Deck 12: Behavioral Finance and Technical Analysis

Question 1

If a 200-day moving average equals the current market price of a stock, that suggests the stock's price will stagnate.

Answer 1

False

Question 2

Acknowledging traits that affect investment behavior should lead to better investment decisions.

Answer 2

True

Question 3

Behavioral finance suggests that investors may fail to sell losing positions since these investors feel the pain of regret.

Answer 3

True

Question 4

Technical analysis stresses historical information and suggests that patterns of securities prices repeat.

Question 5

Evidence supporting technical analysis is the lack of serial correlation between stock prices.

Question 6

The Dow Theory considers price movements in the Dow Jones industrial and transportation averages.

Question 7

According to behavioral finance, investors often select investment data that confirms a preconceived position.

Question 8

Technical analysts use financial statements as the basis for making investment decisions.

Question 9

The adaptive market hypothesis suggests that investors lack the ability to adapt and continue to repeat mistakes.

Question 10

Behavioral finance explains dramatic price changes in securities markets as a tendency for investors to "herd."

Question 11

If investors believe technical analysis, its predictions may become self-fulfilling.

Question 12

The Dogs of the Dow strategy suggests buying the lowest dividend yields of the Dow stocks.

Question 13

A price increase on small volume is more bullish than a price increase on large volume since fewer investors bought the stock.

Question 14

A "head and shoulder" pattern suggests that a stock's price will fall.

Question 15

"Resistance" for a stock suggests that supply will blunt further price increases.

Question 16

Behavioral finance asserts that emotional investing produces higher returns.

Question 17

Few investors believe they are smarter than other investors and hence are not overconfident.

Question 18

Individuals who do the opposite of what investment analysts are suggesting are "contrarians."

Question 19

Being familiar with a company often results in individuals buying stock (e.g., buying the stock in the company for which they work).

Question 20

A point-and-figure chart such as an X-O chart tracks dividends and earnings.

Question 21

Long dark candlesticks suggests

A)stock prices changed dramatically
B)stock prices rose
C)the daily price change was small
D)an investor should sell short

Question 22

If technical analysis cannot be demonstrated to produce higher returns, that is evidence supporting efficient markets.

Question 23

The technical approach suggests that future stock prices are forecasted by

A)past stock prices
B)financial ratios
C)accounting statements
D)monetary policy

Question 24

The moving average convergence divergence indicator uses

A)the difference in yields on stocks and bonds
B)the difference in yields between high and low quality stocks
C)the difference in a short-term moving average and a longer term moving average
D)the difference in the number of shares sold short and the number purchased

Question 25

The Dogs of the Dow strategy

A)forecasts the direction of Dow Jones averages
B)suggests buying the Dow stocks with the highest dividend yields
C)outperforms the S&P 500
D)suggests buying the lowest priced Dow stocks

Question 26

Behavioral finance suggests that

A)investors are not informed
B)individuals make rational investment decisions
C)investors may be subject to bias which leads to excessive buying or selling of stocks
D)emotion plays only a minor role in security selection

Question 27

The Dogs of the Dow strategy suggests buying the Dow stock with the lowest prices.

Question 28

If a moving average of the Dow Jones industrial average crosses the Dow Jones industrial average,

A)the direction of security prices has changed
B)stock prices will stabilize
C)stock prices will go through a period of fluctuation
D)the investor should take profits

Question 29

If a stock meets a resistance level and penetrates that level, the implication is avoid the stock.

Question 30

Which of the following is a fundamental principle of behavioral finance?

A)the use of P/E ratios
B)the tendency to avoid acknowledging investment errors
C)selling stocks at a loss for tax purposes
D)constructing a diversified portfolio

Question 31

Which of the following is not used in technical analysis?

A)moving averages
B)bar graphs
C)point-and-figure charts
D)P/E ratios

Question 32

Which of the following human emotions tend to affect investments decisions?
1. the pain of regret
2. following the crowd or "herding"
3. selective memory

A)1 and 2
B)1 and 3
C)2 and 3
D)all of the above

Question 33

Even if technical analysis accurately predicted the direction of stock prices, commissions from frequent trading may consume any excess return the investor earns.

Question 34

Empirical evidence

A)does not support efficient markets
B)does not support the use of technical analysis
C)cannot be applied to technical analysis
D)only supports head-and-figure charts