Jordan: Fundamentals of Investments, 2ce Test Bank CHAPTER 9

Behavioral Finance and the Psychology of Investing I. DEFINITIONS BEHAVIORAL FINANCE C 1. _____ finance is the area of study which addresses issues such as how reasoning errors affect investment decisions and market prices. A. Logical B. Economic C. Behavioral D. Rational E. Personal Level: Easy PROSPECT THEORY E 2. The theory which stresses the tendency of investors to react differently when faced with a potential loss versus a potential gain is called the _____ theory. A. risk analysis B. relative C. behavioral D. personal E. prospect Level: Easy FRAME DEPENDENCE A 3. The tendency of individuals to react differently to the same situation based on how the situation is presented is referred to as: A. frame dependence. B. loss analysis. C. prospect theory. D. mental accounting. E. behavioral responsiveness. Level: Easy MENTAL ACCOUNTING E 4. When you compare the current price of a security to its purchase cost you are following a behavior known as: A. gain recognition. B. frame dependence. C. time recognition. D. dollar recognition. E. mental accounting. Level: Medium

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LOSS AVERSION D 5. Loss aversion is defined as: A. the inability to acknowledge a financial loss. B. selling any security for less than the price paid to acquire it. C. selling a security as soon as it has earned a profit. D. the hesitancy to sell a security after it has decreased in value. E. the tendency to quickly dispose of any investment that has decreased in value. Level: Medium REPRESENTATIVENESS HEURISTIC B 6. Concluding that casual factors are at work behind random sequences is referred to as: A. random seeking. B. representativeness heuristic. C. sequential processing. D. randomness assumption. E. random chance. Level: Easy CLUSTERING ILLUSION A 7. The tendency for some individuals to believe that random events that occur in clusters are not really random is called the: A. clustering illusion. B. sequential delusion. C. random grouping. D. randomness rejection. E. cluster effect. Level: Easy LIMITS TO ARBITRAGE E 8. The idea that rational, well-capitalized investors are not always able to immediately correct a market mispricing is referred to as: A. a market limitation. B. arbitrage trading. C. market noise. D. a daily flaw. E. a limit to arbitrage. Level: Easy NOISE TRADER C 9. An investor who trades without good information or any worthwhile financial analysis is referred as a(n): A. arbiter. B. market timer. C. noise trader. D. sentiment trader. E. market maker.
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Easy

SENTIMENT-BASED RISK D 10. Sentiment-based risk is _____ risk. A. systematic B. firm-specific C. industry-specific D. emotional-based E. cost-based Level: Easy TECHNICAL ANALYSIS D 11. Technical analysis is the: A. analysis of a firms specific products and services to predict future growth. B. review of a firms financial statements to predict future earnings potential. C. study of investors emotional patterns to predict future market trends. D. study of historical prices as a means of predicting future prices. E. analysis of economic conditions to determine future market movements. Level: Medium DOW THEORY A 12. Dow theory is a method of predicting future market movements based on the Dow Jones _____ averages. A. industrial and transportation B. industrial and municipal C. industrial and commodities D. transportation and utilities E. commodities and utilities Level: Easy ELLIOTT WAVE THEORY C 13. The Elliott wave theory is a theory used to predict future market movements based on: A. repetitive trading patterns over an 8-week period. B. the tidal waves created by the gravitational pull of the moon. C. eight sequential pricing patterns. D. the life-cycle of an industry. E. market trends which come and go over time. Level: Medium SUPPORT LEVEL E 14. The price which is expected to be the minimal value for a security is called the: A. base value. B. par value. C. reactive point. D. resistance level. E. support level. Level: Easy

