Q&A Hero

Q: Which one of the following is correct concerning a head and shoulders top pattern? A. The outside of the right shoulder is a bullish signal. B. The shoulders are higher than the head. C. The left shoulder must be higher than the right shoulder, but lower than the head. D. A piercing of the neckline is a reversal signal. E. The trendline must be relatively flat throughout the pattern.

Q: According to technical analysts, pricing patterns such as the head and shoulders are indicators of potential: A. reversals from the main trend line. B. upcoming corrections which will return the market to the current main trend line. C. increasing strength for the main trend line. D. decreasing market activity. E. increasing market activity.

Q: Which one of the following statements is correct concerning an open-high-low-close bar chart?A. The prices indicated by the two horizontal lines are the maximum and minimum daily prices.B. The upper trendline indicates the support level.C. If the overall price movement is downward, the lower trendline is called the channel line.D. If the overall price movement is upward, the upper trendline is called the head line.E. The final price of the day is indicated by a horizontal line to the left side of the vertical line.

Q: A "block trade" is a trade in excess of how many shares? A. 1,000 B. 5,000 C. 10,000 D. 50,000 E. 100,000

Q: For the past year, a particular stock has a relative strength value of 1.03 as compared to the market. This means that the stock: A. increased in value 3 percent more than the market for the day. B. has 3 percent more risk than the average security. C. outperformed the market for the period. D. had 3 percent higher trading volume on a growth basis as compared to the market. E. is selling for 103 percent of the market value per share.

Q: Which one of the following Arms values is the most bearish? A. .28 B. .45 C. .88 D. 1.03 E. 1.26

Q: If the closing tick of the day is +32, this means that the: A. DJIA ended the day up 32 basis points. B. discount rate at the end of the day was 3.20 percent. C. number of stocks closing on an uptick was 32. D. number of stocks closing on an uptick exceeded those closing on a downtick by 32. E. number of stocks closing on an uptick was 32 more than on the prior trading day.

Q: Which of the following are bullish indicators? I. flat advance/decline line II. breakout of a support level III. Arms ratio of .38 IV. heavy advancing volume A. I and II only B. III and IV only C. I and III only D. II and III only E. I and IV only

Q: Which one of the following advance/decline lines is the most bullish signal? A. relatively flat B. slightly upward sloping C. slightly downward sloping D. steeply upward sloping E. steeply downward sloping

Q: You recently heard a news announcer state that the market is approaching its support level. Which one of the following is the best interpretation of that statement? A. The market is approaching the lowest level that is reasonably expected. B. The federal government will step in to help the market retain its value should the market slip much further. C. The market is almost at a peak and is expected to start declining in the near future. D. The market is almost to the point where trading will be suspended temporarily. E. The market is almost equivalent in value to the international markets so price stabilization is expected.

Q: According to technical analysis, which one of the following is best seen as a buying opportunity? A. a breakout of a resistance level B. an MSI value of 0.1 or less C. a downward sloping advance/decline line D. a flat advance/decline line E. top of Elliott wave 5

Q: If you are a proponent of the Elliott wave theory, you are most apt to do which one of the following? A. sell on wave 2 B. sell on wave 3 C. buy on wave A D. buy on wave 2 E. buy on wave 5

Q: According to Dow theory, which one of the following is the primary means of eliminating secondary market trends? A. corrections B. confirmations C. continuations D. conversions E. coordinated trades

Q: What is the primary purpose of Dow theory? A. to measure the level of investor optimism and pessimism B. to analyze daily market movements C. to identify and measure market waves D. to eliminate market corrections E. to signal changes in the market's primary direction

Q: Which one of the following indicates the long-run direction of the market according to Dow Theory? A. daily fluctuations B. secondary reaction C. monthly changes D. primary trend E. tertiary trend

Q: Which one of the following market sentiment index (MSI) values indicates that all polled investors were bearish? A. -1 B. 0 C. 1 D. 50 E. 100

Q: Which one of the following market sentiment index (MSI) values represents the best buying opportunity? A. 0.16 B. 0.29 C. 0.48 D. 0.61 E. 0.82

Q: Which of the following are impediments to the correction of a security's mispricing? I. sentiment-based risk II. implementation costs III. firm-specific risk IV. noise trader risk A. II only B. II and IV only C. I, III, and IV only D. II, III, and IV only E. I, II, III, and IV

Q: Which one of the following is a characteristic of the self-attribution bias? A. believing what you wish to believe B. placing too much weight on information which you can gather easily C. believing that other investors agree with your thinking D. taking credit for the wins and blaming the losses on bad luck E. believing that your recent performance is an indication of your future performance

Q: According to the theory of recency bias, investors tend to believe the financial markets will: A. gravitate to their long-term average rates of return. B. react over the next year in direct opposition to the performance of the prior year. C. have a maximum of three years of positive annual returns before declining somewhat. D. continue to perform as they have over the past couple of years. E. tend to reverse direction at least every five years.

