Behavioral Finance
Midterm Exam
Course Introduction
Behavioral Finance explores the psychological influences and cognitive biases that affect the financial decision-making processes of individuals and markets. The course examines how traditional theories of finance, such as the Efficient Market Hypothesis, are challenged by real-world investor behavior and systematic deviations from rationality. Topics include prospect theory, overconfidence, herding, mental accounting, and the impact of emotions on investment choices. Students will analyze empirical studies, evaluate market anomalies, and investigate how behavioral insights can be applied to improve financial outcomes for investors, managers, and policymakers.
Recommended Textbook
Investments 11th Edition by Zvi Bodie
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2129 Verified Questions
2129 Flashcards
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Page 2
Chapter 1: The Investment Environment
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Sample Questions
Q1) Theoretically, takeovers should result in
A) improved management.
B) increased stock price.
C) increased benefits to existing management of the taken-over firm.
D) improved management and increased stock price.
E) All of the options.
Answer: D
Q2) In 2016, ____________ was the most significant financial asset of U.S. households in terms of total value.
A) real estate
B) mutual fund shares
C) debt securities
D) life insurance reserves
E) pension reserves
Answer: E
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Page 3
Chapter 2: Asset Classes and Financial Instruments
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Sample Questions
Q1) The smallest component of the money market is
A) repurchase agreements.
B) small-denomination time deposits.
C) savings deposits.
D) money market mutual funds.
E) commercial paper.
Answer: E
Q2) The ____ index represents the performance of the Hong Kong stock market.
A) DAX
B) FTSE
C) Nikkei
D) Hang Seng
Answer: D
Q3) The smallest component of the fixed-income market is _______ debt.
A) Treasury
B) other asset-backed
C) corporate
D) tax-exempt
E) mortgage-backed
Answer: B
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Chapter 3: How Securities Are Traded
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Sample Questions
Q1) Which one of the following statements regarding orders is false?
A) A market order is simply an order to buy or sell a stock immediately at the prevailing market price.
B) A limit-sell order is where investors specify prices at which they are willing to sell a security.
C) If stock ABC is selling at $50, a limit-buy order may instruct the broker to buy the stock if and when the share price falls below $45.
D) A market order is an order to buy or sell a stock on a specific exchange (market).
Answer: D
Q2) Assume you sold short 100 shares of common stock at $70 per share. The initial margin is 50%. What would be the maintenance margin if a margin call is made at a stock price of $85?
A) 40.5%
B) 20.5%
C) 35.5%
D) 23.5%
Answer: D
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5
Chapter 4: Mutual Funds and Other Investment Companies
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Sample Questions
Q1) Which of the following is not an advantage of owning mutual funds?
A) They offer a variety of investment styles.
B) They offer small investors the benefits of diversification.
C) They treat income as "passed through" to the investor for tax purposes.
D) All of the options are advantages of mutual funds.
E) None of the options are an advantage of mutual funds.
Q2) Assume that you purchased 200 shares of Super Performing mutual fund at a net asset value of $21 per share. During the year, you received dividend income distributions of $1.50 per share and capital gains distributions of $2.85 per share. At the end of the year, the shares had a net asset value of $23 per share. What was your rate of return on this investment?
A) 30.24%
B) 25.37%
C) 27.19%
D) 22.44%
E) 29.18%
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Chapter 5: Risk, Return, and the Historical Record
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Sample Questions
Q1) Which of the following statement(s) is(are) true?
I) The real rate of interest is determined by the supply and demand for funds.
II. The real rate of interest is determined by the expected rate of inflation.
III. The real rate of interest can be affected by actions of the Fed.
IV. The real rate of interest is equal to the nominal interest rate plus the expected rate of inflation.
A) I and II only
B) I and III only
C) III and IV only
D) II and III only
E) I, II, III, and IV only
Q2) If the nominal return is constant, the after-tax real rate of return
A) declines as the inflation rate increases.
B) increases as the inflation rate increases.
C) declines as the inflation rate declines.
D) increases as the inflation rate decreases.
E) declines as the inflation rate increases and increases as the inflation rate decreases.
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Chapter 6: Capital Allocation to Risky Assets
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Sample Questions
Q1) You invest $100 in a risky asset with an expected rate of return of 0.12 and a standard deviation of 0.15 and a T-bill with a rate of return of 0.05.
What percentages of your money must be invested in the risky asset and the risk-free asset, respectively, to Form a portfolio with an expected return of 0.09?
