Deck 9: Behavioral Finance and Technical Analysis

Question 1

Researchers have found that most of the small firm effect occurs

A) during the spring months
B) during the summer months
C) in December
D) in January
E) randomly

Answer 1

D

Question 2

Banz (1981)found that,on average,the risk-adjusted returns of small firms

A) were higher than the risk-adjusted returns of large firms
B) were the same as the risk-adjusted returns of large firms
C) were lower than the risk-adjusted returns of large firms
D) were unrelated to the risk-adjusted returns of large firms
E) were negative

Answer 2

A

Question 3

If you believe in the reversal effect,you should

A) buy bonds in this period if you held stocks in the last period
B) buy stocks in this period if you held bonds in the last period
C) buy stocks this period that performed poorly last period
D) go short
E) c and d

Answer 3

C

Question 4

A common strategy for passive management is ____________.

A) creating an index fund
B) creating a small firm fund
C) creating an investment club
D) a and c
E) b and c

Question 5

___________ the return on a stock beyond what would be predicted from market movements alone.

A) An excess economic return is
B) An economic return is
C) An abnormal return is
D) a and b
E) a and c

Question 6

If you believe in the ________ form of the EMH,you believe that stock prices reflect all relevant information including historical stock prices and current public information about the firm,but not information that is available only to insiders.

A) semistrong
B) strong
C) weak
D) a,b,and c
E) none of these

Question 7

Studies of positive earnings surprises have shown that there is

A) a positive abnormal return on the day positive earnings surprises are announced.
B) a positive drift in the stock price on the days following the earnings surprise announcement.
C) a negative drift in the stock price on the days following the earnings surprise announcement.
D) both a and b are true.
E) both a and c are true.

Question 8

Basu (1977,1983)found that firms with low P/E ratios

A) earned higher average returns than firms with high P/E ratios
B) earned the same average returns as firms with high P/E ratios
C) earned lower average returns than firms with high P/E ratios
D) had higher dividend yields that firms with high P/E ratios
E) none of these.

Question 9

Jaffe (1974)found that stock prices _______ after insiders intensively bought shares while a later study by Seyhun (1986)found _________.

A) decreased,buying on insider trading did not yield abnormal returns.
B) decreased,buying on insider trading produced significant abnormal returns.
C) increased,buying on insider trading did not yield abnormal returns.
D) increased,buying on insider trading produced significant abnormal returns.
E) remained stable,buying on insider trading produced significant abnormal returns.

Question 10

If you believe in the _______ form of the EMH,you believe that stock prices reflect all information that can be derived by examining market trading data such as the history of past stock prices,trading volume or short interest.

A) semistrong
B) strong
C) weak
D) all of these
E) none of these

Question 11

A hybrid strategy is one where the investor

A) uses both fundamental and technical analysis to select stocks.
B) selects the stocks of companies that specialize in alternative fuels.
C) selects some actively-managed mutual funds on their own and uses an investment advisor to select other actively-managed funds.
D) maintains a passive core and augments the position with an actively managed portfolio.
E) None of these are correct.

Question 12

Proponents of the EMH think technical analysts

A) should focus on relative strength
B) should focus on resistance levels
C) should focus on support levels
D) should focus on financial statements
E) are wasting their time

Question 13

If you believe in the _________ form of the EMH,you believe that stock prices reflect all available information,including information that is available only to insiders.

A) semistrong
B) strong
C) weak
D) all of these
E) none of these

Question 14

Malkiel (1995)calculated that the average alphas,or abnormal returns,on a large sample of mutual funds between 1972 and 1991 were

A) significantly positive.
B) significantly negative.
C) statistically indistinguishable from zero.
D) positive before 1981 and negative thereafter.
E) negative before 1981 and positive thereafter.

Question 15

A study by Ball,Kothari and Shanken (1995)examines the reversal effect and finds

A) the reversal effect seems to be concentrated in low-priced shares.
B) the reversal effect is substantially diminished when portfolios are formed based on mid-year performance rather than December results.
C) the risk-adjusted return from trying to exploit the reversal effect is effectively zero.
D) all of these are true.
E) none of these.