Q: Four of the last five stocks your investment adviser recommended have outperformed the market. Thus, you believe that if you continue to follow her advice, that 80 percent of your investments will outperform the market over the long term. This belief is based on the: A. gambler's fallacy. B. law of small numbers. C. law of large numbers. D. clustering illusion. E. positive performance illusion.

Q: Tricia has lost money on a particular stock for the past three years. Thus, she believes the stock will have a high positive rate of return this year because earning a good return is long overdue. This assumption is best described as the: A. law of small numbers. B. house money effect. C. gambler's fallacy. D. false consensus. E. recency bias.

Q: The increased cash flows into mutual funds that have recently had superior returns is most associated with which one of the following characteristics? A. overconfidence B. excess trading C. clustering illusion D. diversification E. risk aversion

Q: Which one of the following statements appears to be correct based on current research? A. Single, female investors tend to earn lower returns than their male counterparts. B. Overconfidence tends to result in lower returns. C. Excessive trading tends to increase returns. D. Men tend to trade less frequently than women. E. Investors with higher incomes tend to be more risk-adverse than other investors.

Q: Investors who tend to invest too heavily in the securities issued by their employer suffer from the condition known as: A. overconfidence. B. loyalty adherence. C. status quo. D. local adhesion. E. familiarity.

Q: Ted constantly ignores the effects of inflation on money. Ted is suffering from which one of the following? A. endowment effect B. money illusion C. regret aversion D. myopic loss aversion E. sunk cost fallacy

Q: Yesterday, Krista stated that Overland stock was only worth $12 a share and since it was selling for $15 a share, she declared it overpriced and refused to buy any shares. This morning, she learned that she is inheriting 3,500 shares of Overland stock from her grandmother. Suddenly, she is saying that Overland stock is a great buy at $15 and is probably worth at least $17 a share. This is an example of which one of the following? A. endowment effect B. money illusion C. regret aversion D. myopic loss aversion E. sunk cost fallacy

Q: The tendency to overvalue an item because you own it is referred to as which one of the following? A. endowment effect B. money illusion C. regret aversion D. myopic loss aversion E. sunk cost fallacy

Q: Peter hesitates when it comes to picking an individual stock to purchase as he feels that he will later realize that a different stock would have been a better investment. Peter is suffering from: A. money illusion. B. frame dependence. C. regret aversion. D. risk-taking. E. mental accounting.

Q: According to the concept of house money, individual investors are most apt to do which one of the following? A. take more risks with their initial investment than with the gains on that investment B. value money differently depending upon its source C. treat paper profits the same as initial cash investments D. apply the same level of risk-aversion to all investments E. place high value on paper profits but low value on paper losses

Q: According to the concept of loss aversion, individual investors are most apt to do which one of the following? A. sell stocks with gains more frequently than stocks with losses B. sell stocks with losses more frequently than stocks with gains C. hold stocks with gains and sell stocks with losses D. sell all stocks after a pre-determined length of time E. hold all stocks unless they decline more than ten percent in value

Q: Which one of the following is an example of mental accounting? A. associating a security's gains or losses based on its purchase price B. calculating the gain or loss on a security on a daily basis C. computing the amount of tax due on the gain from a stock sale D. considering the gain realized when a stock pays a dividend E. comparing the gains and losses on a portfolio to those of the overall market

Q: Investors tend to make better decisions when looking at a decision: A. based on historical performance. B. only in respect to potential losses. C. based on individual securities. D. in broad terms. E. based on historical costs.

Q: Phil is a contestant on a game show. At this point in the game, he can either accept $500 or spin a wheel for a chance of winning $100,000. Which type of behavior is he displaying if he spins the wheel? A. forward-looking B. risk-adverse C. prospective D. introspective E. risk-taking

Q: Which one of the following statements is correct regarding prospect theory?A. Average investors tend to lose more money than they earn from investing.B. Typical investors feel that losing $1 is twice as painful as the pleasure derived from making $1.C. Investors should focus on gains and losses in individual securities rather than their portfolio's total value.D. Typical investors tend to react irrationally only when focusing on total portfolio value.E. Average investors tend to prefer higher levels of risk.

Q: Prospect theory is based on the concept that investors are:A. always risk takers.B. risk-adverse regarding losses.C. risk-taking regarding losses.D. always risk-averse.E. neutral regarding risk.

Q: The measure of performance of one investment compared to another investment is called the: A. wave height. B. relative arm. C. relative strength. D. bar height. E. support factor.

