Behavioral Finance Practice Questions
Course Introduction
Behavioral Finance explores the psychological influences and cognitive biases that affect the financial decisions of individuals and institutions. This course examines how real-world investor behavior deviates from traditional financial theories based on rationality, such as the Efficient Market Hypothesis. Key topics include prospect theory, mental accounting, overconfidence, herd behavior, and the impact of emotions on risk perception and market outcomes. Students will analyze empirical evidence, case studies, and contemporary research to understand how behavioral factors can lead to anomalies in financial markets and inform investment strategies and policy-making.
Recommended Textbook
Investments 10th Edition by Zvi Bodie
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2186 Verified Questions
2186 Flashcards
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Page 2
Chapter 1: The Investment Environment
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Sample Questions
Q1) An example of a derivative security is
A)a common share of Microsoft.
B)a call option on Intel stock.
C)a commodity futures contract.
D)a call option on Intel stock and a commodity futures contract.
E)a common share of Microsoft and a call option on Intel stock.
Answer: D
Q2) Until 1999, the ________ Act(s) prohibited banks in the United States from both accepting deposits and underwriting securities.
A)Sarbanes-Oxley
B)Glass-Steagall
C)SEC
D)Sarbanes-Oxley and SEC
E)None of the options
Answer: B
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Chapter 2: Asset Classes and Financial Instruments
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Sample Questions
Q1) You purchased a futures contract on corn at a futures price of 331, and at the time of expiration the price was 343.What was your profit or loss
A)-$12.00
B)$12.00
C)-$600
D)$600
Answer: D
Q2) If a Treasury note has a bid price of $975, the quoted bid price in the Wall Street Journal would be
A)97:50.
B)97:16.
C)97:80.
D)94:24.
E)97:75.
Answer: B
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4
Chapter 3: How Securities Are Traded
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Sample Questions
Q1) You want to purchase XON stock at $60 from your broker using as little of your own money as possible.If initial margin is 50% and you have $3,000 to invest, how many shares can you buy
A)100 shares
B)200 shares
C)50 shares
D)500 shares
E)25 shares
Answer: A
Q2) You sold short 300 shares of common stock at $55 per share.The initial margin is 60%.At what stock price would you receive a margin call if the maintenance margin is 35%
A)$51.00
B)$65.18
C)$35.22
D)$40.36
Answer: B
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Chapter 4: Mutual Funds and Other Investment Companies
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Sample Questions
Q1) Commingled funds are
A)amounts invested in equity and fixed-income mutual funds.
B)funds that may be purchased at intervals of 3, 6, or 12 months at the discretion of management.
C)amounts invested in domestic and global equities.
D)closed-end funds that may be repurchased only once every two years at the discretion of mutual fund management.
E)partnerships of investors that pool their funds, which are then managed for a fee.
Q2) A mutual fund had year-end assets of $327,000,000 and liabilities of $46,000,000.If the fund NAV was $30.48, how many shares must have been held in the fund
A)11,354,751
B)8,412,642
C)10,165,476
D)9,165,414
E)9,219,160
Q3) Discuss the taxation of mutual fund income.
Q4) List and describe the more important types of mutual funds according to their investment policy and use.
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Chapter 5: Risk, Return, and the Historical Record
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Sample Questions
Q1) A year ago, you invested $2,500 in a savings account that pays an annual interest rate of 5.7%.What is your approximate annual real rate of return if the rate of inflation was 1.6% over the year
A)4.1%
B)2.5%
C)2.9%
D)1.6%
Q2) A year ago, you invested $1,000 in a savings account that pays an annual interest rate of 9%.What is your approximate annual real rate of return if the rate of inflation was 4% over the year
A)5%
B)10%
C)7%
D)3%
Q3) Discuss the relationships between interest rates (both real and nominal), expected inflation rates, and tax rates on investment returns.
Q4) Discuss some reasons why an investor with a longtime horizon might choose to invest in common stocks, even though they have historically been riskier than government bonds or T-bills.
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Chapter 6: Capital Allocation to Risky Assets
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Sample Questions
Q1) Asset allocation may involve
A)the decision as to the allocation between a risk-free asset and a risky asset.
B)the decision as to the allocation among different risky assets.
C)considerable security analysis.
D)the decision as to the allocation between a risk-free asset and a risky asset and the decision as to the allocation among different risky assets.
