Question 1

Which of the following statements are correct?
I.Many professional fund managers are paid well but fail to outperform as expected.
II.Professional fund managers that have tenures in excess of ten years,tend to consistently outperform the market on a long-term basis.
III.If a market is truly efficient,then all investments in that market are zero net present value opportunities.
IV.Actively managing a fund appears to be the key to outperforming the market.

Accepted Answer

Statement I is correct as it is a well-known fact that not all professional fund managers are able to outperform the market despite being paid well.
Statement II is not completely true as there may be instances where professional fund managers may underperform even with a tenure of over ten years. Therefore, it is not an absolute rule.
Statement III is correct as the efficient market hypothesis suggests that all investments in a market are zero net present value opportunities as they reflect all available information.
Statement IV is not necessarily true as passive investing has been known to outperform actively managed funds in certain markets.

Question 2

Explain why a low-priced,low trading volume stock is more apt to present limits to arbitrage than is a high-priced,high trading volume stock.

Accepted Answer

The answer of Explain why a low-priced,low trading volume stock...

Question 3

Provide an example of a managerial decision that illustrates each one of the following behaviors:
Behavior:
 Overconfidence
Example:
Behavior:
 Affect heuristic
Example:
Behavior:
 Loss aversion
Example:

Accepted Answer

The answer of Provide an example of a managerial decision...

Question 4

Historical returns support which one of the following statements?

Accepted Answer

Historical returns support the idea that financial markets are efficient, as on average they outperform professional money managers. This is consistent with the efficient market hypothesis which suggests that all available information is reflected in asset prices, making it difficult for active managers to consistently beat the market. Option A is incorrect as historical returns actually contradict the behavioral finance perspective that markets are highly inefficient. Option B is incorrect as studies have shown that active managers tend to underperform passive index funds over the long term. Option C is also incorrect as studies have shown that the longer the time horizon, the less likely active managers are to outperform their benchmark. Option D is incorrect as historical data does not support the idea of a totally efficient market due to the existence of market frictions and imperfect information.

Question 5

Explain 1)the concept of house money,2)why the house money concept is such a common behavior for so many individuals and 3)why house money is an irrational behavior.

Accepted Answer

The answer of Explain 1)the concept of house money,2)why the...

Quiz 22: Behavioral Finance: Implications for Financial Management

Explain why a low-priced,low trading volume stock is more apt to present limits to arbitrage than is a high-priced,high trading volume stock.

Provide an example of a managerial decision that illustrates each one of the following behaviors: Behavior: Overconfidence Example: Behavior: Affect heuristic Example: Behavior: Loss aversion Example:

Historical returns support which one of the following statements?

Explain 1)the concept of house money,2)why the house money concept is such a common behavior for so many individuals and 3)why house money is an irrational behavior.