Q: The maximum price at which a security is expected to trade is called the: A. fourth wave. B. stop limit. C. relative point. D. resistance level. E. support level.

Q: The minimum price at which a security is expected to trade is called the: A. stop value. B. par value. C. Elliott wave price. D. resistance level. E. support level.

Q: According to Elliott wave theory, market predictions should be based on which one of the following? A. eight-week repetitive trading patterns B. the tidal waves created by the gravitational pull of the moon C. series of historical market price swings D. an industry's historical rate of growth E. market fads and trends

Q: Dow theory is a method of predicting future market movements based on which of the following Dow Jones averages? I. industrial II. transportation III. utilities IV. commodities A. I and II only B. II and III only C. III and IV only D. I and IV only E. I, II, and III only

Q: Technical analysis is the study of which one of the following as the basis for trading? A. systematic risk B. historical prices C. dividend growth D. financial statements E. investor's required return

Q: Which one of the following risks is related to irrational beliefs? A. systematic B. firm-specific C. industry-specific D. sentiment-based E. market

Q: Which one of the following is a trader whose trades are not based on meaningful financial analysis or information? A. specialist B. arbitrageur C. noise trader D. sentiment trader E. market maker

Q: The concept that well-capitalized, rational traders may be unable to correct a mispricing defines which one of the following terms? A. noise trading bounds B. market bounds C. limits to arbitrage D. implementation limits E. sentiment borders

Q: Which one of the following best describes heuristics? A. clustering B. rules of thumb C. grouping D. representativeness E. herding

Q: Which one of the following is the tendency to believe that random events that occur in clusters are not really random? A. clustering illusion B. sequential clustering C. random grouping D. representativeness heuristic E. gambler's fallacy

Q: An unwillingness to take a risk after a loss describes: A. over-confidence B. the snakebite effect C. the illusion of knowledge D. the clustering illusion E. loss aversion

Q: The belief that information you hold is superior to information held by other investors best describes: A. over-confidence B. the snakebite effect C. the illusion of knowledge D. the clustering illusion E. loss aversion

Q: Representativeness heuristic is best explained as: A. the process of assuming events are random even when they are not. B. the creation of patterns in planned events. C. concluding that casual factors cause random events when in fact they do not. D. believing that random events that occur in clusters are truly random. E. overconfidence in one's own skills as an investor.

Q: Loss aversion is defined as:A. the inability to mentally acknowledge a loss on a security.B. selling any security for less than the price paid to acquire it.C. selling a security as soon as it has increased significantly in value.D. the reluctance to sell a security after it has decreased in value.E. the tendency to quickly sell any investment that has decreased in value.

Q: Mental accounting is the process of associating a stock with its:A. prior day's market value.B. expected value.C. desired value.D. purchase price.E. lowest value.

Q: Which one of the following defines frame dependence? A. Investors react differently to prospective gains and losses. B. Investors tend to make more cognitive errors when they view investing as gambling. C. Investors tend to be more irrational in bear markets than in bull markets. D. Investors react differently depending on how an opportunity is presented. E. Investors suffer from money illusion in bull markets but not in bear markets.

Q: Which one of the following is the basis for prospect theory? A. Investors react differently to prospective gains and losses. B. Investors make cognitive errors. C. Some investors are irrational. D. Investors react differently depending on the day of the week. E. Investors suffer from money illusion.

Q: What is the area of finance called that addresses issues such as how reasoning errors affect investment decisions? A. logical B. individual C. behavioral D. rational E. personal

Q: Give some examples of how overconfidence affects investor behavior along with the results that might be expected based on that behavior.

Q: Explain the basics of prospect theory and provide an example that illustrates this theory.

Q: A trader was found guilty of violating insider trading laws. As part of his sentencing, he had to forfeit the excessive profits earned on the illegal trades. What does this conviction indicate about the current form of market efficiency?

Q: What should the primary role of portfolio managers be given the research to date on their market performance and based on the assumption that markets are efficient?

Q: What are some of the key lessons to be learned from historical stock market crashes?

Q: A.B. Pharmaceutical announced FDA approval for a new drug on October 12. Uptown Drug Co. announced FDA approval for its new drug on October 14. No other information was released that would affect returns over this time period. What is the combined cumulative abnormal return for the 5 day period commencing 2 days prior to the FDA approval announcement date? Use the following data to answer this question. No trading occurred on October 15 or 16.A. 0.6 percentB. 1.0 percentC. 1.2 percentD. 1.3 percentE. 1.6 percent

Q: Swenson Co. announced its merger plans on August 25 and had a daily return of 0.8 percent. Tyler Co. announced its merger plans on August 26 and had a daily return of 0.6 percent. The Underwood Co. announced its merger plans on August 27 and had a daily return of -0.5 percent. The daily market returns for August 25 through August 27 were 0.2, 0.3, and -0.4, respectively. What is the combined cumulative abnormal return for the announcement date? A. 0.0 percent B. 0.2 percent C. 0.6 percent D. 0.8 percent E. 1.0 percent