Question 16

__________ focus more on past price movements of a firm's stock than on the underlying determinants of future profitability.

A) Credit analysts
B) Fundamental analysts
C) Systems analysts
D) Technical analysts
E) Specialists

Question 17

The debate over whether markets are efficient will probably never be resolved because of ________

A) the lucky event issue
B) the magnitude issue
C) the selection bias issue
D) all of these
E) none of these

Question 18

Proponents of the EMH typically advocate

A) an active trading strategy
B) investing in an index fund
C) a passive investment strategy
D) a and b
E) b and c

Question 19

Fama and Blume (1966)showed that investors could _________ by exploiting filter rules.

A) earn an abnormal return of 3% above transaction costs
B) earn an abnormal return of 2% above transaction costs
C) earn an abnormal return of 1% above transaction costs
D) not earn abnormal returns above transaction costs
E) none of these

Question 20

Arbel (1985)found that

A) the January effect was highest for neglected firms.
B) the book-to-market value ratio effect was highest in January
C) the liquidity effect was highest for small firms.
D) the neglected firm effect was independent of the small firm effect.
E) small firms had higher book-to-market value ratios.

Question 21

Work by Amihud and Mendelson (1986,1991)

A) argues that investors will demand a rate of return premium to invest in less liquid stocks
B) may help explain the small firm effect
C) may be related to the neglected firm effect
D) b and c
E) a,b,and c

Question 22

Studies of mutual fund performance

A) indicate that one should not randomly select a mutual fund.
B) indicate that historical performance is not necessarily indicative of future performance.
C) indicate that the professional management of the fund insures above market returns.
D) a and b.
E) b and c.

Question 23

Empirical research by DeBondt and Thaler (1985),Jagadeesh (1990)and Lehman (1990)

A) found that poorly stocks that performed poorly in one period experienced sizable reversals in the subsequent period
B) found that stocks that performed poorly in one period experienced poor performance in the subsequent period
C) found that stocks that performed poorly in one period experienced neither better nor worse performance than other stocks in the subsequent period
D) did not try to test the reversal effect
E) reinforces the EMH

Question 24

A finding that _________ would provide evidence against the semistrong form of the efficient market theory.

A) low P/E stocks tend to have positive abnormal returns
B) trend analysis is worthless in determining stock prices
C) one can consistently outperform the market by adopting the contrarian approach exemplified by the reversals phenomenon
D) a and b
E) a and c

Question 25

On November 22,1991 the stock price of K-Mart was $39.50 and the retailer stock index was 600.30.On November 25,1991 the stock price of K-mart was $40.25 and the retailer stock index was 605.20.Consider the ratio of K-Mart to the retailer index at November 22 and November 25.K-Mart is _______ the retail industry and technical analysts who follow relative strength would advise _______ the stock.

A) outperforming,buying
B) outperforming,selling
C) underperforming,buying
D) underperforming,selling
E) equally performing,neither buying nor selling

Question 26

In an efficient market,__________.

A) security prices react quickly to new information
B) security prices are seldom far above or below their justified levels
C) security analysts will not enable investors to realize superior returns consistently
D) one cannot make money
E) a,b,and c

Question 27

Matthews Corporation has a beta of 1.2.The annualized market return yesterday was 13%,and the risk-free rate is currently 5%.You observe that Matthews had an annualized return yesterday of 17%.Assuming that markets are efficient,this suggests that

A) bad news about Matthews was announced yesterday.
B) good news about Matthews was announced yesterday.
C) no news about Matthews was announced yesterday.
D) interest rates rose yesterday.
E) interest rates fell yesterday.

Question 28

The likelihood of an investment newsletter's successfully predicting the direction of the market for three consecutive years by chance should be

A) between 50% and 70%.
B) between 25% and 50%.
C) between 10% and 25%.
D) less than 10%.
E) greater than 70%.

