Chapter 12

1. Award: 10.00 points Problems? Adjust credit for all students. Jill Davis tells her broker that she does not want to sell her stocks that are below the price she paid for them. She believes that if she just holds on to them a little longer they will recover, at which time she will sell them. Which behavioral characteristic is the basis for Davis’s decision making? Which behavioral characteristic is the basis for Davis’s decision making? Disposition effect Explanation: Davis uses the disposition effect as the irrational basis for her decision making. She holds on to stocks that are down from the purchase price in the hopes that they will recover. She is reluctant to accept a loss. Worksheet Difficulty: 1 Basic Source: Investments (Bodie, 13e, ISBN 1266836322) > Chapter 12: Behavioral Finance and Technical Analysis > Chapter 12 Problems - Algorithmic & Static References

2. Award: 10.00 points Problems? Adjust credit for all students. After Polly Shrum sells a stock, she avoids following it in the media. She is afraid that it may subsequently increase in price. Which behavioral characteristic is the basis for Shrum’s decision making? Which behavioral characteristic is the basis for Shrum’s decision making? Fear of regret Explanation: Shrum refuses to follow a stock after she sells it because she does not want to experience the regret of seeing it rise. The behavioral characteristic used for the basis for her decision making is the fear of regret. Worksheet Difficulty: 1 Basic Source: Investments (Bodie, 13e, ISBN 1266836322) > Chapter 12: Behavioral Finance and Technical Analysis > Chapter 12 Problems - Algorithmic & Static References

4. Award: 10.00 points Problems? Adjust credit for all students. Select appropriate behavioral characteristics to match each example listed below. Example Characteristic a. Investors are slow to update their beliefs when given new evidence. Conservatism bias b. Investors are reluctant to bear losses caused by their unconventional decisions. Regret avoidance c. Investors exhibit less risk tolerance in their retirement accounts versus their other stock accounts. Mental accounting d. Investors are reluctant to sell stocks with “paper” losses. Disposition effect e. Investors disregard sample size when forming views about the future from the past. Representativeness bias Explanation: No further explanation details are available for this problem. Worksheet Difficulty: 1 Basic Source: Investments (Bodie, 13e, ISBN 1266836322) > Chapter 12: Behavioral Finance and Technical Analysis > Chapter 12 Problems - Algorithmic & Static References

5. Award: 10.00 points Problems? Adjust credit for all students. Use the data from The Wall Street Journal in Figure 12.5 to calculate the trin ratio for the NASDAQ. Is the trin ratio bullish or bearish? Is the trin ratio bullish or bearish? Bullish Explanation: Trin = ( Volume declining ÷ Number declining ) ÷ (Volume advancing ÷ Number advancing) (444.2 ÷ 862) ÷ (4,664.6 ÷ 3,962) = 0.44 This trin ratio, which is below 1.0, would be taken as a bullish signal (or it might mean there are more selling opportunities). Worksheet Difficulty: 2 Intermediate Source: Investments (Bodie, 13e, ISBN 1266836322) > Chapter 12: Behavioral Finance and Technical Analysis > Chapter 12 Problems - Algorithmic & Static References

6. Award: 10.00 points Problems? Adjust credit for all students. a. Calculate breadth for the NASDAQ using the data in Figure 12.5 . b. Is the signal bullish or bearish?  Required A Required B  Complete this question by entering your answers in the tabs below. Is the signal bullish or bearish? Required A Required B Is the signal bullish or bearish? Bullish Explanation: b. Breadth is positive — bullish signal (no one would actually use a one-day measure). Worksheet Difficulty: 2 Intermediate Source: Investments (Bodie, 13e, ISBN 1266836322) > Chapter 12: Behavioral Finance and Technical Analysis > Chapter 12 Problems - Algorithmic & Static References

7. Award: 10.00 points Problems? Adjust credit for all students. Baa-rated bonds currently yield 6%, while Aa-rated bonds yield 5%. Suppose that due to an increase in the expected inflation rate, the yields on both bonds increase by 1%. Required: a. Calculate the new confidence index? Note: Round your answer to 3 decimal places. b. Would this be interpreted as bullish or bearish by a technical analyst? a. Confidence index 0.857 b. Bullish or bearish Bullish Explanation: a. The confidence index increases from (5% ÷ 6%) = 0.833 to (6% ÷ 7%) = 0.857. b. This indicates slightly higher confidence which would be interpreted by technicians as a bullish signal. Worksheet Difficulty: 2 Intermediate Source: Investments (Bodie, 13e, ISBN 1266836322) > Chapter 12: Behavioral Finance and Technical Analysis > Chapter 12 Problems - Algorithmic & Static References