Q: Over the past 5 days, the common stock of Tyler Mfg. had daily returns of 0.2, -0.1, -0.2, 0.3, and 0.1 percent, respectively. For the same 5 days, the market had daily returns of 0.0, 0.1, -0.3, 0.4, and 0.2 percent, respectively. What is the cumulative abnormal return on Tyler Mfg. stock for this time period?A. -0.2 percentB. -0.1 percentC. 0.0 percentD. 0.1 percentE. 0.2 percent

Q: The following are the daily returns for both the overall market and for Dexter Inc. What is the cumulative abnormal return on Dexter, Inc., stock for these 5 days?A. -0.7 percentB. -0.3 percentC. -0.2 percentD. 0.3 percentE. 0.6 percent

Q: By the end of 2002, the AMEX Internet Index was at a level approximately equal to _____ percent of the index high. A. 75 B. 50 C. 25 D. 17 E. 9

Q: The value of the Amex Internet Index increased by about _____ percent from October 1998 to March 2000 and subsequently declined by about _____ percent by October 2002. A. 100; 50 B. 200; 75 C. 400; 80 D. 500; 90 E. 600; 80

Q: The Asian stock market crash of 1990 was followed by a:A. long bull market.B. rapid recovery.C. prolonged flat market.D. short-term decline.E. long bear market.

Q: From the end of 1989 to the spring of 2003, the Nikkei Index declined in value approximately _____ percent. A. 50 B. 60 C. 70 D. 80 E. 90

Q: The primary purpose of the NYSE circuit breakers is to: A. halt short selling. B. encourage program trading. C. limit trading by specialists. D. minimize institutional trading. E. slow a market decline.

Q: The NYSE circuit breakers are recalculated: A. every day B. every week C. monthly D. every 6 months E. annually

Q: If the S&P 500 falls by 7 percent, the NYSE will: A. halt trading for thirty minutes. B. halt trading for two hours if the decline occurs before 3:25 P.M. C. halt trading for one hour. D. halt trading for one hour if the decline occurs after noon. E. halt trading for 15 minutes if the decline occurs before 3:25 pm.

Q: If the S&P 500 falls by 20 percent, the NYSE will: A. do nothing if the drop occurs after 2:30 P.M. B. halt trading for one hour. C. halt trading for one hour if the decline occurs before 3 P.M. D. halt trading for one-half hour if the decline occurs after noon. E. cease trading for the day.

Q: Immediately following the Crash of 1987, the stock market: A. remained in a slump for five years. B. remained flat for an extended period of time. C. had one of the biggest short-term gains ever. D. began a very slow and choppy recovery. E. began a very slow and smooth recovery.

Q: Which of the following factors contributed to the Crash of 1987? I. irrational investors II. program trading III. panic selling IV. price uncertainty A. II and IV only B. I, II, and III only C. I, II, and IV only D. II, III, and IV only E. I, II, III, and IV

Q: Which one of the following occurred following the Crash of 1987? A. Program trading was barred. B. All market orders were changed to electronic orders. C. Trading is now halted for the day anytime the market declines by 10 percent or more. D. Trading now stops for one hour anytime the market declines by 10 percent. E. Congress decided not to pass any anti-takeover legislation.

Q: Which of the following occurred during the Crash of 1987? I. market prices were kept up-to-date which increased investors' anxiety II. the market declined another 5 percent within the 2 days following the crash III. trading volume exceeded the exchange's capacities IV. NASDAQ went off-line A. I and II only B. III and IV only C. I, II and IV only D. II, III, and IV only E. I, II, III, and IV

Q: Which of the following are offered as factors contributing to the Crash of October 1987? I. bubble bursting II. market volatility III. negative economic signals IV. activities in Congress A. I and II only B. I and III only C. II, III, and IV only D. I, II, and III only E. I, II, III, and IV

Q: Approximately how many years did it take for the stock market to recover from the bear market of 1929 to 1932? A. 5 B. 10 C. 15 D. 20 E. 25

Q: Over the time period of 1929 to 1932, the stock market lost approximately _____ percent of its value. A. 33 B. 40 C. 50 D. 75 E. 90

Q: Which one of the following statements concerning the stock market is correct? A. Leverage was one of the contributing factors of the Crash of 1929. B. "Black Monday" refers to October 29, 1929. C. Program trading is cited as the sole cause of the Crash of 1987. D. Generally speaking, market crashes tend to last longer than market bubbles. E. It took the market 10 years to recover from the Crash of 1987.