Question 1

You started an online business three weeks ago.Thus far,you have averaged 10 sales a day,which is one sale for every five hits.You are now considering giving up your day job and becoming a full-time online retailer.You have calculated the amount of income you can earn based on 10 sales a day and know that level of income would support you in a comfortable fashion.The belief that you will have 10 sales per day on average if this becomes your full-time occupation is based on which one of the following?

Accepted Answer

The belief that the online retailer will continue to have 10 sales per day based on only three weeks of data is an example of the law of small numbers, which refers to the tendency to make decisions based on insufficient or limited data. It may be premature to assume that this trend will continue in the long term without further observation and analysis.

Question 2

Which of the following have been offered as factors contributing to the market crash of 1987?
I.requirement for only a 10 percent cash payment to purchase a stock
II.program trading
III.irrational investors
IV.preceeding bear market

Accepted Answer

Program trading and irrational investors have both been identified as contributing factors to the market crash of 1987, while the requirement for only a 10 percent cash payment and the preceding bear market are not commonly cited as significant factors.

Question 3

Ramon opened a combination laundry and dry cleaning establishment three years ago.Due to his excellent service and reasonable prices,his business has grown and is doing quite well financially.He has considered expanding this business by opening another location but keeps putting off that decision for fear that the second location will not be a success.Ramon is currently displaying which one of the following behavior characteristics?

Accepted Answer

Ramon's behavior is driven by regret aversion, as he is hesitant to take a risk due to the fear of regretting it later. The other options are not applicable as there is no indication of overconfidence, self-attribution bias, house money effect, or frame dependence in the given scenario.

Question 4

AB Industries is an all-equity firm that has $10 per share in cash and a book value per share of $12.At which one of the following market prices would you know with absolute certainty that the stock was mispriced?

Accepted Answer

If AB Industries has $10 per share in cash, then the stock cannot be correctly priced below this amount because the cash value alone supports a $10 per share valuation, not accounting for any additional assets or business operations. Therefore, a price of $9 would indicate the stock is mispriced.

Question 5

You recently overheard your boss telling someone that if he'd actually crunched some numbers and done some analysis instead of just going with his instincts that he never would have opened the new store in Centre City.Which one of the following caused your boss to make a bad decision?

Accepted Answer

The affect heuristic is when someone makes a decision based on their emotions or feelings rather than rational analysis. In this case, the boss went with his instincts instead of analyzing the numbers, leading to a bad decision.

Question 6

Phyllis is planning for her retirement in fifteen years.She knows that she can currently live reasonably well on $38,000 a year given that she is debt-free.Based on her family history she expects to die ten years after she retires.Thus,she computes her retirement need as $38,000 a year for 10 years.Which one of the following behaviors applies to Phyllis?

Accepted Answer

Phyllis is exhibiting money illusion by not considering the impact of inflation on her future purchasing power. She calculates her retirement needs based on today's dollars without accounting for how inflation will increase her cost of living in the future.

Question 7

You are employed as a commission-based sales clerk for a cosmetics retail store.You know that on average,exactly 50 percent of the customers that enter your store will make at least one purchase.Thus far this morning,you have waited on eight customers without making a single sale.You are convinced that the next customer you wait on will buy something.This belief is known as:

Accepted Answer

The belief that the next customer will make a purchase because of the previous eight customers not buying anything is an example of the gambler's fallacy, which is the mistaken belief that previous events will affect the likelihood of a random event occurring.

Question 8

You don't particularly like to shop so only go to the mall once a month.To help make the trek more enjoyable,you always have lunch at the restaurant located inside the mall.Since you are such a creature of habit,you always order the same meal.You've noticed that the price of that meal has increased every time you have been there over the past six months.Thus,you expect the meal to increase in price next month.This is an example of which one of the following?

Accepted Answer

This is an example of recency bias because the expectation that the meal will increase in price next month is based on the most recent experiences of price increases over the past six months, rather than on a broader analysis of price trends or other factors.

Question 9

Roger's Meat Market is a chain of retail stores that limits its sales to fresh-cut meats.The stores have been very profitable in northern cities.However,when two stores were opened in the south,both lost money and had to be closed.Roger,the owner,has now concluded that no southern-based store should be opened as it would not be profitable.Which one of the following applies to Roger?

Accepted Answer

Roger is exhibiting the representativeness heuristic, where he is making decisions based on his limited experience and assuming that all southern stores will have the same outcome as the ones that failed. He is not considering other factors such as location, demographics, or marketing strategies that could impact the success of a southern-based store.

Question 10

Which of the following create limits to arbitrage?
I.risks related to an individual firm
II.implementation costs
III.rational traders
IV.noise traders

Accepted Answer

Limits to arbitrage can arise due to various factors such as risks related to an individual firm, implementation costs, and the presence of noise traders in the market. Rational traders do not create limits to arbitrage but can take advantage of these limits for their own benefit. Therefore, options A and C are incorrect. Option B only includes implementation costs and noise traders, but not risks related to an individual firm. Option E includes all possible factors but also includes rational traders, which do not create limits to arbitrage. Therefore, the best choice is D, which includes all three relevant factors: risks related to an individual firm, implementation costs, and noise traders.

Question 11

Which one of the following statements is true?

