BUS 405 Week 2 Chapter 8 Behavioral Finance and the Psychology of Investing

This document of BUS 405 Week 2 Chapter 8 Behavioral Finance and the Psychology of Investing includes:

1. What is the area of finance called that addresses issues such as how reasoning errors affect investment decisions?

2. Which one of the following is the basis for prospect theory?

3. Which one of the following defines frame dependence?

4. Mental accounting is the process of associating a stock with its:

5. Loss aversion is defined as:

6. Representativeness heuristic is best explained as:

7. The belief that information you hold is superior to information held by other investors best describes:

8. An unwillingness to take a risk after a loss describes:

9. Which one of the following is the tendency to believe that random events that occur in clusters are not really random?

10. Which one of the following best describes heuristics?

11. The concept that well-capitalized, rational traders may be unable to correct a mispricing defines which one of the following terms?

12. Which one of the following is a trader whose trades are not based on meaningful financial analysis or information?

13. Which one of the following risks is related to irrational beliefs?

14. Technical analysis is the study of which one of the following as the basis for trading?

15. Dow theory is a method of predicting future market movements based on which of the following Dow Jones averages?

I. industrial

II. transportation

III. utilities

IV. commodities

16. According to Elliott wave theory, market predictions should be based on which one of the following?

17. The minimum price at which a security is expected to trade is called the:

18. The maximum price at which a security is expected to trade is called the:

19. The measure of performance of one investment compared to another investment is called the:

20. Prospect theory is based on the concept that investors are:

21. Which one of the following statements is correct regarding prospect theory?

22. Phil is a contestant on a game show. At this point in the game, he can either accept $500 or spin a wheel for a chance of winning $100,000. Which type of behaviour is he displaying if he spins the wheel?

23. Investors tend to make better decisions when looking at a decision:

24. Which one of the following is an example of mental accounting?

25. According to the concept of loss aversion, individual investors are most apt to do which one of the following?

26. According to the concept of house money, individual investors are most apt to do which one of the following?

27. Peter hesitates when it comes to picking an individual stock to purchase as he feels that he will later realize that a different stock would have been a better investment. Peter is suffering from:

28. The tendency to overvalue an item because you own it is referred to as which one of the following?

29. Yesterday, Krista stated that Overland stock was only worth $12 a share and since it was selling for $15 a share, she declared it overpriced and refused to buy any shares. This morning, she learned that she is inheriting 3,500 shares of Overland stock from her grandmother. Suddenly, she is saying that Overland stock is a great buy at $15 and is probably worth at least $17 a share. This is an example of which one of the following?

30. Ted constantly ignores the effects of inflation on money. Ted is suffering from which one of the following?

31. Investors who tend to invest too heavily in the securities issued by their employer suffer from the condition known as:

32. Which one of the following statements appears to be correct based on current research?

33. The increased cash flows into mutual funds that have recently had superior returns is most associated with which one of the following characteristics?

34. Tricia has lost money on a particular stock for the past three years. Thus, she believes the stock will have a high positive rate of return this year because earning a good return is long overdue. This assumption is best described as the:

35. Four of the last five stocks your investment adviser recommended have outperformed the market. Thus, you believe that if you continue to follow her advice, that 80 percent of your investments will outperform the market over the long term. This belief is based on the:

36. According to the theory of recency bias, investors tend to believe the financial markets will:

37. Which one of the following is a characteristic of the self-attribution bias?

38. Which of the following are impediments to the correction of a security's mispricing?

I. sentiment-based risk

II. implementation costs

III. firm-specific risk

IV. noise trader risk

39. Which one of the following market sentiment index (MSI) values represents the best buying opportunity?

40. Which one of the following market sentiment index (MSI) values indicates that all polled investors were bearish?

41. Which one of the following indicates the long-run direction of the market according to Dow Theory?

42. What is the primary purpose of Dow theory?

43. According to Dow theory, which one of the following is the primary means of eliminating secondary market trends?

44. If you are a proponent of the Elliott wave theory, you are most apt to do which one of the following?

45. According to technical analysis, which one of the following is best seen as a buying opportunity?

46. You recently heard a news announcer state that the market is approaching its support level. Which one of the following is the best interpretation of that statement?

47. Which one of the following advance/decline lines is the most bullish signal?

48. Which of the following are bullish indicators?

I. flat advance/decline line

II. breakout of a support level

III. Arms ratio of .38

IV. heavy advancing volume

49. If the closing tick of the day is +32, this means that the:

50. Which one of the following Arms values is the most bearish?

51. For the past year, a particular stock has a relative strength value of 1.03 as compared to the market. This means that the stock:

52. A "block trade" is a trade in excess of how many shares?

53. Which one of the following statements is correct concerning an open-high-low-close bar chart?

54. According to technical analysts, pricing patterns such as the head and shoulders are indicators of potential:

55. Which one of the following is correct concerning a head and shoulders top pattern?

56. Which one of the following statements is correct regarding moving averages?

57. Assume the 50-day moving average is currently intersecting the 200-day moving average. Also assume the 50-day average is downward sloping and the 200-day average is upward sloping. Which one of the following statements is accurate based on this information?

58. Bollinger bands:

59. A stock's price has been relatively constant for an extended period of time. In this instance, the Bollinger bands are:

60. Investors who use the MACD indicator as a signal for trading are most apt to buy a security when the MACD:

61. Which of the following are considered in the computation of money flows?

I. last trade price

II. current trade price

III. volume of each trade

IV. time of each trade

62. Assume a stock's price remains relatively stable while the money flow becomes highly positive. Which one of the following is most expected given this scenario?

63. Fibonacci numbers:

64. Some technical analysts use Fibonacci numbers to predict:

65. Which one of the following is seen as a bearish indicator?

66. A survey of 55 of your fellow classmates determines that 20 of them are bullish on the market while the remainder is bearish. What is the market sentiment index for this group of individuals?

67. A recent survey indicates that 1,731 people are bearish on the market for every 1,000 that are bullish. What is the value of the market sentiment index based on this information?

68. Given the following information, what is the value of the advance/decline line on the third day of this 3-day period?

69. Given the following information, what is the value of the advance/decline line on the second day of this 3-day period?

70. Given the following information, what is the value of the closing Arms?

71. Given the following information, what is the value of the closing Arms?

72. Last year, Kathy purchased 2 shares of stock A at $60 a share. At the same time, she purchased 3 shares of stock B at $40 a share. Today, stock A is valued at $70 a share and stock B is worth $47 a share. What is the relative strength of stock A as compared to stock B?

73. What is the 3-day simple moving average as of day 5, given the following information?

74. What is the 4-day simple moving average as of day 7, given the following information?

75. What is the 3-day exponential moving average as of day 4 assuming that a weight of 70 percent is placed on the most recent price?

76. What is the 3-day exponential moving average as of day 5 assuming that a weight of 60 percent is placed on the most recent price?

77. Given the following information, what is the net money flow at the end of the trading day?

78. Given the following information, what is the net money flow at the end of the trading day?

79. The series of Fibonacci numbers contains the sequential values of 610 and 987. What is the next number in this series?

80. The price of a stock increased from $21 to $26. Using phi, what are the primary and secondary support areas for the stock?

81. Altoona Train stock increased from $18 a share to $25 a share. Based on phi, what are the primary and secondary support areas for this stock?

82. Draw a basic Elliott Wave Pattern. Identify each wave and indicate the waves that are "corrective" and those that are "impulsive".

83. Explain the basics of prospect theory and provide an example that illustrates this theory.

84. Give some examples of how overconfidence affects investor behavior along with the results that might be expected based on that behavior.