Question 29

Nicholas Manufacturing just announced yesterday that its 4^th-quarter earnings will be 10% higher than last year's 4^th quarter.You observe that Nicholas had an abnormal return of -1.2% yesterday.This suggests that

A) the market is not efficient.
B) Nicholas' stock will probably rise in value tomorrow.
C) investors expected the earnings increase to be larger than what was actually announced.
D) investors expected the earnings increase to be smaller than what was actually announced.
E) earnings are expected to decrease next quarter.

Question 30

The weak form of the efficient market hypothesis asserts that

A) stock prices do not rapidly adjust to new information contained in past prices or past data
B) future changes in stock prices cannot be predicted from past prices
C) technicians cannot expect to outperform the market
D) a and b
E) b and c

Question 31

The weak form of the efficient market hypothesis contradicts

A) technical analysis,but supports fundamental analysis as valid
B) fundamental analysis,but supports technical analysis as valid
C) both fundamental analysis and technical analysis
D) technical analysis,but is silent on the possibility of successful fundamental analysis.
E) none of these.

Question 32

Two basic assumptions of technical analysis are that security prices adjust

A) rapidly to new information and market prices are determined by the interaction of supply and demand
B) rapidly to new information and liquidity is provided by security dealers
C) gradually to new information and market prices are determined by the interaction of supply and demand
D) gradually to new information and liquidity is provided by security dealers
E) rapidly to information and to the actions of insiders

Question 33

Fama and French (1992)found that the stocks of firms within the highest decile of market/book ratios had average monthly returns of _______ while the stocks of firms within the lowest decile of market/book ratios had average monthly returns of

A) greater than 1%,greater than 1%
B) greater than 1%,less than 1%
C) less than 1%,greater than 1%
D) less than 1%,less than 1%
E) less than 0.5%,greater than 0.5%

Question 34

In an efficient market the correlation coefficient between stock returns for two non-overlapping time periods should be

A) positive and large.
B) positive and small.
C) zero.
D) negative and small.
E) negative and large.

Question 35

Cumulative abnormal returns (CAR)

A) are used in event studies.
B) are better measures of security returns due to firm-specific events than are abnormal returns (AR).
C) are cumulated over the period prior to the firm-specific event.
D) a and b.
E) a and c.

Question 36

The weather report says that a devastating and unexpected freeze is expected to hit Florida tonight,during the peak of the citrus harvest.In an efficient market one would expect the price of Florida Orange's stock to

A) drop immediately.
B) remain unchanged.
C) increase immediately.
D) gradually decline for the next several weeks.
E) gradually increase for the next several weeks.

Question 37

A market decline of 23% on a day when there is no significant macroeconomic event ______ consistent with the EMH because ________.

A) would be,because it was a clear response to macroeconomic news.
B) would be,because it was not a clear response to macroeconomic news.
C) would not be,because it was a clear response to macroeconomic news.
D) would not be,because it was not a clear response to macroeconomic news.
E) We cannot tell based on the information given.

Question 38

Fama and French (1988)found that the return on the aggregate stock market _________

A) is higher when the dividend yield is high
B) is lower when the dividend yield is high
C) is unrelated to the dividend yield
D) is higher when bank failures are high
E) is unrelated to the economy

Question 39

To improve the likelihood of choosing "winning" mutual fund managers,investors should look for

A) a long and consistent track record by the manager.
B) a fund that is not excessively large.
C) a fund style that is consistent with their own portfolio needs.
D) all of these.
E) none of these.

Question 40

Studies regarding the "death of beta"

A) indicate that the reports were premature.
B) indicate that effect of systematic risk on returns persists after controlling for such variables as market-to-book ratios.
C) indicate that beta is not a meaningful risk measure.
D) a and b.
E) none of these.

Question 41

When Maurice Kendall first examined stock price patterns in 1953,he found that

A) certain patterns tended to repeat within the business cycle.
B) there were no predictable patterns in stock prices.
C) stocks whose prices had increased consistently for one week tended to have a net decrease the following week.
D) stocks whose prices had increased consistently for one week tended to have a net increase the following week.
E) the direction of change in stock prices was unpredictable,but the amount of change followed a distinct pattern.