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RESISTANCE LEVEL D 15. The maximum value which the market is expected to reach is called the: A. whole value. B. target value. C. reactive point. D. resistance level. E. support level. Level: Easy RELATIVE STRENGTH C 16. A relative strength chart compares the: A. number of buy orders to the number of sell orders. B. volume of trading for one day to another day. C. performance of one security or market to another. D. value of one investors performance to that of another investor. E. gains and losses for a particular investment. Level: Easy FIBONACCI NUMBER A 17. An interesting observation about Fibonacci numbers is A. the frequency with which they appear in nature. B. their predictive ability. C. the fact that they are all even. D. the fact that they are all odd. E. their superstition. Level: Easy II. CONCEPTS MARKET INEFFICIENCY B 18. For the financial markets to be inefficient,: A. arbitrage trading must be prohibited. B. the collective irrational trading of some investors must exceed the corrective arbitrage trading of the remaining investors. C. at least the majority of the investors must be overly optimistic. D. each irrational investor must act independently of every other irrational investor. E. irrational investors must become arbitrage traders. Level: Medium PROSPECT THEORY B 19. Investors react stronger to a financial _____ than they do to a financial _____, according to prospect theory. A. profit; loss B. loss; profit C. purchase; sale D. sale; purchase E. debt security; equity security Level: Easy

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PROSPECT THEORY C 20. According to prospect theory, investors: A. tend to always be risk-adverse. B. tend to always be risk-taking. C. are risk-taking when it comes to losses. D. are risk-adverse when it comes to losses. E. tend to risk-neutral. Level: Medium RISK-ADVERSE BEHAVIOR B 21. Peg is a contestant on a game show. At this point in the game, she can either accept $1,000 or she can throw one dart at a game board for a chance of winning $500,000. If Peg accepts the guaranteed $1,000, she is displaying _____ behavior. A. optimistic B. risk-adverse C. prospective D. risk-neutral E. risk-taking Level: Easy FRAME DEPENDENCE D 22. Investors tend to make better decisions if they concentrate on: A. actual losses only. B. only potential losses. C. individual securities. D. the overall situation. E. potential profits only. Level: Medium MENTAL ACCOUNTING D 23. Mental accounting tends to lead to irrational investor behavior because it supports the notion that: A. investors tend to overanalyze each investment opportunity. B. investors avoid any mental effort related to investing. C. selling a security is mentally easier than purchasing it. D. investors can become emotionally attached to a security at a specific value. E. investors have unrealistic rate of return expectations. Level: Medium LOSS AVERSION C 24. Individual investors tend to: A. quickly sell their losers and buy more of their winners. B. sell their losers and hold their winners. C. sell winners more frequently than losers. D. sell winners and losers with equal frequency. E. suffer from loss aversion while professional money managers do not. Level: Medium

