Chapter 12
1.Conventional theories presume that investors ____________ and behavioral finance presumes that they ____________.
B.are rational; may not be rational
2.The premise of behavioral finance is that
A.conventional financial theory ignores how real people make decisions and that people make a difference.
3.Some economists believe that the anomalies literature is consistent with investors ____________ and ____________.
D.inability to always process information correctly and therefore they infer incorrect probability distributions about future rates of return; given a probability distribution of returns, they often make inconsistent or suboptimal decisions
rmation processing errors consist of
I) forecasting errors
II) overconfidence
III) conservatism
IV) framing
E.I, II and III
5.Forecasting errors are potentially important because
B.research suggests that people overweight recent information.
Forecasting errors are potentially important because research suggests that people overweight recent information.
6.DeBondt and Thaler believe that high P/E result from investors
A.earnings expectations that are too extreme.
DeBondt and Thaler believe that high P/E result from investors earnings expectations that are too extreme.
7.If a person gives too much weight to recent information compared to prior beliefs, they would make ________ errors.
E.forecasting
8.Single men trade far more often than women. This is due to greater ________ among men.
C.overconfidence
9.____________ may be responsible for the prevalence of active versus passive investments management.
B.Overconfidence
10.Barber and Odean (2000) ranked portfolios by turnover and report that the difference in return between the highest and lowest turnover portfolios is 7% per year. They attribute this to
A.overconfidence
11.________ bias means that investors are too slow in updating their beliefs in response to evidence.
D.conservatism
12.Psychologists have found that people who make decisions that turn out badly blame themselves more when that decision was unconventional. The name for this phenomenon is A.regret avoidance13.An example of ________ is that a person may reject an investment when it is posed in terms of risk surrounding potential gains but may accept the same investment if it is posed in terms of risk surrounding potential losses.
A.framing
14.Statman (1977) argues that ________ is consistent with some investors' irrational preference for stocks with high cash dividends and with a tendency to hold losing positions too long.
A.mental accounting
15.An example of ________ is that it is not as painful to have purchased a blue-chip stock that decreases in value, as it is to lose money on an unknown start-up firm.
B.regret avoidance
16.Arbitrageurs may be unable to exploit behavioral biases due to ____________.
I) fundamental risk
II) implementation costs
III) model risk
IV) conservatism
V) regret avoidance
B.I, II, and III
17.____________ are good examples of the limits to arbitrage because they show that the law of one price is violated.
I) Siamese Twin Companies
II) Unit trusts
III) Closed end funds
IV) Open end funds
V) Equity carve outs
C.I, III, and V
18.__________ was the grandfather of technical analysis.
C.Charles Dow
19.The goal of the Dow theory is to
E.identify long-term trends
20.A long-term movement of prices, lasting from several months to years is called _________.
B.a primary trend
21.A daily fluctuation of little importance is called ____________.
A.a minor trend
22.Price movements that are caused by short-term deviations of prices from the underlying trend line are called
B.secondary trends.
23.The Dow theory posits that the three forces that simultaneously affect stock prices are ____________.
I) primary trend