Question 42

Discuss the various forms of market efficiency.Include in your discussion the information sets involved in each form and the relationships across information sets and across forms of market efficiency.Also discuss the implications for the various forms of market efficiency for the various types of securities' analysts.

Question 43

If stock prices follow a random walk

A) it implies that investors are irrational.
B) it means that the market cannot be efficient.
C) price levels are random.
D) price changes are random.
E) price movements are predictable.

Question 44

If you believe in the reversal effect,you should

A) sell bonds in this period if you held stocks in the last period.
B) sell stocks in this period if you held bonds in the last period.
C) sell stocks this period that performed well last period.
D) go long.
E) sell stocks this period that performed well last period and go long

Question 45

Chartists practice

A) technical analysis.
B) fundamental analysis.
C) regression analysis.
D) insider analysis.
E) psychoanalysis.

Question 46

Google has a beta of 1.0.The annualized market return yesterday was 11%,and the risk-free rate is currently 5%.You observe that Google had an annualized return yesterday of 14%.Assuming that markets are efficient,this suggests that

A) bad news about Google was announced yesterday.
B) good news about Google was announced yesterday.
C) no news about Google was announced yesterday.
D) interest rates rose yesterday.
E) interest rates fell yesterday.

Question 47

LJP Corporation just announced yesterday that it would undertake an international joint venture.You observe that LJP had an abnormal return of 3% yesterday.This suggests that

A) the market is not efficient.
B) LJP stock will probably rise in value again tomorrow.
C) investors view the international joint venture as bad news.
D) investors view the international joint venture as good news.
E) earnings are expected to decrease next quarter.

Question 48

With regard to market efficiency,what is meant by the term "anomaly"? Give three examples of market anomalies and explain why each is considered to be an anomaly.

Question 49

What is an event study? It is a test of what form of market efficiency? Discuss the process of conducting an event study,including the best variable(s)to observe as tests of market efficiency.

Question 50

According to proponents of the efficient market hypothesis,the best strategy for a small investor with a portfolio worth $25,000 is probably to

A) perform fundamental analysis.
B) exploit market anomalies.
C) invest in Treasury securities.
D) invest in derivative securities.
E) invest in mutual funds.

Question 51

Which of the following are used by fundamental analysts to determine proper stock prices?
I)trendlines
II)earnings
III)dividend prospects
IV)expectations of future interest rates
V)resistance levels

A) I,IV,and V
B) I,II,and III
C) II,III,and IV
D) II,IV,and V
E) All of the items are used by fundamental analysts.

Question 52

The main difference between the three forms of market efficiency is that

A) the definition of efficiency differs.
B) the definition of excess return differs.
C) the definition of prices differs.
D) the definition of information differs.
E) they were discovered by different people.

Question 53

Which of the following are investment superstars who have consistently shown superior performance?
I)Warren Buffet
II)Phoebe Buffet
III)Peter Lynch
IV)Merrill Lynch
V)Jimmy Buffet

A) I,III,and IV
B) II,III,and IV
C) I and III
D) III and IV
E) I,III,IV,and V

Question 54

QQAG just announced yesterday that its fourth quarter earnings will be 35% higher than last year's fourth quarter.You observe that QQAG had an abnormal return of -1.7% yesterday.This suggests that

A) the market is not efficient.
B) QQAG stock will probably rise in value tomorrow.
C) investors expected the earnings increase to be larger than what was actually announced.
D) investors expected the earnings increase to be smaller than what was actually announced.
E) earnings are expected to decrease next quarter.

Question 55

Discuss the small firm effect,the neglected firm effect,and the January effect,the tax effect and how the four effects may be related.

Question 56

Your professor finds a stock-trading rule that generates excess risk-adjusted returns.Instead of publishing the results,she keeps the trading rule to herself.This is most closely associated with ________.

A) regret avoidance
B) selection bias
C) framing
D) insider trading
E) None of these is correct.