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HOUSE MONEY A 25. The term house money refers to the concept that investors react differently to: A. losing their profits as compared to losing their initial investment. B. losing their savings to buy a home as compared to their other savings. C. losses than they do to gains. D. money they manage individually versus the money they have placed under the control of a professional money manager. E. money that is jointly owned with a spouse than that which is their personal asset. Level: Medium MYOPIC LOSS AVERSION E 26. Martha refuses to invest her retirement money in stocks or bonds as she is afraid that if she does, she will lose money this year. Martha is displaying a characteristic known as: A. frame dependence. B. regret aversion. C. mental accounting. D. house money. E. myopic loss aversion. Level: Medium REGRET AVERSION C 27. 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. myopic loss aversion. B. frame dependence. C. regret aversion. D. risk-taking. E. mental accounting. Level: Medium SUNK COST FALLACY E 28. Lester purchased a stock which has declined in value by 25 percent due to production flaws and obsolete product offerings. Lester continues to purchase shares as the stock price continues to decline. Lester is displaying the characteristic known as: A. endowment effect. B. money illusion. C. regret aversion. D. myopic loss aversion. E. sunk cost fallacy. Level: Medium ENDOWMENT EFFECT A 29. Last week, Alicia stated that ABC stock was only worth $16 a share and since it was selling for $23 a share, she declared it overpriced refusing to buy. After inheriting 1,000 shares of ABC stock from her grandmother, Alicia is suddenly saying that ABC stock is a great buy at $23 and is probably worth at least $31 a share. This is an example of the: A. endowment effect. B. money illusion. C. regret aversion. D. myopic loss aversion. E. sunk cost fallacy. Level: Medium
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MONEY ILLUSION C 30. If you suffer from money illusion, you: A. are obsessed with earning high returns and gathering great wealth. B. believe that your meager savings will support your retirement even though that is totally unrealistic. C. do not understand the difference between nominal and real buying power. D. refuse to recognize that you have incurred losses which will probably not be offset for an extended period of time. E. believe that everyone else has more money than you do, even though that is untrue. Level: Medium OVERCONFIDENCE E 31. Investor overconfidence tends to cause investors to: I. trade too frequently. II. invest too heavily in the securities issued by their employer. III. earn lower rates of return caused by trading frequency. IV. invest too heavily in companies from their local region. A. I and III only B. II and IV only C. I, II, and III only D. II, III, and IV only E. I, II, III, and IV Level: Medium HOT-HAND FALLACY D 32. According to the idea of hot-hand fallacy, investors are most apt to: A. quickly sell any loser. B. invest most heavily in their big losers. C. get in and back out of the market quickly. D. invest more in recent winners than in recent losers. E. sell their winners and keep their losers. Level: Easy CLUSTERING ILLUSION B 33. The fact that the money managers that earned the best returns last year tend to attract more money this year than the average money manager is an example of: A. the money effect. B. the clustering illusion. C. the endowment effect. D. the house money effect. E. overconfidence. Level: Medium GAMBLERS FALLACY C 34. Mark feels that gold will increase in value significantly this coming year simply because it has lost value in each of the last five years. Mark is displaying signs of the: A. clustering illusion. B. house money effect. C. gamblers fallacy. D. endowment effect. E. losers turnaround. Level: Medium
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LAW OF SMALL NUMBERS B 35. Five of the last 6 stocks your investment adviser recommended have outperformed the market. You therefore believe that your adviser will be right 5 out of every 6 times. This belief is based on the: A. gamblers fallacy. B. law of small numbers. C. law of large numbers. D. clustering illusion. E. positive performance illusion. Level: Medium RECENCY BIAS D 36. According to the theory of recency bias, investors tend to believe that the financial markets will: A. revolve around their long-term average performance. B. react over the next year in direct opposition to the performance of the prior year. C. have a maximum of 4 years of positive annual returns. D. continue to perform as they have over the past couple of years. E. have an average return for the next 3 years that equals the average return for the past 30 years. Level: Medium SELF-ATTRIBUTION BIAS D 37. 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 Level: Easy LIMITS TO ARBITRAGE C 38. Which of the following are considered limits to arbitrage? I. sentiment-based risk II. systematic risk III. firm-specific risk IV. noise trader risk A. I and III only B. II and IV only C. I, III, and IV only D. II, III, and IV only E. I, II, III, and IV Level: Medium FIRM-SPECIFIC RISK E 39. Firm-specific risk can create a barrier to arbitrage when A. securities are poor substitutes for one another B. securities have weak correlations C. security market is illiquid D. security market is segmented E. none of the above Level: Hard

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MARKET SENTIMENT INDEX E 40. Which one of the following market sentiment index (MSI) values represents the best buying opportunity? A. 0.13 B. 0.24 C. 0.50 D. 0.72 E. 0.98 Level: Easy MARKET SENTIMENT INDEX A 41. If all investors are bullish, the market sentiment index (MSI) will have a value of: A. 0. B. 1. C. 10. D. 50. E. 100. Level: Easy DOW THEORY D 42. According to Dow theory, the long-run direction of the stock market is seen in the: A. daily market movements. B. secondary reaction. C. MSI trend. D. primary trend. E. tertiary trend. Level: Easy DOW THEORY D 43. The Dow theory describes stock prices are moving in trends analogous to the movement of water. Which of the following is incorrect? A. major trends resemble tides. B. intermediate trends resemble waves. C. short-run movements are like ripples. D. waves are the most important. E. none of the above. Level: Easy DOW THEORY E 44. The Dow theory: A. proposes that the market is bullish only when the secondary trends are bearish. B. advocates that the market rarely deviates from its primary trend for more than 2 weeks. C. states that daily market movements are key to changes in the overall market trend. D. supports the idea that primary trends are eliminated by corrections. E. is primarily designed to identify changes in the primary market direction. Level: Medium