E)the decision as to the allocation between a risk-free asset and a risky asset and considerable security analysis.
Q2) Consider a risky portfolio, A, with an expected rate of return of 0.15 and a standard deviation of 0.15, that lies on a given indifference curve.Which one of the following portfolios might lie on the same indifference curve
A)E(r) = 0.15; Standard deviation = 0.20
B)E(r) = 0.15; Standard deviation = 0.10
C)E(r) = 0.10; Standard deviation = 0.10
D)E(r) = 0.20; Standard deviation = 0.15
E)E(r) = 0.10; Standard deviation = 0.20
Q3) Describe how an investor may combine a risk-free asset and one risky asset in order to obtain the optimal portfolio for that investor.
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8
Chapter 7: Optimal Risky Portfolios
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Sample Questions
Q1) The individual investor's optimal portfolio is designated by:
A)The point of tangency with the indifference curve and the capital allocation line.
B)The point of highest reward to variability ratio in the opportunity set.
C)The point of tangency with the opportunity set and the capital allocation line.
D)The point of the highest reward to variability ratio in the indifference curve.
E)None of the options.
Q2) The unsystematic risk of a specific security
A)is likely to be higher in an increasing market.
B)results from factors unique to the firm.
C)depends on market volatility.
D)cannot be diversified away.
Q3) Systematic risk is also referred to as
A)market risk, nondiversifiable risk.
B)market risk, diversifiable risk.
C)unique risk, nondiversifiable risk.
D)unique risk, diversifiable risk.
E)None of the options
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Chapter 8: Index Models
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Sample Questions
Q1) If a firm's beta was calculated as 1.3 in a regression equation, a commonly used adjustment technique would provide an adjusted beta of
A)less than 1.0 but greater than zero.
B)between 0.3 and 0.9.
C)between 1.0 and 1.3.
D)greater than 1.3.
E)zero or less.
Q2) The beta of JCP stock has been estimated as 1.2 using regression analysis on a sample of historical returns.A commonly used adjustment technique would provide an adjusted beta of
A)1.20.
B)1.32.
C)1.13.
D)1.0.
Q3) Rosenberg and Guy found that __________ helped to predict a firm's beta.
A)the firm's financial characteristics
B)the firm's industry group
C)firm size
D)the firm's financial characteristics and the firm's industry group
E)All of the options
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Chapter 9: The Capital Asset Pricing Model
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Sample Questions
Q1) Discuss the assumptions of the capital asset pricing model and how these assumptions relate to the "real world" investment decision process.
Q2) The risk-free rate is 7%.The expected market rate of return is 15%.If you expect a stock with a beta of 1.3 to offer a rate of return of 12%, you should
A)buy the stock because it is overpriced.
B)sell short the stock because it is overpriced.
C)sell the stock short because it is underpriced.
D)buy the stock because it is underpriced.
E)None of the options, as the stock is fairly priced
Q3) You invest $600 in a security with a beta of 1.2 and $400 in another security with a beta of 0.90.The beta of the resulting portfolio is A)1.40.
B)1.00.
C)0.36.
D)1.08.
E)0.80.
Q4) Discuss how the CAPM might be used in capital budgeting decisions and utility rate decisions.
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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) ___________ a relationship between expected return and risk.
A)APT stipulates
B)CAPM stipulates
C)Both CAPM and APT stipulate
D)Neither CAPM nor APT stipulate
E)No pricing model has been found.
Q2) A professional who searches for mispriced securities in specific areas such as merger-target stocks, rather than one who seeks strict (risk-free) arbitrage opportunities is engaged in
A)pure arbitrage.
B)risk arbitrage.
C)option arbitrage.
D)equilibrium arbitrage.
Q3) In developing the APT, Ross assumed that uncertainty in asset returns was a result of
A)a common macroeconomic factor.
B)firm-specific factors.
C)pricing error.
D)a common macroeconomic factor and firm-specific factors.
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Chapter 11: The Efficient Market Hypothesis
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Sample Questions
Q1) 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)indicate that one should not randomly select a mutual fund and indicate that historical performance is not necessarily indicative of future performance.
E)indicate that historical performance is not necessarily indicative of future performance and indicate that the professional management of the fund insures above market returns.
Q2) 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.
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Chapter 12: Behavioral Finance and Technical Analysis
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Sample Questions
Q1) DeBondt and Thaler (1990) argue that the P/E effect can be explained by
A)forecasting errors.
