Question 1

When the market breaks through the moving average line from below, a technical analyst would probably suggest that it is a good time to ________.
A) buy the stock
B) hold the stock
C) sell the stock
D) short the stock

Accepted Answer

When the market breaks through the moving average line from below, it is a signal that the stock price is gaining momentum and may continue to rise. Therefore, a technical analyst would suggest buying the stock at this point.

Question 2

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

Accepted Answer

The investor appears to be engaging in mental accounting by treating her bonus cash differently from her other retirement investments and investing it in gold futures.

Question 3

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

Accepted Answer

Conservatism bias is the tendency for beliefs to be held onto for too long, even after evidence refutes them. In this scenario, investors are slow to update their beliefs, implying they are exhibiting conservatism biases.

Question 4

Contrarian investors consider a high put/call ratio a ________.
A) bearish signal
B) bullish signal
C) trend confirmation signal
D) signal to enter the options market

Accepted Answer

A high put/call ratio indicates that more investors are betting on a decline in the market, which contrarian investors interpret as a bullish signal, suggesting that the market may be poised for an upward move as sentiment is overly pessimistic.

Question 5

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) 25%; overestimate their ability
C) 15%; suffer from framing biases
D) 25%; engage in mental accounting

Accepted Answer

The statement suggests that indexing is growing in popularity but only a small proportion of equity in the mutual fund industry is held in indexed funds. This may indicate that investors and managers overestimate their ability to outperform the market through active management, which is consistent with Choice B. Choices A, C, and D are not supported by the information given in the statement.

Question 6

Which of the following is not a sentiment indicator?
A) confidence index
B) short interest
C) relative strength
D) put/call ratio

Accepted Answer

Relative strength is a momentum indicator used in technical analysis that compares the performance of a stock or financial asset to that of the overall market, rather than a sentiment indicator which gauges the attitude of investors towards the market or specific securities.

Question 7

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

Accepted Answer

Jill's choice to take a guaranteed $50 instead of the gamble implies that she has a diminishing marginal utility of wealth. The expected value of the gamble is $50, but Jill is willing to give up the possibility of winning $100 in exchange for a sure $50. This suggests that the additional utility gained from winning an extra $50 is not worth the additional risk.

Question 8

A TRIN ratio of greater than 1 is considered a ________.
A) bearish signal
B) bullish signal
C) bearish signal by some technical analysts and a bullish signal by other technical analysts
D) trend reversal signal

Accepted Answer

A TRIN ratio of greater than 1 is considered a bearish signal, indicating that there is more selling pressure than buying pressure in the market. This is because the TRIN ratio measures the ratio of volume in declining stocks to that in advancing stocks, and a high ratio suggests that sellers are dominating the market.

Question 9

If investors overweight recent performance in forecasting the future, they are exhibiting ________.
A) representativeness bias
B) framing error
C) memory bias
D) overconfidence

Accepted Answer

Representativeness bias refers to the tendency to base judgments or make decisions based on the degree to which an event or situation appears to be similar to typical examples. In this case, investors are overweighting recent performance, which is a typical example of representativeness bias. Framing error refers to the way in which information is presented or framed, which can influence decision-making. Memory bias refers to the way in which past experiences or information can influence current decision-making. Overconfidence refers to the tendency to overestimate one's abilities or knowledge, which is not directly related to the scenario described in the question.

Question 10

Conventional finance theory assumes investors are ________, and behavioral finance assumes investors are ________.
A) rational; irrational
B) irrational; rational
C) greedy; philanthropic
D) philanthropic; greedy

Accepted Answer

Conventional finance theory assumes that investors are rational and make decisions based on logical and objective analysis of available information. Behavioral finance, on the other hand, recognizes that investors are subject to cognitive biases and emotional influences that can result in irrational decision-making.

Question 11

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

Accepted Answer

Behavioral patterns in prices can persist if there are limits to arbitrage activity, which means that it may not be possible for rational investors to quickly and easily exploit market inefficiencies. This can allow pricing anomalies to persist, even in relatively efficient markets. Market inefficiencies and behavioral patterns may still exist even in weak-form efficient markets (choice A), and significant trading costs (choice C) could potentially limit trading activity but would not necessarily lead to the persistence of behavioral patterns. Market psychology may be inconsistent over time (choice D), but this alone would not necessarily lead to persistent behavioral patterns in prices.