A) 85% and 15%
B) 75% and 25%
C) 67% and 33%
D) 57% and 43%
E) Cannot be determined.
Q2) According to the mean-variance criterion, which one of the following investments dominates all others?
A) E(r) = 0.15; Variance = 0.20
B) E(r) = 0.10; Variance = 0.20
C) E(r) = 0.10; Variance = 0.25
D) E(r) = 0.15; Variance = 0.25
E) None of these options dominates the other alternatives.
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Page 8
Chapter 7: Optimal Risky Portfolios
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Sample Questions
Q1) Given an optimal risky portfolio with expected return of 20%, standard deviation of 24%, and a risk free rate of 7%, what is the slope of the best feasible CAL?
A) 0.64
B) 0.14
C) 0.62
D) 0.33
E) 0.54
Q2) Consider an investment opportunity set formed with two securities that are perfectly negatively correlated. The global-minimum variance portfolio has a standard deviation that is always
A) greater than zero.
B) equal to zero.
C) equal to the sum of the securities' standard deviations. D) equal to 1.
Q3) Nondiversifiable risk is also referred to as A) systematic risk or unique risk.
B) systematic risk or market risk.
C) unique risk or market risk.
D) unique risk or firm-specific risk.
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Page 9
Chapter 8: Index Models
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Sample Questions
Q1) Assume that stock market returns do not resemble a single-index structure. An investment fund analyzes 150 stocks in order to construct a mean-variance efficient portfolio constrained by 150 investments. They will need to calculate ____________ covariances.
A) 12
B) 150
C) 22,500
D) 11,175
Q2) Analysts may use regression analysis to estimate the index model for a stock. When doing so, the slope of the regression line is an estimate of
A) the of the asset.
B) the of the asset.
C) the of the asset.
D) the of the asset.
Q3) As diversification increases, the unique risk of a portfolio approaches
A) 1.
B) 0.
C) infinity.
D) (n - 1) × n.
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Page 10
Chapter 9: The Capital Asset Pricing Model
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Sample Questions
Q1) The capital asset pricing model assumes
A) all investors are price takers.
B) all investors have the same holding period.
C) investors pay taxes on capital gains.
D) all investors are price takers and have the same holding period.
E) all investors are price takers, have the same holding period, and pay taxes on capital gains.
Q2) In a well-diversified portfolio,
A) market risk is negligible.
B) systematic risk is negligible.
C) unsystematic risk is negligible.
D) nondiversifiable risk is negligible.
Q3) The risk-free rate is 4%. The expected market rate of return is 11%. If you expect CAT with a beta of 1.0 to offer a rate of return of 13%, you should
A) buy CAT because it is overpriced.
B) sell short CAT because it is overpriced.
C) sell short CAT because it is underpriced.
D) buy CAT because it is underpriced.
E) None of the options, as CAT is fairly priced.
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Page 11
Chapter 10: Arbitrage Pricing Theory and Multifactor Models
of Risk and Return
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Sample Questions
Q1) <sup> </sup>Which of the following is false about the security market line (SML) derived from the APT?
A) The SML has a downward slope.
B) The SML for the APT shows expected return in relation to portfolio standard deviation.
C) The SML for the APT has an intercept equal to the expected return on the market portfolio.
D) The benchmark portfolio for the SML may be any well-diversified portfolio.
E) The SML has a downward slope, shows expected return in relation to portfolio standard . deviation, and has an intercept equal to the expected return on the market portfolio.
Q2) <sup> </sup>Which of the following factors did Chen, Roll, and Ross include in their multifactor model?
A) Change in industrial waste
B) Change in expected inflation
C) Change in unanticipated inflation
D) Change in expected inflation and unanticipated inflation
E) All of the factors were included in their model.
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Chapter 11: The Efficient Market Hypothesis
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Sample Questions
Q1) _________ below which it is difficult for the market to fall.
A) An intrinsic value is a value
B) A resistance level is a value
C) A support level is a value
D) An intrinsic value and a resistance level are values
E) A resistance level and a support level are values
Q2) 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) low P/E stocks tend to have positive abnormal returns and trend analysis is worthless in determining stock prices
E) low P/E stocks tend to have positive abnormal returns and one can consistently outperform the market by adopting the contrarian approach exemplified by the reversals phenomenon
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Chapter 12: Behavioral Finance and Technical Analysis
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Sample Questions
Q1) Kahneman and Tversky (1973) report that __________ and __________.
