analysis can provide a more comprehensive view of an investment's potential, as they assess different aspects of its value and market behavior.

Question 2

One market anomaly that offers some evidence in support of charting or other forms of technical analysis is

Accepted Answer

Momentum is a market anomaly that supports the use of charting or technical analysis. It refers to the tendency of securities that have performed well in the past to continue performing well in the short term, and vice versa for poorly performing securities. This trend-following behavior is a key concept in technical analysis.

Question 3

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

Accepted Answer

Barb and Ken's decision to list their house at the original purchase price despite its lower appraisal value is indicative of loss aversion, where they are trying to avoid realizing a financial loss. Additionally, anchoring is at play here as they are fixated on the original purchase price of $300,000 as a reference point for their selling price, disregarding the current market appraisal.

Question 4

When the number of issues with rising prices exceeds the number with declining prices for a period of time, the market is considered strong.

Accepted Answer

This is because a market where more stocks are increasing in price than decreasing typically indicates investor confidence and buying pressure, suggesting overall market strength.

Question 5

Resources for technical analysis are readily available on the Internet.

Accepted Answer

Many websites, platforms, and forums offer resources, tools, and information for conducting technical analysis in various markets, making them readily accessible to anyone with an internet connection.

Question 6

For technical analysts, the forces of supply and demand have an important effect on the prices of securities.

Accepted Answer

Technical analysts believe that the prices of securities are determined by the forces of supply and demand in the market, as these forces reflect all publicly available information and investor sentiment.

Question 7

From a behavioral perspective, the anomaly known as post-earnings announcement drift or momentum is best explained by

Accepted Answer

Representativeness leads investors to underreact to new information, such as earnings announcements, because they are overly influenced by past trends or stereotypes. This underreaction can cause the post-earnings announcement drift, where stock prices continue to move in the direction of the earnings surprise for some time after the announcement.

Question 8

Market volume is a function of market demand for and supply of stocks.

Accepted Answer

Market volume, which refers to the number of shares or contracts traded in a security or an entire market during a given period, is influenced by the market demand for and supply of stocks. When there is high demand and ample supply, trading volume increases, and vice versa.

Question 9

The stock price of PHRM 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

Accepted Answer

Patrick's behavior is an example of belief perseverance because he continues to hold onto his belief in the stock's potential despite new evidence to the contrary. He is ignoring negative reports and searching for information that supports his existing belief.

Question 10

Even after adjusting for risk, firms have, over long periods of time, earned higher returns than firms.

Accepted Answer

Historically, small firms have tended to outperform large firms over long periods, even after adjusting for risk. This phenomenon is often referred to as the "size premium" in finance.

Question 11

On-balance volume charts the difference between the number of advancing issues and the number of declining issues.

Accepted Answer

On-balance volume (OBV) is a technical analysis indicator that uses volume flow to predict changes in stock price, by adding volume on up days and subtracting volume on down days, rather than charting the difference between the number of advancing and declining issues.

Question 12

A principal objective of technical analysis is trying to determine when to invest.

Accepted Answer

Technical analysis focuses on analyzing price movements and trading volumes in financial markets to identify trends and patterns that can help predict future price movements, thereby aiding investors in deciding when to buy or sell an asset.

Question 13

The odd-lot theory supports buying into the market when the number of odd-lot trades rises.

Accepted Answer

The odd-lot theory suggests that small investors are usually wrong, so a rise in odd-lot trades (small, non-round number of shares typically bought by small investors) would be seen as a bearish signal, not a reason to buy into the market.

Question 14

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

Accepted Answer

Anchoring is the tendency to rely too heavily on the first piece of information received when making a decision. In this case, naive investors may be anchoring their decisions to the high prices they see after a period of rising prices, and the low prices they see after a period of falling prices.

Question 15

The confidence index is based on the difference between the yields on 3 month Treasury bills and the 10 Treasury bond.

Accepted Answer

The confidence index is typically based on the spread between yields of high-grade bonds versus those of lower-grade bonds, reflecting investor confidence in the economy, not the difference between 3-month Treasury bills and 10-year Treasury bonds.

Question 16

Technical analysis is so called because it relies on sound scientific principles rather than intuition.

Accepted Answer

Technical analysis primarily relies on the study of past market data, including price and volume, to forecast future price movements, rather than on sound scientific principles.

Question 17

A relatively high level of short sales is an indicator of a current bull market.

Accepted Answer

A high level of short sales typically indicates that investors are expecting prices to fall, which is more characteristic of a bear market sentiment rather than a bull market.

Question 18

On-balance volume is a secondary indicator used to confirm price trends.

Accepted Answer

On-balance volume (OBV) is indeed a secondary (or momentum) indicator that traders and analysts use to confirm price trends by observing the volume flow to predict changes in stock price.

Question 19

The new high-new lows measure suggests that buying opportunities occur when new lows outnumber new highs.

Accepted Answer

The new highs-new lows measure typically suggests that buying opportunities may be present when new highs outnumber new lows, indicating a bullish market sentiment. Conversely, when new lows outnumber new highs, it may suggest caution or bearish sentiment.

Question 20

Efficient market proponents tend to explain market anomalies as

Accepted Answer

Efficient market proponents often explain market anomalies as inaccurate risk measurements, temporary phenomena, or statistical accidents, suggesting that these anomalies do not necessarily contradict the efficient market hypothesis but rather can be explained within its framework.

Quiz 9: Market Efficiency and Behavioral Finance