Multiple Choice Questions
1. Testing many different trading rules until you find one that would have worked in the past
is called _______.
A. data mining
B. perceived patterning
C. pattern searching
D. behavioral analysis
Answer: A. data mining
2. Models of financial markets that emphasize psychological factors affecting investor
behavior are called _______.
A. data mining
B. fundamental analysis
C. charting
D. behavioral finance
Answer: D. behavioral finance
3. The trin statistic is a ______ indicator.
A. sentiment
B. flow of funds
C. market structure
D. fundamental
Answer: A. sentiment
4. The put/call ratio is a ______ indicator.
A. sentiment
B. flow of funds
C. market structure
D. fundamental
Answer: A. sentiment
5. Relative strength is ______ indicator.
A. a fundamental
B. an economic
C. a technical
D. an international
Answer: C. a technical
6. Short interest is a ______ indicator.
A. sentiment
B. flow of funds
C. market structure
D. fundamental
Answer: A. sentiment
7. Moving averages are ______ indicators.
A. sentiment
B. flow of funds
C. trend
D. fundamental
Answer: C. trend
8. Market breadth is a ______ indicator.
A. sentiment
B. flow of funds
C. technical
D. fundamental
Answer: C. technical
9. The cumulative tally of the number of advancing stocks minus declining stocks is called the
______________.
A. market breadth
B. market volume
C. trin ratio
D. relative strength ratio
Answer: A. market breadth
10. A high amount of short interest is typically considered as a __________ signal, and
contrarians may consider it as a _________ signal.
A. bearish; bullish
B. bullish; bearish
C. bearish; false
D. bullish; false
Answer: A. bearish; bullish
11. Technical analysis focuses on _____________________.
A. finding opportunities for risk-free investing
B. finding repeating trends and patterns in prices
C. changing prospects for earnings growth of particular firms or industries
D. forecasting technical regulatory changes
Answer: B. finding repeating trends and patterns in prices
12. Behavioralists point out that even if market prices are ____________, there may be
_______________.
A. distorted; limited arbitrage opportunities
B. distorted; fundamental efficiency
C. allocationally efficient; limitless arbitrage opportunities
D. distorted; allocational efficiency
Answer: A. distorted; limited arbitrage opportunities
13. According to market technicians, it is time to sell stock in a head-and-shoulders formation
when ___________.
A. the price index pierces the left shoulder
B. the price index pierces the right shoulder
C. the price index pierces the head
D. none of these options takes place
Answer: B. the price index pierces the right shoulder
14. When a stock price breaks through the moving average from below, this is considered to
be ______.
A. the starting point for a new moving average
B. a bearish signal
C. a bullish signal
D. none of these options
Answer: C. a bullish signal
15. When the stock price falls below a moving average, a possible conclusion is that _____.
A. market momentum has become positive
B. market momentum has become negative
C. there is no regular pattern for this stock's market momentum
D. professional analysts' opinions are invalid until the stock price rises again
Answer: B. market momentum has become negative
16. Following a period of falling prices, the moving average will _____.
A. be below the current price
B. be above the current price
C. be equal to the current price
D. become more volatile than it had been before prices fell
Answer: B. be above the current price
17. A moving average of stock prices _________________.
A. always lies above the most recent price
B. always lies below the most recent price
C. is less volatile than the actual prices
D. is more volatile than the actual prices
Answer: C. is less volatile than the actual prices
18. When the housing bubble burst in 2007, it set off the worst financial crisis _____.
A. in 25 years.
B. in 40 years.
C. in 50 years.
D. in 75 years.
Answer: D. in 75 years.
19. A support level is ___________________.
A. a level beyond which the market is unlikely to rise
B. a level below which the market is unlikely to fall
C. an equilibrium price level justified by characteristics such as earnings and cash flows
D. the peak of a market wave or cycle
Answer: B. a level below which the market is unlikely to fall
20. According to Kondratieff, the macro economy moves in a series of waves that recur at
intervals of approximately _________________.