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ELLIOTT WAVE THEORY B 45. If you are a proponent of the Elliott wave theory, you: A. buy based on the primary trend and sell based on the secondary trend. B. will buy at the beginning and sell at the end of the impulsive waves. C. have the ability to determine when to buy, but not when to sell. D. will buy on wave # 3 and sell on wave # 8. E. expect all market corrections to occur in one swift wave. Level: Medium RESISTANCE LEVEL A 46. Which one of the following is considered the best indicator of a bull market according to technical analysts? A. a breakout of a resistance level B. a breakout of a support level C. market prices remaining above the support level D. prices falling below the support level E. prices remaining between the resistance and support levels Level: Easy SUPPORT LEVEL C 47. If you prefer to buy stocks at prices which are considered relatively low, you should buy a stock when its price: A. breaks through the resistance level. B. is just short of the resistance level. C. approaches the support level, given than you expect the price to rebound. D. exceeds the support level by a relatively good margin. E. is relatively in the middle between the resistance and the support prices. Level: Medium RESOSTANCE AND SUPPORT LEVEL C 48. A resistance level differs from a support level in that A. at a resistance level most investors would hold stock until the price improves; at a support level a stock becomes overvalued and investor interest is likely to decrease. B. at a resistance level the analyst would expect a substantial increase in the demand for a stock; at a support level the analyst would expect a substantial decrease in the demand for a stock. C. at a resistance level most investor would sell a stock; at a support level most investors would be willing to purchase a stock. D. at a resistance level, the technician would expect to an increase in demand for a stock. E. none of the above. Level: Medium ADVANCE/DECLINE LINE E 49. If the advance/decline line is _____ the markets are considered to be the most bearish. A. relatively flat B. slightly upward sloping C. slightly downward sloping D. steeply upward sloping E. steeply downward sloping Level: Medium

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ADVANCE/DECLINE LINE E 50. Advances and declines are associated with market A. efficiency B. position C. diffusion D. depth E. Breath Level: Easy CLOSING TICK D 51. If the closing tick of the day is +724, this means that the: A. DJIA ended the day up 724 basis points. B. discount rate at the end of the day was 7.24 percent. C. number of stocks closing on an uptick was 724. D. number of stocks closing on an uptick exceeded those closing on a downtick by 724. E. number of stocks closing on an uptick was 724 more than on the prior trading day. Level: Hard ARMS
A 52. A. B. C. D. E. Level: Which one of the following Arms values is the most bullish? .67 .75 1.00 1.06 1.23 Medium

RELATIVE STRENGTH A 53. An increase in the relative strength value from 1.06 to 1.09 indicates that: A. one security is continuing to outperform the other security. B. at least one of the securities is outperforming the overall market. C. one security is increasing in value while the other is decreasing in value. D. both securities are increasing in value. E. both securities are decreasing in value. Level: Medium RELATIVE STRENGTH E 54. Technicians believe that an stock that is outperforming the market will tend to: A. form head and shoulder patterns. B. meet a resistance level. C. reverse trend. D. return to normal. E. continue to outperform the market. Level: Hard
PRICE CHANNEL D 55. On an open-high-low-close chart, the price channel is: A. bounded on the lower level by the opening price for each trading day. B. a linear function with points set at the closing price of each trading day. C. bounded by the daily opening and closing prices. D. bounded by both an upper and a lower trend line. E. a graph of the difference between a days high and low price.

Level:

