Behavior Finance Chapter 1

Conventional theories presume that investors ____________, and behavioral finance presumes that they ____________.

• are irrational; are irrational

• are rational; may not be rational

• are rational; are rational

• may not be rational; may not be rational

Which of the following is not the assumption of Efficient Market Hypothesis (EMH) ?

• There are large number of investors interacting in the market.

• Information is freely available for all the investors.

• There may be cost of transactions.

• Every investors are capable to make perfect investment decisions.

Which of the following statements is not true as per “Merton Miller and Franco Modigliani in their 1961 article on dividends”?

• Rational people always prefer more wealth to less

• Rational people are never confused by the form of wealth

• Rational people are indifferent between company-paid dividends and “homemade” dividends created by selling shares

• Normal people are not indifferent between company-paid dividends and “homemade” dividends

Which of the following statements is not true as per “Behavior Finance”?

• Normal people never buy lottery tickets for the emotional benefits of hope of odds of winning.

• Normal people have normal wants, such as social responsibility, social status, and caring for family.

• Normal people use cognitive and emotional shortcuts on the way to their want.

• Normal people are often confused by the form of wealth.

Which of the following best define “PEA Drift”?

• It is the change in price due to the earning information of a company leaked before the announcement.

• It is the slow change in price due to the negligence of investors after the earning announcement of small companies.

• It is the change in price due to the announcement of earning by the public companies.

• It is the change in price of listed companies after the exchange post the earning figures of listed companies.

Which of the following best describes “IPO under performance”?

• Under subscription of IPO

• Over subscription of IPO

• Higher price in secondary market than IPO price

• Lower price in secondary market than IPO price

Which of the following is not the biasness of investors?

• Riding hot and selling cold

• Wishful thinking

• Trying to get insider information

• Narrow framing

Which of the following is not the assumption of “Behavior Finance”?

• Investors exhibit information processing bias that cause them over and under reaction

• Investors biases in the market are average out and not correlated

• Investors’ biases in the market are correlated and cannot be average out

• Existence of rational investors in the market should not be sufficient to make the market efficient

As per the study by Kent et al (2001), which of the following may not be the common behavior that is shown by the most of the investors during the investment decision making?

• Investors trade too aggressively

• Investors do not think to form efficient portfolio

• Investors are not influenced by historic high or low price

• Investors often do not participate in all asset and security categories

Which of the following may not be the proper way to overcome “Greed” and “Fear” in the market?

• Setting rules

• Investment plans

• Review of plans

• Following the market trend