A. 18 months
B. 4 years
C. 8 years
D. 50 years
Answer: D. 50 years
21. According to Elliot's wave theory, stock market behavior can be explained as
_________________.
A. a series of medium-term wave cycles with no short-term trend
B. a series of long-term wave cycles with no short-term trend
C. a series of superimposed long-term and short-term wave cycles
D. sine and cosine functions
Answer: C. a series of superimposed long-term and short-term wave cycles
22. Conventional finance theory assumes investors are _______, and behavioral finance
assumes investors are _______.
A. rational; irrational
B. irrational; rational
C. greedy; philanthropic
D. philanthropic; greedy
Answer: A. rational; irrational
23. The only way for behavioral patterns to persist in prices is if ______________.
A. markets are not weak-form efficient
B. there are limits to arbitrage activity
C. there are no significant trading costs
D. market psychology is inconsistent over time
Answer: B. there are limits to arbitrage activity
24. In the context of a point and figure chart, a horizontal band of Xs and Os is a
_____________.
A. buy signal
B. sell signal
C. congestion area
D. trend reversal
Answer: C. congestion area
25. Even though indexing is growing in popularity, only about _____ of equity in the mutual
fund industry is held in indexed funds. This may be a sign that investors and managers
__________.
A. 5%; are excessively conservative
B. 15%; overestimate their ability
C. 20%; suffer from framing biases
D. 25%; engage in mental accounting
Answer: B. 15%; overestimate their ability
26. If investors are too slow to update their beliefs about a stock's future performance when
new evidence arises, they are exhibiting _______.
A. representativeness bias
B. framing error
C. conservatism
D. memory bias
Answer: C. conservatism
27. If investors overweight recent performance in forecasting the future, they are exhibiting
_______.
A. representativeness bias
B. framing error
C. memory bias
D. overconfidence
Answer: A. representativeness bias
28. Trading activity and average returns in brokerage accounts tend to be _________.
A. uncorrelated
B. negatively correlated
C. positively correlated
D. positively correlated for women and negatively correlated for men
Answer: B. negatively correlated
29. 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
_____________.
A. mental accounting
B. framing bias
C. conservatism
D. representativeness bias
Answer: D. representativeness bias
30. Which of the following is not a sentiment indicator?
A. Confidence index
B. Short interest
C. Odd-lot trading
D. Put/call ratio
Answer: C. Odd-lot trading
31. Which of the following is considered a sentiment indicator?
A. A 200-day moving average
B. Short interest
C. Credit balances in brokerage accounts
D. Relative strength
Answer: B. Short interest
32. 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 ___________.
A. overconfidence
B. representativeness
C. forecast errors
D. mental accounting
Answer: D. mental accounting
33. Which of the following analysts focus more on past price movements of a firm's stock
than on the underlying determinants of its future profitability?
A. Credit analysts
B. Fundamental analysts
C. Systems analysts
D. Technical analysts
Answer: D. Technical analysts
34. A trin ratio of greater than 1 is considered a __________.
A. bearish signal
B. bullish signal
C. bearish signal by some technical analysts and a bullish signal by other technical analysts
D. trend reversal signal
Answer: A. bearish signal
35. Contrarian investors consider a high put/call ratio a __________.
A. bearish signal
B. bullish signal
C. trend confirmation signal
D. signal to enter the options market
Answer: B. bullish signal
36. The ratio of the average yield on 10 top-rated corporate bonds to the average yield on 10
intermediate-grade bonds is called the __________.
A. bond price index
B. confidence index
C. relative strength index
D. trin ratio
Answer: B. confidence index
37. 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
___________.
A. overconfidence
B. representativeness
C. forecast errors
D. mental accounting
Answer: D. mental accounting
38. 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,
_________________________________________.
A. Bill will have more regret over the loss than Shelly
B. Shelly will have more regret over the loss than Bill
C. Bill and Shelly will have equal regret over their losses
D. Bill's and Shelly's risk aversion will increase in the future
Answer: B. Shelly will have more regret over the loss than Bill
39. The most common measure of __________ is the spread between the number of stocks
that advance in price and the number of stocks that decline in price.
