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Investment Final Ch. 9

Terms in this set (23)

Testing many different trading rules until you find one that would have worked in the past is called
data mining
Models of financial markets that emphasize psychological factors affecting investor behavior are called _______.
D. behavioral finance
Behavioralists point out that even if market prices are ____________, there may be _______________.
A. distorted; limited arbitrage opportunities
When a stock price breaks through the moving average from below, this is considered to be ______.
a bullish signal
When the stock price falls below a moving average, a possible conclusion is that _____.
B. market momentum has become negative
A support level is ___________________.
B. a level below which the market is unlikely to fall
Conventional finance theory assumes investors are _______, and behavioral finance assumes investors are _______.
A. rational; irrational
The only way for behavioral patterns to persist in prices is if ______________.
B. there are limits to arbitrage activity
If investors are too slow to update their beliefs about a stock's future performance when new evidence arises, they are exhibiting _______.
C. conservatism
If investors overweight recent performance in forecasting the future, they are exhibiting _______.
A. representativeness bias
Your two best friends each tell you about a person they know who successfully started a small business. That's it, you decide; if they can do it, so can you. This is an example of _____________.
D. representativeness bias
An investor holds a very conservative portfolio invested for retirement, but she takes some extra cash she earned from her year-end bonus and buys gold futures. She appears to be engaging in ___________.
D. mental accounting
Bill and Shelly are friends. Bill invests in a portfolio of hot stocks that almost all his friends are invested in. Shelly invests in a portfolio that is totally different from the portfolios of all her friends. Both Bill's and Shelly's stocks fall 15%. According to regret theory, _________________________________________.
B. Shelly will have more regret over the loss than Bill
An investor needs cash to pay some hospital bills. He is willing to use his dividend income to pay the bills, but he will not sell any stock to do so. He is engaging in ___________.
D. mental accounting
Jill is offered a choice between receiving $50 with certainty or possibly receiving the proceeds from a gamble. In the gamble a fair coin is tossed, and if it comes up heads, Jill will receive $100; if the coin comes up tails, she will receive nothing. Jill chooses the $50 instead of the gamble. Jill's behavior indicates __________________.
C. that she has a diminishing marginal utility of wealth
A _________ is a value above which it is difficult for the market to rise
B. resistance level
If the utility you derive from your next dollar of wealth increases by less than a loss of a dollar reduces it, you are exhibiting __________.
A. loss aversion
In technical analysis, __________ is a value below which the market is relatively unlikely to fall.
C. support level
A possible limit on arbitrage activity that may allow behavioral biases to persist is _______.
C. fundamental risk
The tendency of investors to hold on to losing investments is called the ________.
C. disposition effect
Which one of the following best describes fundamental risk?
You buy a stock that you believe is underpriced, and the underpricing persists for a long time, hurting your short-term results
Problems with behavioral finance include
I. The behavioralists tell us nothing about how to exploit any irrationality.
II. The implications of behavioral patterns are inconsistent from case to case, sometimes suggesting overreaction, sometimes underreaction.
III. As with technical trading rules, behavioralists can always find some pattern in past data that supports a behavioralist trait.
D. I, II, and III
Investors gravitate toward the latest hot stock even though it has never paid a dividend. Even though net income is projected to fall over the current and next several years, the price of the stock continues to rise. What behavioral concept may explain this price pattern?
A. Overconfidence
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