Medium
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HEAD AND SHOULDERS PATTERN A 56. According to technical analysts, pricing patterns such as the head and shoulders pattern, are indicators of: 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. Level: Medium HEAD AND SHOULDERS PATTERN D 57. On a graph depicting a head and shoulders top pattern, the neckline support: A. indicates a bull market when it is pierced. B. is the trend line that existed prior to the head and shoulders pattern appearing. C. is a straight line connecting the high points of the left and right shoulders. D. indicates a reversal signal anytime it is broken through in a downward direction. E. is a line drawn connecting the humps created by the left and right shoulders. Level: Medium EXPONENTIAL MOVING AVERAGE B 58. A 5-day exponential moving average: A. is a compound function. B. places more emphasis on the latest closing price than it does on prior 4 days closing prices. C. considers only the prior days closing price. D. places a weight of 20 percent on the closing price of each day. E. is an indicator of the long-term trend of the market. Level: Medium MOVING AVERAGES A 59. Which two of the following are possible explanations for the situation where a 30-day moving average intersects a 300-day moving average assuming that the 30-day average is upward sloping and the 300-day average in downward sloping? I. the long-term trend of the market is getting ready to turn bullish II. the long-term trend of the market is getting ready to turn bearish III. the market will be bullish in the short-run but bearish in the long-run IV. the market will be bearish in the short-run but bullish in the long-run A. I and III only B. I and IV only C. II and III only D. II and IV only E. None of the above Level: Hard BOLLINGER BANDS D 60. Bollinger bands: A. depict the convergence or divergence of two moving averages. B. display the relative strength of one market sector versus another. C. are a graphical representation of an exponential moving average. D. are based on 2 standard deviations around a moving average. E. are the current support and resistance levels for the overall market. Level: Easy

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MONEY FLOW C 61. Money flow measures the: A. total dollar volume of trading on a daily basis. B. total dollar value of all securities listed on an exchange. C. strength of the buying versus the selling of a security. D. volume of trading in a particular security on a given trading day. E. total increase or decrease in the value of a security on a daily basis. Level: Easy MONEY FLOW C 62. If a stocks price remains relatively stable while the money flow becomes quite positive, you should expect the _____ according to technical analysts. A. stock price to decrease B. stock price to remain relatively stable C. stock price to increase D. trading volume to increase E. trading volume to decrease Level: Medium FIBONACCI NUMBERS E 63. Fibonacci numbers are: A. numbers which never seem to appear in the natural world. B. commonly referred to as the silver series. C. created by multiplying the 2 previous numbers in the series and then taking the square root of that value. D. numbers such that phi is roughly equal to .382. E. a series of numbers wherein each number, starting with the third number in the series, is equal to the summation of the two previous numbers. Level: Easy FIBONACCI NUMBERS E 64. Some technical analysts use Fibonacci numbers to predict: A. primary trend breakthroughs. B. market turnarounds. C. secondary market trend lines. D. relative performance values. E. resistance and support levels. Level: Easy ODD-LOT INDICATOR B 65. If you are an advocate of the odd-lot indicator, you will buy stocks when: A. odd-lot trading volume decreases significantly. B. the odd-lot traders are primarily selling. C. the odd-lot traders significantly increase their buying. D. odd-lot trading volume remains relatively flat. E. the odd-lot traders appear to be overly optimistic. Level: Medium

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ODD-LOT INDICATOR C 66. Which of the following market indicators is based on the idea of contrary opinion? A. volume data. B. confidence index. C. odd-lot index. D. liquidity of mutual funds. E. advance-decline line. Level: Easy MARKET INDICATORS A 67. Which of the following have been used as bullish market indicators? I. short skirts II. negative money flow with stable stock price III. a win by an NFL team IV. a piercing of the neckline support A. I and III only B. II and IV only C. III and IV only D. I, II, and III only E. II, III, and IV only Level: Medium MARKET INDICATORS B 68. Which of the following is false regarding market indicators? A. The strength or weakness of the market can be judged by changes in volume data B. The advance-decline line concentrates on the degree of price changes C. The primary objective of the Dow theory is to forecast major changes in the trend of the stock market D. the odd-lot index is the ratio of odd-lot sales to odd-lot purchases E. technicians feel that the greater the liquidity position of mutual funds, the more bullish is the market outlook Level: Medium III. PROBLEMS MARKET SENTIMENT INDEX (MSI) B 69. You survey 250 of your fellow classmates and determine that 161 of them are bullish on the markets and the remainder are bearish on the market. What is the market sentiment index for this group of individuals? A. .28 B. .36 C. .48 D. .56 E. .64 Level: Easy Solution: MSI = (250 ! 161) / 250 = .356 = .36