A. market breadth
B. market volume
C. odd-lot trading
D. short interest
Answer: A. market breadth
40. 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 __________________.
A. regret avoidance
B. overconfidence
C. that she has a diminishing marginal utility of wealth
D. prospect theory loss aversion
Answer: C. that she has a diminishing marginal utility of wealth
41. When the market breaks through the moving average line from below, a technical analyst
would probably suggest that it is a good time to ___________.
A. buy the stock
B. hold the stock
C. sell the stock
D. short the stock
Answer: A. buy the stock
42. If you believed in the reversal effect, you should __________.
A. buy bonds this period if you held stocks last period
B. buy stocks this period that performed poorly last period
C. buy stocks this period that performed well last period
D. do nothing if you held the stock last period
Answer: B. buy stocks this period that performed poorly last period
43. According to technical analysts, a shift in market fundamentals will __________.
A. be reflected in stock prices immediately
B. lead to a gradual price change that can be recognized as a trend
C. lead to high volatility in stock market prices
D. leave prices unchanged
Answer: B. lead to a gradual price change that can be recognized as a trend
44. According to market technicians, a trin statistic of less than 1 is considered a __________.
A. bearish signal
B. bullish signal
C. volume decline
D. signal reversal
Answer: B. bullish signal
45. It is difficult to test the Kondratieff wave theory because _________.
A. it applies to only Russian stocks
B. its main proponent found contrary research results
C. only two independent data points are generated each century
D. the stock market is too volatile to generate smooth waves
Answer: C. only two independent data points are generated each century
46. A _________ is a value above which it is difficult for the market to rise.
A. book value
B. resistance level
C. support level
D. confidence level
Answer: B. resistance level
47. _____________ is a tool that can help identify the direction of a stock's price.
A. Prospect theory
B. Framing
C. A moving average
D. Conservatism
Answer: C. A moving average
48. 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
B. regret avoidance
C. mental accounting
D. framing bias
Answer: A. loss aversion
49. In technical analysis, __________ is a value below which the market is relatively unlikely
to fall.
A. book value
B. resistance level
C. support level
D. the Dow line
Answer: C. support level
50. A possible limit on arbitrage activity that may allow behavioral biases to persist is
_______.
A. technical trends in prices
B. momentum effects
C. fundamental risk
D. trend reversals
Answer: C. fundamental risk
51. If you are not a contrarian, you consider a high put/call ratio to be a __________.
A. bearish signal
B. bullish signal
C. trend confirmation signal
D. signal to enter the options market
Answer: A. bearish signal
52. On day 1, the stock price of Ford was $12 and the automotive stock index was 127. On
day 2, the stock price of Ford was $15 and the automotive stock index was 139. Consider the
ratio of Ford to the automotive stock index at day 1 and day 2. Ford is __________ the
automotive industry, and technical analysts who follow relative strength would advise
__________ the stock.
A. outperforming; buying
B. outperforming; selling
C. underperforming; buying
D. underperforming; selling
Answer: A. outperforming; buying
Since the ratio is increasing, the relative strength of Ford is improving; it is outperforming and
should be bought.
53. At the end of July, the average yields on 10 top-rated corporate bonds and 10
intermediate-grade bonds were 7.65% and 8.42%, respectively. At the end of August, the
average yields on 10 top-rated corporate bonds and 10 intermediate-grade bonds were 6% and
6.71%, respectively. The confidence index _________ during August, and bond technical
analysts are likely to be ________.
A. increased; bullish
B. increased; bearish
C. decreased; bullish
D. decreased; bearish
Answer: D. decreased; bearish
Since the confidence index decreased, this would be considered a bearish signal.
54. On a particular day, there were 890 stocks that advanced on the NYSE and 723 that
declined. The volume in advancing issues was 80,846,000, and the volume in declining issues
was 70,397,000. The common measure of market breadth is __________.