Question 12

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

Accepted Answer

Short interest is considered a sentiment indicator because it measures the number of investors who are betting against a particular stock. If short interest is high, it suggests that there is a lot of negative sentiment surrounding that stock. The other choices are technical indicators or measures of investor behavior, but they do not directly measure sentiment.

Question 13

Which of the following analysts focus 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

Accepted Answer

Technical analysts focus on past price movements of a firm's stock in order to predict future price trends. They use charts and other tools to analyze market trends and patterns, but do not consider the underlying fundamentals of the company in their analysis.

Question 14

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

Accepted Answer

This scenario is an example of representativeness bias, as the individual is extrapolating from two anecdotes of successful small business owners to assume that they can also succeed in starting their own small business.

Question 15

Trading activity and average returns in brokerage accounts tend to be ________.
A) uncorrelated
B) negatively correlated
C) positively correlated
D) positively correlated for women and negatively correlated for men

Accepted Answer

Trading activity and average returns in brokerage accounts tend to be negatively correlated. This means that, generally, the more an individual trades, the lower their average returns tend to be. This phenomenon is often attributed to trading costs, taxes, and the difficulty of consistently outperforming the market through frequent trading.

Question 16

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

Accepted Answer

The ratio of the average yield on 10 top-rated corporate bonds to the average yield on 10 intermediate-grade bonds is called the confidence index. This index is used to gauge investor confidence in the economy; higher ratios suggest greater confidence in the economy as investors are willing to choose lower yields for safer, top-rated bonds.

Question 17

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

Accepted Answer

Shelly is likely to experience more regret than Bill because she made a unique decision that went against the choices of her peers, leading to a sense of individual responsibility for the loss.

Question 18

The most common measure of ________ is the spread between the number of stocks that advance in price and the number of stocks that decline in price.
A) market breadth
B) market volume
C) odd-lot trading
D) short interest

Accepted Answer

Market breadth is the most common measure of the overall health of the stock market. It measures the spread between the number of stocks that advance in price and the number of stocks that decline in price. This gives an idea of whether the market is being driven by a few strong stocks or if there is broad-based strength across the market as a whole. Market volume, odd-lot trading, and short interest are not measures of market breadth.

Question 19

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

Accepted Answer

The investor is engaging in mental accounting, where he is segregating his dividend income for a specific purpose and not willing to sell any stock for that purpose. It is an example of mental accounting, where he is assigning a specific purpose to his cash flows.

Question 20

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

Accepted Answer

A horizontal band of Xs and Os on a point and figure chart is known as a congestion area. This signifies a period of consolidation or indecision in the market, where neither bulls nor bears are in control. It is not a buy or sell signal, nor does it indicate a trend reversal.

Quiz 9: Behavioral Finance and Technical Analysis

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

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 ________.

If investors are too slow to update their beliefs about a stock's future performance when new evidence arises, they are exhibiting ________.

Contrarian investors consider a high put/call ratio a ________.

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 .

Which of the following is not a sentiment indicator?

A TRIN ratio of greater than 1 is considered a ________.

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

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

The only way for behavioral patterns to persist in prices is if ________.

Which of the following is considered a sentiment indicator?

Which of the following analysts focus more on past price movements of a firm's stock than on the underlying determinants of its future profitability?

Your two best friends each tell you about a person they know who successfully started a small business. That's it, you decide; if they can do it, so can you. This is an example of ________.

Trading activity and average returns in brokerage accounts tend to be ________.

The ratio of the average yield on 10 top-rated corporate bonds to the average yield on 10 intermediate-grade bonds is called the ________.

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 the portfolios of all her friends. Both Bill's and Shelly's stocks fall 15%. According to regret theory, ________.

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

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 ________.

In the context of a point and figure chart, a horizontal band of Xs and Os is a ________.