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MARKET SENTIMENT INDEX (MSI) B 70. Yesterday, there were 1,408 stocks that advanced and 1,897 stocks that declined. What is the value of the market sentiment index based on this information? A. .43 B. .57 C. .74 D. 1.02 E. 1.34 Level: Easy Solution: MSI = 1,897 / (1,408 + 1,897) = .574 = .57 ADVANCE/DECLINE LINE D 71. Given the following information, what is the value of the advance/decline line on the third day of this 3-day period?
Day 1 Day 2 Day 3 Issues Advancing Issues Declining 1,407 1,845 2,106 1,151 1,709 1,534

A. B. C. D. E.

-438 +175 +369 +692 +955

Level: Easy Solution: Value of A/D line = 1,407 + 2,106 + 1,709 ! 1,845 ! 1,151 ! 1,534 = + 692

ADVANCE/DECLINE LINE C 72. Given the following information, what is the value of the advance/decline line on the second day of this 3-day period?
Day 1 Day 2 Day 3 Issues Advancing Issues Declining 1,804 1,638 1,470 1,952 1,524 1,711

A. B. C. D. E.

-503 -482 -316 +497 +518

Level: Easy Solution: Value of A/D line = 1,804 + 1,470 ! 1,638 ! 1,952 = -316

ARMS C 73. Given the following information, what is the value of the closing Arms?
Issues Issues Advancing Declining Advancing Declining Volume Volume 1,948 1,602 947,628,820 721,067,030 A. .82 B. .87 C. .93 D. 1.01 E. 1.08 Level: Easy Solution: Arms = (721,067,030 / 1,602) / (947,628,820 / 1,948) = 450,104.2634 / 486,462.4333 = .925 = .93 2009 McGraw-Hill Ryerson Ltd. 9-15

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ARMS D 74. Given the following information, what is the value of the closing Arms? Issues Advancing 1,413 Issues Declining 1,984 Advancing Volume 628,417,080 Declining Volume 1,218,413,050

A. .72 B. .89 C. 1.11 D. 1.38 E. 1.43 Level: Easy Solution: Arms = (1,218,413,050 / 1,984) / (628,417,080 / 1,413) = 614,119.4808 / 444,739.6178 = 1.381 = 1.38 RELATIVE STRENGTH D 75. Last year, Krista purchased 5 shares of stock A at $30 a share. At the same time, she purchased 3 shares of stock B at $50 a share. Today, stock A is valued at $37 a share and stock B is worth $62 a share. What is the relative strength of stock A as compared to stock B? A. .84 B. .88 C. .96 D. .99 E. 1.02 Level: Easy Solution: Relative strength = (5 " $37) / (3 " $62) = $185 / $186 = .9946 = .99 Use this information to answer questions 76 -79: Day 1 2 3 4 5 6 7 Closing Price 48.22 48.40 47.28 47.30 48.11 49.02 49.10

SIMPLE MOVING AVERAGE A 76. What is the 4-day simple moving average as of day 6? A. 47.93 B. 48.08 C. 48.11 D. 48.74 E. 48.81 Level: Medium Solution: 4-day moving average as of day 6 = (47.28 + 47.30 + 48.11 + 49.02) / 4 = 47.928 = 47.93

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SIMPLE MOVING AVERAGE C 77. What is the 5-day simple moving average as of day 7? A. 46.87 B. 47.24 C. 48.16 D. 49.01 E. 49.47 Level: Medium Solution: 5-day moving average as of day 7 = (47.28 + 47.30 + 48.11 + 49.02 + 49.10) / 5 = 48.162 = 48.16 EXPONENTIAL MOVING AVERAGE E 78. What is the 3-day exponential moving average as of day 4 assuming that a weight of 60 percent of the average weight is placed on the most recent price? A. 42.34 B. 44.14 C. 45.13 D. 45.91 E. 47.46 Level: Hard Solution: Three-Day Exponential Day Closing Price Moving Average Computation 1 48.22 --2 48.40 48.31 (48.22 + 48.40) / 2 = 48.31 3 47.28 47.69 (.4 " 48.31) + (.6 " 47.28) = 19.324 + 28.368 = 47.692 = 47.69 4 47.30 47.46 (.4 " 47.69) + (.6 " 47.30) = 19.076 + 28.38 = 47.456 = 47.46 The 3-day moving average as of day 4 is 47.46. EXPONENTIAL MOVING AVERAGE B 79. What is the 4-day exponential moving average as of day 5 assuming that a weight of 70 percent of the average weight is placed on the most recent price? A. 46.08 B. 47.93 C. 48.14 D. 48.57 E. 49.33 Level: Hard Solution: Four-Day Exponential Day Closing Price Moving Average Computation 1 48.22 --2 48.40 --3 47.28 47.97 (48.22 + 48.40 + 47.28) / 3 = 47.97 4 47.30 47.50 (.3 " 47.97) + (.7 " 47.30) = 14.391 + 33.11 = 47.501 = 47.50 5 48.11 47.93 (.3 " 47.50) + (.7 " 48.11) = 14.25 + 33.677 = 47.927 = 47.93 The 4-day moving average as of day 5 is 47.93.