A) people give too little weight to recent experience compared to prior beliefs; tend to make forecasts that are too extreme given the uncertainty of their information
B) people give too much weight to recent experience compared to prior beliefs; tend to make forecasts that are too extreme given the uncertainty of their information
C) people give too little weight to recent experience compared to prior beliefs; tend to make forecasts that are not extreme enough given the uncertainty of their information
D) people give too much weight to recent experience compared to prior beliefs; tend to make forecasts that are not extreme enough given the uncertainty of their information
Q2) Kahneman and Tversky (1973) reported that people give __________ weight to recent experience compared to prior beliefs when making forecasts. This is referred to as
A) too little; hyper rationality
B) too little; conservatism
C) too much; framing
D) too much; memory bias
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Chapter 13: Empirical Evidence on Security Returns
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Sample Questions
Q1) In their multifactor model, Chen, Roll, and Ross found
A) that two market indexes, the equally weighted NYSE and the value weighted NYSE, were not significant predictors of security returns.
B) that the value weighted NYSE index had the incorrect sign, implying a negative market risk premium.
C) expected changes in inflation predicted security returns.
D) that two market indexes, the equally weighted NYSE and the value weighted NYSE, were not significant predictors of security returns and that the value weighted NYSE index had the incorrect sign, implying a negative market risk premium.
E) All of the options are correct.
Q2) In the 1972 empirical study by Black, Jensen, and Scholes, they found that the estimated slope of the security market line was _______ what the CAPM would predict.
A) higher than B) equal to C) less than
D) twice as much as E) More information is required to answer this question.
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Page 15
Chapter 14: Bond Prices and Yields
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Sample Questions
Q1) A zero-coupon bond has a yield to maturity of 9% and a par value of $1,000. If the bond matures in eight years, the bond should sell for a price of _______ today.
A) $422.41
B) $501.87
C) $513.16
D) $483.49
E) None of the options are correct.
Q2) Most corporate bonds are traded
A) on a formal exchange operated by the New York Stock Exchange.
B) by the issuing corporation.
C) over the counter by bond dealers linked by a computer quotation system.
D) on a formal exchange operated by the American Stock Exchange.
E) on a formal exchange operated by the Philadelphia Stock Exchange.
Q3) Of the following five investments, ________ is (are) considered the safest.
A) commercial paper
B) corporate bonds
C) U.S. agency issues
D) Treasury bonds
E) Treasury bills
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Page 16
Chapter 15: The Term Structure of Interest Rates
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Sample Questions
Q1) The following is a list of prices for zero-coupon bonds with different maturities and par values of $1,000. \(\begin{array}{cc}
\text { Maturity }\\
\text { (Years) } & \text { Price } \\
1 & \$ 925.15 \\
2 & 862.57 \\
3 & 788.66 \\
4 & 711.00
\end{array}\) What is the price of a 4-year maturity bond with a 10% coupon rate paid annually? (Par values = $1,000.)
A) $742.09
B) $1,222.09
C) $1,035.66
D) $1,141.84
Q2) The value of a Treasury bond should
A) be equal to the sum of the value of STRIPS created from it.
B) be less than the sum of the value of STRIPS created from it.
C) be greater than the sum of the value of STRIPS created from it.
D) All of the options are correct.
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Page 17
Chapter 16: Managing Bond Portfolios
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Sample Questions
Q1) Which of the following are true about the interest-rate sensitivity of bonds? I) Bond prices and yields are inversely related.
II) Prices of long-term bonds tend to be more sensitive to interest-rate changes than prices of short-term bonds.
III) Interest-rate risk is correlated with the bond's coupon rate.
IV) The sensitivity of a bond's price to a change in its yield to maturity is inversely related to the yield to maturity at which the bond is currently selling.
A) I and II
B) I and III
C) I, II, and IV
D) II, III, and IV
E) I, II, III, and IV
Q2) Which of the following bonds has the longest duration?
A) A 15-year maturity, 0% coupon bond.
B) A 15-year maturity, 9% coupon bond.
C) A 20-year maturity, 9% coupon bond.
D) A 20-year maturity, 0% coupon bond.
E) Cannot tell from the information given
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Chapter 17: Macroeconomic and Industry Analysis
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Sample Questions
Q1) If the economy is shrinking, firms with low operating leverage will experience
A) larger decreases in profits than firms with high operating leverage.
