Question 1

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

Accepted Answer

Technical analysis is used to identify when to invest, by analyzing patterns and trends in price and volume data.

Question 2

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 3

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

Accepted Answer

Technical analysis is actually based on analyzing past market data and identifying patterns in order to make predictions about future market movements. It is not completely reliant on scientific principles and does involve some degree of intuition and subjective interpretation.

Question 4

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

Accepted Answer

A high level of short sales indicates that investors are pessimistic about the market and are betting on a decline in prices, which is contrary to a bull market. Therefore, a high level of short sales is actually an indicator of a current bear market or market downturn.

Question 5

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 6

The tendency of small firms to have higher returns than large firms , even after adjusting for risk, may be attributable to

Accepted Answer

Small firms may be less familiar to investors, leading to a familiarity bias where investors prefer larger, more well-known firms, potentially resulting in higher returns for small firms as they are undervalued.

Question 7

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

Accepted Answer

Market volume refers to the total number of shares bought and sold in a market over a certain period. This volume is determined by both the demand for and the supply of stocks in the market. When there is high demand for stocks, more shares are bought, leading to higher market volume. Conversely, when there is a high supply of stocks, more shares are sold, also leading to higher market volume. Therefore, market volume is a function of both market demand and supply.

Question 8

Stocks of small companies have a historical tendency to do especially well in the month of January.

Accepted Answer

This is known as the January Effect, where small-cap stocks tend to outperform larger-cap stocks in the month of January due to various reasons such as tax-loss harvesting and portfolio re-balancing at the start of a new year.

Question 9

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 10

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

Accepted Answer

The small firms are more likely to be undervalued and have higher growth opportunities, which can result in higher returns over time. Even after adjusting for risk, small firms have historically outperformed large firms.

Question 11

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

The behavioral tendencies at work here are loss aversion, as Barb and Ken are holding onto the price they originally paid for the house and may be unwilling to accept a loss, and anchoring, as they are anchored to the original purchase price and have a reluctance to lower the price below that point.

Question 12

The breadth of the market refers to the spread between the number of stocks advancing and those declining in value.

Accepted Answer

The breadth of the market is defined as the difference between the number of stocks that are advancing versus those that are declining in value. This can provide insight into whether the market movements are being driven by a few large stocks or a broad range of companies.

Question 13

The stock of PHRM, the price 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, as he continues to hold onto the stock and searches for favorable stories despite negative news. This is a cognitive bias where people tend to cling to their beliefs even when faced with contradictory evidence. Anchoring, overconfidence, and loss aversion may be related biases, but they do not fully explain Patrick's behavior in this scenario.

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

The answer of The tendency of naive investors to buy...

Question 15

One of the calendar effect market anomalies indicates that ________ in value during January.

Accepted Answer

The January Effect is a market anomaly that suggests that small-cap stocks tend to outperform large-cap stocks in January. This is believed to be due to year-end tax-loss harvesting by investors, which can push down the prices of small-cap stocks, creating a buying opportunity for investors in the new year. As a result, small-cap stocks tend to experience higher returns in January.

Question 16

The anomaly known as post-earnings announcement drift or momentum describes the tendency of stock prices to rise or fall for several ________ after unexpectedly good or bad earnings announcements.

Accepted Answer

The post-earnings announcement drift or momentum typically lasts for several weeks after unexpectedly good or bad earnings announcements. It is not as long as months, nor as short as days or hours.

Question 17

The stock market is considered strong when the market volume decreases in a declining market.

Accepted Answer

The answer of The stock market is considered strong when...

Question 18

Resources for technical analysis are readily available on the Internet.

Accepted Answer

Many websites and online platforms offer various technical analysis resources, such as charts, indicators, and market tools that traders can use to analyze financial markets.

Question 19

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 price movement in the market is a result of the interplay of supply and demand forces. They use charts and technical indicators to identify price patterns and trends that help them predict future price movements based on the changes in supply and demand. Therefore, supply and demand forces have a crucial impact on the prices of securities according to technical analysis.

Question 20

Investors should never combine fundamental analysis and technical analysis.

Accepted Answer

Investors can use both fundamental analysis and technical analysis to make informed investment decisions. Fundamental analysis involves analyzing a company's financial and economic fundamentals, while technical analysis uses charts and patterns to analyze the price and volume movements of a security. Combining both approaches can provide a more comprehensive understanding of the investment opportunity.

Quiz 9: Market Efficiency and Behavioral Finance