9. Award: 10.00 points Problems? Adjust credit for all students. The following table contains data on market advances and declines. Day Advances Declines 1 906 704 2 653 986 3 721 789 4 503 968 5 497 1,095 6 970 702 7 1,002 609 8 903 722 9 850 748 10 766 766 Required: a. Calculate cumulative breadth. b. Decide whether this technical signal is bullish or bearish.  Required A Required B  Complete this question by entering your answers in the tabs below. Calculate cumulative breadth . Note: Leave no cells blank - be certain to enter "0" wherever required. Negative amounts should be indicated by a minus sign . Required A Required B Day Advances Declines Net Advances Cumulative Breadth 1 906 704 202 202 2 653 986 (333) (131) 3 721 789 (68) (199) 4 503 968 (465) (664) 5 497 1,095 (598) (1,262) 6 970 702 268 (994) 7 1,002 609 393 (601) 8 903 722 181 (420) 9 850 748 102 (318) 10 766 766 0 (318) Explanation: b. The signal is bearish as cumulative breadth is negative; however, the negative number is declining in magnitude, indicative of improvement. Perhaps the worst of the bear market has passed. Worksheet Difficulty: 2 Intermediate Source: Investments (Bodie, 13e, ISBN 1266836322) > Chapter 12: Behavioral Finance and Technical Analysis > Chapter 12 Problems - Algorithmic & Static References

9. Award: 10.00 points Problems? Adjust credit for all students. The following table contains data on market advances and declines. Day Advances Declines 1 906 704 2 653 986 3 721 789 4 503 968 5 497 1,095 6 970 702 7 1,002 609 8 903 722 9 850 748 10 766 766 Required: a. Calculate cumulative breadth. b. Decide whether this technical signal is bullish or bearish.  Required A Required B  Complete this question by entering your answers in the tabs below. Decide whether this technical signal is bullish or bearish. Required A Required B Bullish or bearish Bearish Explanation: b. The signal is bearish as cumulative breadth is negative; however, the negative number is declining in magnitude, indicative of improvement. Perhaps the worst of the bear market has passed. Worksheet Difficulty: 2 Intermediate Source: Investments (Bodie, 13e, ISBN 1266836322) > Chapter 12: Behavioral Finance and Technical Analysis > Chapter 12 Problems - Algorithmic & Static References

10. Award: 10.00 points Problems? Adjust credit for all students. Use the following data on bond yields: This Year Last Year Yield on top-rated corporate bonds 4% 7% Yield on intermediate-grade corporate bonds 6 9 Required: a. Calculate the change in the confidence index from last year to this year. b. Is the confidence index rising or falling?  Required A Required B  Complete this question by entering your answers in the tabs below. Is the confidence index rising or falling? Required A Required B Is the confidence index rising or falling? Falling Explanation: a. Confidence index = Yield on top-rated corporate bonds ÷ Yield on intermediate-grade corporate bonds Last year: Confidence index = (7% ÷ 9%) = 0.778 This year: Confidence index = (4% ÷ 6%) = 0.667 b. Thus, the confidence index is decreasing. Worksheet Difficulty: 2 Intermediate Source: Investments (Bodie, 13e, ISBN 1266836322) > Chapter 12: Behavioral Finance and Technical Analysis > Chapter 12 Problems - Algorithmic & Static References

11. Award: 10.00 points Problems? Adjust credit for all students. You are evaluating a closed-end mutual fund and see that its price is different from its net asset value (NAV). The fund has an expense ratio (ε) of 2.80% and a dividend yield (δ) of 4.00%. The fund has experienced a risk- adjusted abnormal return (α) of 3.50%. By what amount (premium or discount) is the fund likely to trade relative to its NAV? Note: Use a minus sign if the amount is a discount. Round your answer to 2 decimal places. Amount 21.21 % Explanation: The amount of the premium or the discount is The fund may be trading at a discount because the expense ratio is higher than the risk-adjusted abnormal return. If the managers can reduce expenses and/or earn higher abnormal returns, the situation may reverse. Worksheet Difficulty: 1 Basic Source: Investments (Bodie, 13e, ISBN 1266836322) > Chapter 12: Behavioral Finance and Technical Analysis > Chapter 12 Additional Algorithmic Problems References

13. Award: 10.00 points Problems? Adjust credit for all students. Use the information in the table below to calculate the trin ratio for October 1 and February 1. State whether each ratio represents a bullish or a bearish outlook. Note: Round your answers to 2 decimal places. October 1 February 1 Advances 8,601 8,793 Declines 3,854 10,951 Volume advancing 2,468,578 2,617,846 Volume declining 1,840,742 1,025,622 Trin Bullish or Bearish October 1 1.66 Bearish February 1 0.31 Bullish Explanation: The trin ratio is calculated by the equation The ratio equals on October 1 (Bearish) and on February 1 (Bullish). A trin ratio above 1 is considered bearish and below 1 is considered bullish. Worksheet Difficulty: 2 Intermediate Source: Investments (Bodie, 13e, ISBN 1266836322) > Chapter 12: Behavioral Finance and Technical Analysis > Chapter 12 Additional Algorithmic Problems References