A. -10,449,000
B. -167
C. 167
D. 10,449,000
Answer: C. 167
Market breadth = 890 - 723 = 167
55. On a particular day, there were 920 stocks that advanced on the NYSE and 723 that
declined. The volume in advancing issues was 80,846,000, and the volume in declining issues
was 70,397,000. The trin ratio is __________, and technical analysts are likely to be
__________.
A. .90; bullish
B. .90; bearish
C. 1.11; bullish
D. 1.11; bearish
Answer: D. 1.11; bearish
56. An accumulation of cash by mutual funds may be viewed by technical traders as a
__________ indicator.
A. bullish
B. neutral
C. bearish
D. trend reversal
Answer: C. bearish
57. A point and figure chart:
I. Gives a sell signal when the stock price penetrates previous lows
II. Tracks significant upward or downward movements
III. Has no time dimension
IV. Indicates congestion areas
A. I and II only
B. II and III only
C. I, III, and IV only
D. I, II, III, and IV
Answer: D. I, II, III, and IV
58. When technical analysts say a stock has good "relative strength," they mean that in the
recent past __________.
A. it has performed well compared to its closest competitors
B. it has exceeded its own historical high
C. trading volume in the stock has exceeded the normal trading volume
D. it has outperformed the market index
Answer: D. it has outperformed the market index
59. Technical traders view mutual fund investors as _________ market timers.
A. excellent
B. frequent
C. neutral
D. poor
Answer: D. poor
60. An important assumption underlying the use of technical analysis techniques is that
___________________.
A. security prices adjust rapidly to new information
B. security prices adjust gradually to new information
C. security dealers will provide enough liquidity to keep price changes relatively small
D. all investors have immediate and costless access to information
Answer: B. security prices adjust gradually to new information
61. If the put/call ratio increases, market contrarians may interpret this as what kind of signal?
A. Buy signal
B. Sell signal
C. Hold signal
D. This is not interpreted as a signal
Answer: A. Buy signal
62. The tendency of investors to hold on to losing investments is called the ________.
A. overweighting effect
B. head-in-the-sand effect
C. disposition effect
D. prospector effect
Answer: C. disposition effect
63. Which one of the following best describes fundamental risk?
A. A stock is overpriced, but your fund does not allow you to engage in short sales.
B. Your models indicate a stock is mispriced, but you are not sure if this is a real profit
opportunity or a model input error.
C. You buy a stock that you believe is underpriced, and the underpricing persists for a long
time, hurting your short-term results.
D. A stock is trading in two different markets at two different prices.
Answer: C. You buy a stock that you believe is underpriced, and the underpricing persists for
a long time, hurting your short-term results.
64.
The trin on day 2 is ___.
A. .72
B. 1.04
C. .92
D. .55
Answer: A. .72
65.
The confidence index on day 1 is _____.
A. .82
B. .89
C. .92
D. 1.09
Answer: C. .92
Confidence index on day 1 = 6.8/7.4 = .92
66.
The breadth on day 3 is _______.
A. -70
B. 10
C. 90
D. 170
Answer: D. 170
Breadth on day 3 = 960 - 790 = 170
67.
The cumulative breadth for the first 2 days is ___.
A. -240
B. -50
C. 110
D. 250
Answer: A. -240
Cumulative breadth, days 1 and 2 = (870 - 880) + (760 - 990) = -240
68.
Cumulative breadth for the 4 days is ___, which is ___.
A. -140; bullish
B. -140; bearish
C. -300; bullish
D. -300; bearish
Answer: B. -140; bearish
Cumulative breadth, days 1-4
= (870 - 880) + (760 - 990) + (960 - 790) + (840 - 910) = -140
Negative cumulative breadth is bearish.
69.
From day 1 to day 4, the trin has ___ and is ___.
A. increased; bullish
B. increased; bearish
C. decreased; bullish
D. decreased; bearish
Answer: C. decreased; bullish
The trin has decreased, and this is bullish.
70.
From day 1 to day 4, the confidence index has _____. This is _____.
A. increased; bullish
B. decreased; bullish
C. increased; bearish
D. decreased; bearish
Answer: D. decreased; bearish
Confidence index, day 1 = 6.8/7.4 = .92
Confidence index, day 4 = 6.6/7.6 = .87
The CI is decreasing; this is bearish.
71. 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.