B)earnings expectations that are too extreme.
C)earnings expectations that are not extreme enough.
D)regret avoidance.
E)forecasting errors and earnings expectations that are too extreme.
Q2) If information processing was perfect, many studies conclude that individuals would tend to make __________ decisions using that information due to __________.
A)less than fully rational; behavioral biases
B)fully rational; behavioral biases
C)less than fully rational; fundamental risk
D)fully rational; fundamental risk
E)fully rational; utility maximization
Q3) Barber and Odean (2001) report that men trade __________ frequently than women.
A)less
B)less in down markets
C)more in up markets
D)more
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Page 14
Chapter 13: Empirical Evidence on Security Returns
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Sample Questions
Q1) Petkova and Zhang (2005) examine the relationship between beta and the market risk premium and find
A)a countercyclical beta is negative in good economies and positive in bad economies. B)the beta of the HML portfolio is negative in good economies and positive in bad economies.
C)a cyclical beta is positive in good economies and negative in bad economies. D)the beta of the HML portfolio is positive in good economies and negative in bad economies.
E)a countercyclical beta and the beta of the HML portfolio are negative in good economies and positive in bad economies.
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)flatter than B)equal to C)steeper than D)one-half as much as E)None of the options
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Page 15
Chapter 14: Bond Prices and Yields
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Sample Questions
Q1) If a 9% coupon bond that pays interest every 182 days paid interest 112 days ago, the accrued interest would be
A)27.69.
B)27.35.
C)26.77.
D)27.98.
E)28.15.
Q2) SIVs raise funds by ______ and then use the proceeds to ______.
A)issuing short-term commercial paper; retire other forms of their debt
B)issuing short-term commercial paper; buy other forms of debt such as mortgages
C)issuing long-term bonds; retire other forms of their debt
D)issuing long-term bonds; buy other forms of debt such as mortgages
Q3) The bond indenture includes
A)the coupon rate of the bond.
B)the par value of the bond.
C)the maturity date of the bond.
D)All of the options
E)None of the options
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16
Chapter 15: The Term Structure of Interest Rates
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Sample Questions
Q1) 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.
Q2) An upward sloping yield curve is a(n) _______ yield curve.
A)normal
B)humped
C)inverted
D)flat
E)None of the options
Q3) The yield curve is a component of
A)the Dow Jones Industrial Average.
B)the consumer price index.
C)the index of leading economic indicators.
D)the producer price index.
E)the inflation index.
Q4) Explain what the following terms mean: spot rate, short rate, and forward rate.Which of these is(are) observable today
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Chapter 16: Managing Bond Portfolios
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Sample Questions
Q1) Some of the problems with immunization are
A)duration assumes that the yield curve is flat.
B)duration assumes that if shifts in the yield curve occur, these shifts are parallel.
C)immunization is valid for one interest rate change only.
D)durations and horizon dates change by the same amounts with the passage of time.
E)immunization is valid for one interest rate change only, duration assumes that the yield curve is flat, and that if shifts in the yield curve occur, these shifts are parallel.
Q2) Holding other factors constant, the interest-rate risk of a coupon bond is higher when the bond's
A)term to maturity is lower.
B)coupon rate is lower.
C)yield to maturity is higher.
D)term to maturity is lower and yield to maturity is higher.
E)None of the options
Q3) Discuss rate anticipation swaps as a bond portfolio management strategy.
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Chapter 17: Macroeconomic and Industry Analysis
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Sample Questions
Q1) Two firms, C and D, both produce coat hangers.The price of coat hangers is $1.20 each.Firm C has total fixed costs of $750,000 and variable costs of 30¢ per coat hanger.Firm D has total fixed costs of $400,000 and variable costs of 50¢ per coat hanger.The corporate tax rate is 40%.If the economy is strong, each firm will sell 2,000,000 coat hangers.If the economy enters a recession, each firm will sell 1,400,000 coat hangers. If the economy is strong, the tax of firm C will be
A)$420,000.
B)$750,000.
C)$510,000.
D)$204,000.
Q2) Supply-side economists wishing to stimulate the economy are most likely to recommend
A)a decrease in the money supply.
B)a decrease in production output.
C)an increase in the real interest rate.
D)a decrease in the tax rate.