B) similar decreases in profits as firms with high operating leverage.
C) -smaller decreases in profits than firms with high operating leverage.
D) no change in profits.
Q2) In the decline stage of the industry life cycle,
A) the product may have reached obsolescence.
B) the industry will grow at a rate less than the overall economy.
C) the industry may experience negative growth.
D) the product may have reached obsolescence, and the industry will grow at a rate less than the overall economy.
E) -the product may have reached obsolescence, the industry will grow at a rate less than the overall economy, and the industry may experience negative growth.
Q3) Assume that the Federal Reserve decreases the money supply. This action will cause ________ to decrease.
A) interest rates
B) the unemployment rate
C) -investment in the economy
D) trade balance
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Page 19
Chapter 18: Equity Valuation Models
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Sample Questions
Q1) Suppose that the average P/E multiple in the oil industry is 22. Exxon is expected to have an EPS of $1.50 in the coming year. The intrinsic value of Exxon stock should be
A) $33.00.
B) $35.55.
C) $63.00.
D) $72.00.
E) None of the options are correct.
Q2) Siri had a FCFE of $1.6M last year and has 3.2M shares outstanding. Siri's required return on equity is 12%, and WACC is 9.8%. If FCFE is expected to grow at 9% forever, the intrinsic value of Siri's shares is
A) $68.13.
B) $18.17.
C) $26.35.
D) $14.76.
E) None of the options are correct.
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20
Chapter 19: Financial Statement Analysis
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Sample Questions
Q1) The dollar value of a firm's return in excess of its opportunity costs is called its A) profitability measure.
B) excess return.
C) economic value added.
D) prospective capacity.
E) return margin.
Q2) Proceeds from a company's sale of stock to the public are included in A) par value.
B) additional paid-in capital.
C) retained earnings.
D) par value and additional paid-in capital.
E) All of the options are correct.
Q3) A measure of asset utilization is
A) sales divided by working capital.
B) return on total assets.
C) return on equity capital.
D) operating profit divided by sales.
E) None of the options are correct.
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21
Chapter 20: Options Markets: Introduction
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Sample Questions
Q1) The price that the writer of a call option receives to sell the option is called the
A) strike price.
B) exercise price.
C) execution price.
D) acquisition price.
E) premium.
Q2) The current market price of a share of IBM stock is $195. If a call option on this stock has a strike price of $195, the call
A) is out of the money.
B) is in the money.
C) is at the money.
D) None of the options are correct.
Q3) A call option on a stock is said to be at the money if
A) the exercise price is higher than the stock price.
B) the exercise price is less than the stock price.
C) the exercise price is equal to the stock price.
D) the price of the put is higher than the price of the call.
E) the price of the call is higher than the price of the put.
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Chapter 21: Option Valuation
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Sample Questions
Q1) A hedge ratio of 0.85 implies that a hedged portfolio should consist of
A) long 0.85 calls for each short stock.
B) short 0.85 calls for each long stock.
C) long 0.85 shares for each short call.
D) long 0.85 shares for each long call.
E) None of the options are correct.
Q2) A portfolio consists of 100 shares of stock and 1500 calls on that stock. If the hedge ratio for the call is 0.7, what would be the dollar change in the value of the portfolio in response to a $1 decline in the stock price?
A) +$700
B) +$500
C) $1,150
D) $520
Q3) A put option has an intrinsic value of zero if the option is
A) at the money.
B) out of the money.
C) in the money.
D) at the money and in the money.
E) at the money or out of the money.
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Page 23
Chapter 22: Futures Markets
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Sample Questions
Q1) If a trader holding a long position in oil futures fails to meet the obligations of a futures contract, the party that is hurt by the failure is
A) the offsetting short trader.
B) the oil producer.
C) the clearinghouse.
D) the broker.
E) the commodities dealer.
Q2) You purchased one corn future contract at $2.29 per bushel. What would be your profit (loss) at maturity if the corn spot price at that time were $2.10 per bushel? Assume the contract size is 5,000 bushels and there are no transactions costs.
A) $950 profit
B) $95 profit
C) $950 loss
D) $95 loss
E) None of the options are correct.