A. I only
B. II only
C. I and III only
D. I, II, and III
Answer: D. I, II, and III
72. A major problem with technical trading strategies is that ________.
A. it is very difficult to identify a true trend before the fact
B. it is very difficult to identify the correct trend after the fact
C. it is so easy to identify trends that all investors quickly do so
D. Kondratieff showed that you can't identify trends without 48 to 60 years of data
Answer: A. it is very difficult to identify a true trend before the fact
73. The Elliott wave theory gives a buy signal when you can identify a primary bull trend by
identifying _________.
A. when the long-term direction of the market is positive
B. when the long-term direction of the market is negative
C. when the long-term direction of the market is stable
D. good stocks without regard to the long-term direction of the market
Answer: A. when the long-term direction of the market is positive
74. In 1997 CSX successfully purchased a significant share of Conrail. Immediately after the
first offer was announced and the acquisition eventually consummated, the price of CSX fell
below preacquisition levels and took many years to recover. This may be an example of
________________.
A. loss aversion
B. mental accounting
C. overreaction
D. managerial overconfidence
Answer: D. managerial overconfidence
75. An investor has her money segregated into checking, savings, and investments. The
allocation among the categories is subjective, yet the investor spends freely from the checking
account and not the others. This behavior can be explained as _______________.
A. loss aversion
B. mental accounting
C. overreaction
D. winner's curse
Answer: B. mental accounting
76.
Identify the resistance-level stock price.
A. $40
B. $42
C. $44
D. $46
Answer: D. $46
77.
Identify the support level stock price.
A. $40
B. $42
C. $44
D. $46
Answer: A. $40
78. 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
B. Loss aversion
C. Mental accounting
D. Calendar bias
Answer: A. Overconfidence
79. During a period when prices have been rising, the _________ will be _______ the current
price.
A. relative strength index; declining with
B. relative strength index; declining faster than
C. moving average; above
D. moving average; below
Answer: D. moving average; below
80. An investor purchases shares of an index fund. The investor could take on the same level
of risk by taking out a loan and purchasing a higher-risk specialty fund. The Sharpe ratio on
this complete portfolio is higher than her existing investment. What behavioral concept
prevents the investor from taking out the loan and investing in the index fund?
A. Framing bias
B. Excessive volatility
C. Loss aversion
D. Mental accounting
Answer: C. Loss aversion
81. The price of a stock fluctuates between $43 and $60. If the time frame referenced
encompasses the primary trend, the $43 price may be considered the ___________.
A. intermediate trend level
B. minor trend level
C. resistance level
D. support level
Answer: D. support level
82.
The moving average generates buy signal(s) _____.
A. on days 3, 11, and 15
B. on days 2 and 16
C. on days 5, 9, and 13
D. on no days
Answer: B. on days 2 and 16
83.
The moving average generates sell signals _____.
A. on days 3, 11, and 15
B. on days 7, 15, and 18
C. on days 5, 9, and 13
D. on day 16
Answer: B. on days 7, 15, and 18
84. The price of a stock fluctuates over a period of 10 days. The movement of the stock price
below the 10-day minimum price of $25 triggers a rash of selling. The $25 price might now
be considered the _______________.
A. congestion area
B. penetration point
C. resistance level
D. support level
Answer: B. penetration point
85. Trend analysts who follow bonds are most likely to monitor the ____________.
A. confidence index
B. odd-lot trading
C. short interest
D. trin statistic
Answer: A. confidence index
86. You find that the confidence index is down, the market breadth is up, and the trin ratio is
down. In total, how many bullish signs do you have?
A. 0
B. 1
C. 2
D. 3
Answer: C. 2
87. You find that the trin ratio is up, the market breadth is down, and the market has closed
below its 50-day moving average. In total, how many bearish signs do you have?
A. 0
B. 1
C. 2
D. 3
Answer: D. 3
Test Bank for Essentials of Investments
Zvi Bodie, Alex Kane, Alan Marcus
9780078034695, 9789389957877, 9781264140251, 9781260316148, 9780073382401, 9780078034695, 9781260013924, 9780077835422