Q3) Discuss the tools of the U.S.government's "demand-side" policy.Include in your discussion of these tools the relative advantages and disadvantages of each in terms of the effect of the use of these tools on the economy.
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Page 19
Chapter 18: Equity Valuation Models
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Sample Questions
Q1) Old Quartz Gold Mining Company is expected to pay a dividend of $8 in the coming year.Dividends are expected to decline at the rate of 2% per year.The risk-free rate of return is 6% and the expected return on the market portfolio is 14%.The stock of Old Quartz Gold Mining Company has a beta of -0.25.The intrinsic value of the stock is A)$80.00.
B)$133.33.
C)$200.00.
D)$400.00.
Q2) Low Tech Chip Company is expected to have EPS of $2.50 in the coming year.The expected ROE is 14%.An appropriate required return on the stock is 11%.If the firm has a dividend payout ratio of 40%, the intrinsic value of the stock should be
A)$22.73.
B)$27.50.
C)$28.57.
D)$38.46.
Q3) The price/earnings ratio, or multiplier approach, may be used for stock valuation.Explain this process and describe how the "multiplier" varies from the one available in the stock market quotation pages.
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Page 20
Chapter 19: Financial Statement Analysis
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Sample Questions
Q1) The P/E ratio that is based on a firm's financial statements and reported in the newspaper stock listings is different from the P/E ratio derived from the dividend discount model (DDM) because
A)the DDM uses a different price in the numerator.
B)the DDM uses different earnings measures in the denominator.
C)the prices reported are not accurate.
D)the people who construct the ratio from financial statements have inside information.
E)They are not different-this is a "trick" question.
Q2) A firm has an ROE of -2%, a debt/equity ratio of 1.0, a tax rate of 0%, and an interest rate on debt of 10%.The firm's ROA is A)2%.
B)4%.
C)6%.
D)8%.
E)None of the options
Q3) In an increasingly globalized investment environment, comparability problems become even greater.Discuss some of the problems for the investor who wishes to have an internationally diversified portfolio.
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Chapter 20: Options Markets: Introduction
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Sample Questions
Q1) You purchase one IBM March 200 put contract for a put premium of $6.What is the maximum profit that you could gain from this strategy
A)$20,000
B)$20,600
C)$19,400
D)$19,000
Q2) A call option on a stock is said to be out of 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.
Q3) A call option on a stock is said to be in 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.
Q4) Describe the protective put.What are the advantages of such a strategy
Q5) List three types of exotic options and describe their characteristics.
Page 22
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Chapter 21: Option Valuation
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Sample Questions
Q1) Before expiration, the time value of an at-the-money call option is always
A)positive.
B)equal to zero.
C)negative.
D)equal to the stock price minus the exercise price.
E)None of the options
Q2) In volatile markets, dynamic hedging may be difficult to implement because
A)prices move too quickly for effective rebalancing.
B)as volatility increases, historical deltas are too low.
C)price quotes may be delayed so that correct hedge ratios cannot be computed.
D)volatile markets may cause trading halts.
E)All of the options
Q3) Portfolio A consists of 600 shares of stock and 300 calls on that stock.Portfolio B consists of 685 shares of stock.The call delta is 0.3.Which portfolio has a higher dollar exposure to a change in stock price
A)Portfolio B
B)Portfolio A
C)The two portfolios have the same exposure.
D)Portfolio A if the stock price increases, and portfolio B if it decreases
E)Portfolio B if the stock price increases, and portfolio A if it decreases
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Chapter 22: Futures Markets
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Sample Questions
Q1) Foreign currency futures contracts are actively traded on the
A)Japanese yen.
B)Australian dollar.
C)Brazilian real.
D)Japanese yen and Australian dollar.
E)All of the options
Q2) Which of the following is true about profits from futures contracts
A)The person with the long position gets to decide whether to exercise the futures contract and will only do so if there is a profit to be made.
B)It is possible for both the holder of the long position and the holder of the short position to earn a profit.
C)The clearinghouse makes most of the profit.
D)The amount that the holder of the long position gains must equal the amount that the holder of the short position loses.
E)Holders of short positions can recognize profits by making delivery early.
Q3) Distinguish between the short and long positions in futures transactions.
Q4) Discuss marking to market and margin accounts in the futures market.
Q5) Describe the differences between futures and forward contracts.
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Chapter 23: Futures, Swaps, and Risk Management
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Q1) If you sold S&P 500 Index futures contract at a price of 950 and closed your position when the index futures was 947, you incurred:
A)a loss of $1,500.