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Chapter 23: Futures, Swaps, and Risk Management
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Sample Questions
Q1) You are given the following information about a portfolio you are to manage. For the long term, you are bullish, but you think the market may fall over the next month.
\[\begin{array} { l r r }
\text { Portfolio Value } & \$ \quad 1 \text { million } \\
\text { Portfolio's Beta } & 0.86 \\
\text { Current S\&P500 Value } & 990 \\
\text { Anticipated S\&P500 Value } & 915 \\
\end{array}\] What is the dollar value of your expected loss?
A) $142,900
B) $65,200
C) $85,700
D) $30,000
E) $64,200
Q2) The most common short-term interest rate used in the swap market is
A) the U.S. discount rate.
B) the U.S. prime rate.
C) the U.S. fed funds rate.
D) LIBOR.
E) None of the options are correct.
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Page 25
Chapter 24: Portfolio Performance Evaluation
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Sample Questions
Q1) A pension fund that begins with $500,000 earns 15% the first year and 10% the second year. At the beginning of the second year, the sponsor contributes another $300,000. The dollar-weighted and time-weighted rates of return, respectively, were
A) 11.7% and 12.5%.
B) 12.1% and 12.5%.
C) 12.5% and 11.7%.
D) 12.5% and 12.1%.
Q2) Suppose two portfolios have the same average return and the same standard deviation of returns, but portfolio A has a higher beta than portfolio B. According to the Sharpe measure, the performance of portfolio A
A) is better than the performance of portfolio B.
B) is the same as the performance of portfolio B.
C) is poorer than the performance of portfolio B.
D) cannot be measured as there are no data on the alpha of the portfolio.
E) None of the options are correct.
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Chapter 25: International Diversification
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Q1) When Country A's currency strengthens against Country B's, citizens of Country A will
A) pay less to buy Country B's products.
B) pay more to buy Country B's products.
C) pay more to buy domestically-produced products.
D) not be affected by the change in their currency's value.
Q2) You are a U.S. investor who purchased British securities for 4,000 pounds one year ago when the British pound cost $1.50. No dividends were paid on the British securities in the past year. Your total return based on U.S. dollars was __________ if the value of the securities is now 4,400 pounds and the pound is worth $1.62.
A) 16.7%
B) 18.8%
C) 28.0%
D) 40.0%
E) None of the options
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Chapter 26: Hedge Funds
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Sample Questions
Q1) Hedge funds are ______ transparent than mutual funds because of ______ strict SEC regulation on hedge funds.
A) more; more
B) more; less
C) less; less
D) less; more
Q2) ______ bias arises because hedge funds only report returns to database publishers if they want to.
A) Survivorship
B) Backfill
C) Omission
D) Incubation
E) None of the options are correct.
Q3) A hedge fund pursuing a ______ strategy is attempting to exploit temporary misalignments in relative pricing.
A) directional
B) nondirectional
C) stock or bond
D) arbitrage or speculation
E) None of the options are correct.
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Chapter 27: The Theory of Active Portfolio Management
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Q1) Consider the Treynor-Black model. The alpha of an active portfolio is 2%. The expected return on the market index is 12%. The variance of the return on the market portfolio is 4%. The nonsystematic variance of the active Portfolio is 2%. The risk-free rate of return is 3%. The beta of the active portfolio is 1.15. The optimal proportion
To invest in the active portfolio is
A) 48.7%.
B) 98.3%.
C) 47.6%.
D) 100.0%.
Q2) The tracking error of an optimized portfolio can be expressed in terms of the ____________ of the portfolio, and thus reveals ____________.
A) return; portfolio performance
B) total risk; portfolio performance
C) beta; portfolio performance
D) beta; benchmark risk
E) relative return; benchmark risk
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Chapter 28: Investment Policy and the Framework of the
Cfa Institute
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Source URL: https://quizplus.com/quiz/59248
Sample Questions
Q1) Assume that at retirement you have accumulated $500,000 in a variable annuity contract. The assumed investment return is 6%, and your life expectancy is 15 years. If the first year's actual investment return is 8%, what is the starting benefit payment?
A) $30,000.00
B) $33,333.33
C) $51,481.38
D) $52,452.73
E) The answer cannot be determined from the information provided.
Q2) The shortest time horizons are likely to be set by
A) banks.
B) property and casualty insurance companies.
C) pension funds.
D) banks and property and casualty insurance companies.
E) property and casualty insurance companies and pension funds.
Q3) Target date retirement funds are not
A) funds of funds diversified across stocks and bonds.
B) designed to change their asset allocation as time passes.
C) a simple, but useful, strategy.
D) designed to function much like hedge funds.
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