14. Award: 10.00 points Problems? Adjust credit for all students. On April 1 there are 207 put options and 264 call options outstanding on a stock. Calculate the put/call ratio. Note: Round your answer to 2 decimal places. Put/call ratio 0.78 Explanation: The put/call ratio equals 207 ÷ 264 = 0.78. A put/call ratio above the typical level of 65% is open to interpretation. Puts are purchased in anticipation of falling prices so some investors consider an increased put/call ratio bearish. These investors would be likely to sell when the ratio is 0.78. Others, called contrarians, believe that an increase in the put/call ratio indicates that the market is undervalued and that it would be a good time to buy. They expect that prices would rise soon to get to proper valuation levels. Worksheet Difficulty: 2 Intermediate Source: Investments (Bodie, 13e, ISBN 1266836322) > Chapter 12: Behavioral Finance and Technical Analysis > Chapter 12 Additional Algorithmic Problems References

1. Award: 10.00 points 2. Award: 10.00 points 3. Award: 10.00 points 4. Award: 10.00 points 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 may not be rational; are rational Conventional theories presume that investors are rational, and behavioral finance presumes that they may not be rational. References Multiple Choice Difficulty: 1 Basic The premise of behavioral finance is that: conventional financial theory ignores how real people make decisions and that people make a difference. conventional financial theory considers how emotional people make decisions, but the market is driven by rational utility-maximizing investors. conventional financial theory should ignore how the average person makes decisions because the market is driven by investors who are much more sophisticated than the average person. conventional financial theory considers how emotional people make decisions, but the market is driven by rational utility-maximizing investors and should ignore how the average person makes decisions because the market is driven by investors who are much more sophisticated than the average person. None of the options are correct. The premise of behavioral finance is that conventional financial theory ignores how real people make decisions and that people make a difference. References Multiple Choice Difficulty: 1 Basic Some economists believe that the anomalies literature is consistent with investors': ability to always process information correctly, and therefore, they infer correct probability distributions about future rates of return; and given a probability distribution of returns, they always make consistent and optimal decisions. inability to always process information correctly, and therefore, they infer incorrect probability distributions about future rates of return; and given a probability distribution of returns, they always make consistent and optimal decisions. ability to always process information correctly, and therefore, they infer correct probability distributions about future rates of return; and given a probability distribution of returns, they often make inconsistent or suboptimal decisions. inability to always process information correctly, and therefore, they infer incorrect probability distributions about future rates of return; and given a probability distribution of returns, they often make inconsistent or suboptimal decisions. Some economists believe that the anomalies literature is consistent with investors' inability to always process information correctly and therefore they infer incorrect probability distributions about future rates of return; and given a probability distribution of returns, they often make inconsistent or suboptimal decisions. References Multiple Choice Difficulty: 2 Intermediate Information processing errors consist of: I. forecasting errors. II. overconfidence. III. conservatism. IV. framing. I and II I and III III and IV IV only I, II, and III Information processing errors consist of forecasting errors, overconfidence, and conservatism. References Multiple Choice Difficulty: 2 Intermediate                       

5. Award: 10.00 points 6. Award: 10.00 points 7. Award: 10.00 points 8. Award: 10.00 points Forecasting errors are potentially important because: research suggests that people underweight recent information. research suggests that people overweight recent information. research suggests that people correctly weight recent information. research suggests that people either underweight recent information or overweight recent information depending on whether the information was good or bad. None of the options are correct. Forecasting errors are potentially important because research suggests that people overweight recent information. References Multiple Choice Difficulty: 2 Intermediate De Bondt and Thaler believe that high P/E result from investors': earnings expectations that are too extreme. earnings expectations that are not extreme enough. stock-price expectations that are too extreme. stock-price expectations that are not extreme enough. None of the options are correct. DeBondt and Thaler believe that high P/E result from investors' earnings expectations that are too extreme. References Multiple Choice Difficulty: 2 Intermediate If a person gives too much weight to recent information compared to prior beliefs, they would make ________ errors. framing selection bias overconfidence conservatism forecasting If a person gives too much weight to recent information compared to prior beliefs, they would make forecasting errors. References Multiple Choice Difficulty: 2 Intermediate Single men trade far more often than women. This is due to greater _________ among men. framing regret avoidance overconfidence conservatism Selection Bias Single men trade far more often than women. This is due to greater overconfidence among men. References Multiple Choice Difficulty: 2 Intermediate                        