B)a gain of $1,500.
C)a loss of $750.
D)a gain of $750.
E)None of the options
Q2) Which one of the following stock index futures has a multiplier of 10 euros times the index
A)CAC 40
B)Hang Seng
C)Nikkei
D)DAX-30
E)CAC 40 and Hang Seng
Q3) Commodity futures pricing
A)must be related to spot prices.
B)includes cost of carry.
C)converges to spot prices at maturity.
D)All of these
E)None of the options
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Chapter 24: Portfolio Performance Evaluation
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Q1) Suppose you buy 100 shares of Abolishing Dividend Corporation at the beginning of year 1 for $80.Abolishing Dividend Corporation pays no dividends.The stock price at the end of year 1 is $100, $120 at the end of year 2, and $150 at the end of year 3.The stock price declines to $100 at the end of year 4, and you sell your 100 shares.For the four years, your geometric average return is
A)0.0%.
B)1.0%.
C)5.7%.
D)9.2%.
E)34.5%.
Q2) Studies of style analysis have found that ________ of fund returns can be explained by asset allocation alone.
A)between 50% and 70%
B)less than 10%
C)between 40 and 50%
D)between 75% and 90%
E)over 90%
Q3) Discuss, in general, the performance attribution procedures.
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Chapter 25: International Diversification
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Q1) The emerging market country with the lowest average U.S.dollar equity-market excess return between 2002-2011 is
A)China.
B)Russia.
C)Poland.
D)Taiwan.
Q2) WEBS portfolios
A)are passively managed.
B)are shares that can be sold by investors.
C)are free from brokerage commissions.
D)are passively managed and are shares that can be sold by investors.
E)All of the options.
Q3) In 2011, the U.S.equity market represented __________ of the world equity market.
A)19%
B)60%
C)43%
D)36%
Q4) Discuss performance evaluation of international portfolio managers in terms of potential sources of abnormal returns.
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Chapter 26: Hedge Funds
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Q1) Explain the five major differences between hedge funds and mutual funds.
Q2) A bet on particular mispricing across two or more securities, with extraneous sources of risk such as general market exposure hedged away, is a
A)pure play.
B)relative play.
C)long shot.
D)sure thing.
E)relative play and sure thing.
Q3) Assume that you manage a $3 million portfolio that pays no dividends and has a beta of 1.45 and an alpha of 1.5% per month.Also, assume that the risk-free rate is 0.025% (per month) and the S&P 500 is at 1,220.If you expect the market to fall within the next 30 days you can hedge your portfolio by ______ S&P 500 futures contracts (the futures contract has a multiplier of $250).
A)selling 1
B)selling 14
C)buying 1
D)buying 14
E)selling 6
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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 3%.The expected return on the market index is 10%.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)98.4%.
C)51.3%.
D)100.0%.
Q2) Consider the Treynor-Black model.The alpha of an active portfolio is 1%.The expected return on the market index is 11%.The variance of return on the market portfolio is 6%.The nonsystematic variance of the active portfolio is 2%.The risk-free rate of return is 4%.The beta of the active portfolio is 1.1.The optimal proportion to invest in the active portfolio is A)45%.
B)25%.
C)50%.
D)100%.
Q3) Discuss the Treynor-Black model.
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Chapter 28: Investment Policy and the Framework of the
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Source URL: https://quizplus.com/quiz/52445
Sample Questions
Q1) Alex Goh is 39 years old and has accumulated $128,000 in his self-directed defined contribution pension plan.Each year he contributes $2,500 to the plan and his employer contributes an equal amount.Alex thinks he will retire at age 62 and figures he will live to age 86.The plan allows for two types of investments.One offers a 4% risk-free real rate of return.The other offers an expected return of 11% and has a standard deviation of 37%.Alex now has 25% of his money in the risk-free investment and 75% in the risky investment.He plans to continue saving at the same rate and keep the same proportions invested in each of the investments.His salary will grow at the same rate as inflation. How much can Alex be sure of having in the safe account at retirement
A)$132,473
B)$162,557
C)$178,943
D)$189,211
E)$124,643
Q2) Discuss investments as a hedge against inflation
Q3) Discuss the relationships between investor objectives, constraints, and policies.
Q4) Discuss the tax status of the major categories of institutional investors described in the text.
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