Accepted Answer

Market crashes tend to follow market bubbles, where prices are driven up beyond their true value. Once the bubble bursts, prices rapidly decline and a crash can occur. This has been observed in many historical market crashes, including the 1929 and 1987 crashes. Options A and B are false, as market crashes tend to have high volume and the Asian market crash did not have a quick recovery. Option C is also false, as the two crashes differed in both percentage decline and recovery. Option E is not necessarily true, as financial markets can still be efficient overall despite occasional bubbles and crashes.

Question 12

You are the manager of a retail store.You believe the economy is in a recession and that sales for the month will be unusually slow.Since you have complete discretion over the pricing at your location,you decide to have a store-wide sale and offer 10 percent off all merchandise for a 3-day period.You don't expect your superiors to criticize this decision as you believe they,along with the majority of the other store managers,feel the same way about the economy as you do.Which one of the following applies to you?

Accepted Answer

This is an example of false consensus bias, where the manager assumes that their beliefs and actions are shared by others, specifically their superiors and other store managers. They assume that because they believe the economy is in a recession and that sales will be slow, everyone else also holds this belief. However, this may not necessarily be true, and thus they are overestimating the degree of consensus among their peers.

Question 13

You are a hard-charging manager who doesn't really like to sit at a desk for too long.You prefer to gather information quickly,make a decision,and move on to the next item on your agenda.Which one of the following applies to you?

Accepted Answer

The answer of You are a hard-charging manager who doesn't...

Question 14

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 studies have shown that many professional fund managers fail to outperform their benchmark. Statement III is also correct as the Efficient Market Hypothesis suggests that all investments are zero net present value opportunities in a truly efficient market. However, Statement II is not entirely accurate as there is no guarantee that professional fund managers with tenures in excess of ten years will consistently outperform the market on a long-term basis. Statement IV is also incorrect as some studies suggest that passive investing can outperform active investing over the long term.

Question 15

Kate is attempting to sell her house for $260,000.Fred lives across the street in an identical house.Fred recently stated to his wife that Kate's house is probably worth only $250,000 but that once she sells her house,he would like to put their house on the market at $285,000 and then move into a condominium.Which one of the following behaviors applies to Fred?

Accepted Answer

Fred's behavior is an example of the endowment effect, which occurs when people ascribe more value to things merely because they own them. Fred believes his identical house is worth more than Kate's simply because it's his.

Question 16

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 17

Historical returns support which one of the following statements?

Accepted Answer

Historical returns support the statement that financial markets appear to be efficient because, on average, they outperform professional money managers. This is consistent with research that suggests passive index investing is a better strategy than active stock picking.

Question 18

You have saved a total of $200,000 over the past several years.Jane,a trusted business associate,recently approached you with an offer.She has offered you a partnership in a new firm that she expects to be exceedingly profitable.Your initial investment in the partnership would be $125,000.However,Jane cannot give you any odds on that success occurring.You have decided to keep your $125,000 and forego this opportunity simply because you don't know the probability of success.Which one of the following behavior characteristics do you have?

Accepted Answer

Aversion to ambiguity refers to the tendency to avoid uncertain situations and risk due to a lack of information or understanding. This is demonstrated by the individual's decision to not invest in the partnership despite the potential for significant profit due to the lack of information on the probability of success.

Question 19

Over the past six months,you have watched as your parent's retirement savings have declined in value by 45 percent due to a severe financial market downturn.As a result,you have decided that you will never invest in stocks for your own retirement but will instead keep all of your money in an insured bank account.Which behavior characteristic have you developed as a result of the market downturn?

Accepted Answer

The behavior characteristic developed in this situation is myopic loss aversion, which refers to the tendency to focus on short-term losses rather than long-term gains. The individual in this scenario is avoiding the stock market due to the recent decline, despite the potential for long-term growth and higher returns.

Question 20

Mike is a stock broker and financial planner.Phil is one of Mike's clients.Phil prefers to meet with Mike just once a year to review his investment portfolio.At their most recent meeting,Phil stated he believes the stock market is going to decline in value over the next six months.Thus,Phil instructed Mike to sell every stock he owns that is currently worth more than what he paid to purchase it.Phil also instructed Mike to retain any stock that would create a capital loss if sold.Phil is displaying the behavior known as:

Accepted Answer

Phil is displaying the disposition effect, which is the tendency for investors to hold onto losing investments too long and to sell winning investments too soon. He is instructing Mike to sell stocks that have increased in value (winning investments) and to hold onto ones that have decreased in value (losing investments). This behavior is not based on rational analysis of the investments, but rather on the desire to avoid regret or the pain of realizing losses.

Quiz 22: Behavioral Finance: Implications for Financial Management

Which of the following have been offered as factors contributing to the market crash of 1987? I.requirement for only a 10 percent cash payment to purchase a stock II.program trading III.irrational investors IV.preceeding bear market

AB Industries is an all-equity firm that has $10 per share in cash and a book value per share of $12.At which one of the following market prices would you know with absolute certainty that the stock was mispriced?

You recently overheard your boss telling someone that if he'd actually crunched some numbers and done some analysis instead of just going with his instincts that he never would have opened the new store in Centre City.Which one of the following caused your boss to make a bad decision?

Which of the following create limits to arbitrage? I.risks related to an individual firm II.implementation costs III.rational traders IV.noise traders

Which one of the following statements is true?

You are a hard-charging manager who doesn't really like to sit at a desk for too long.You prefer to gather information quickly,make a decision,and move on to the next item on your agenda.Which one of the following applies to you?

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?