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MONEY FLOW B 80. Given the following information, what is the net money flow at the end of the trading day? Price 21.00 20.50 21.00 20.75 20.75 A. -223,650 B. -105,375 C. 12,900 D. 108,625 E. 247,225 Level: Hard Solution: Price +,! ,0 21.00 20.50 ! 21.00 + 20.75 ! 20.75 0 Volume 8,600 9,800 6,500 5,700

Volume

Price " Volume

Money Flow (+)

Money Net Money Flow (!) Flow . 176,300 134,875 -105,375

8,600 176,300 9,800 205,800 205,800 6,500 134,875 5,700 At the end of the day

MONEY FLOW A 81. Given the following information, what is net money flow at the end of the trading day? Price 17.80 18.00 18.05 17.90 17.75 Volume 8,500 9,100 4,800 9,700

A. 59,160 B. 231,000 C. 317,255 D. 403,175 E. 575,350 Level: Hard Solution: Price " Price +,! ,0 Volume Volume 17.80 18.00 + 8,500 153,000 18.05 + 9,100 164,255 17.90 ! 4,800 85,920 17.75 ! 9,700 172,175 At the end of the day

Money Flow (+) 153,000 164,255

Money Net Money Flow (!) Flow .

85,920 172,175 59,160

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FIBONACCI NUMBERS C 82. The series of Fibonacci numbers contains the values 34, 55, and 89. What is the next number in this series? A. 110 B. 136 C. 144 D. 152 E. 163 Level: Medium Solution: Next number = 55 + 89 = 144 FIBONACCI NUMBERS D 83. The price of a stock increased from $32 to $36. Using phi, what are the primary and secondary support areas for the stock? A. 32.18; 30.81 B. 32.18; 33.53 C. 34.47; 31.40 D. 34.47; 33.53 E. 35.14; 33.72 Level: Hard Solution: Primary support = 36 ! [(36 ! 32) " .382] = 34.472 = 34.47 Secondary support = 36 ! [(36 ! 32) " .618] = 33.528 = 33.53 FIBONACCI NUMBERS B 84. Buffalo Burgers stock increased from $14 a share to $19 a share. Based on phi, what are the primary and secondary support areas for this stock? A. 17.09; 14.87 B. 17.09; 15.91 C. 18.13; 15.42 D. 18.71; 15.44 E. 18.71; 16.57 Level: Hard Solution: Primary support = 19 ! [(19 ! 14) " .382] = 17.09 Secondary support = 19 ! [(19 ! 14) " .618] = 15.91 FIBONACCI NUMBERS B 85. Which of the following is a Fibonacci number? A. 12 B. 13 C. 14 D. 15 E. Cannot be determined Level: Easy Solution: 1, 1, 2, 3, 5, 8, (13 = 5+8)

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CHAPTER 9

IV. ESSAY 86. Use the following information to create an open-high-low-close chart for the week. Day Monday Tuesday Wednesday Thursday Friday High 28.16 27.14 27.42 27.50 27.40 Low 27.42 26.90 27.10 27.25 26.88 Open Close 28.01 27.44 26.98 27.14 27.17 27.30 27.30 27.47 27.40 27.10

Students should draw a graph similar to that found in the textbook. 87. What is behavioral finance and how does investor behavior affect the markets according to those who support behavioral finance? Behavioral finance is a research area which studies investor behavior and how investor reasoning errors affect investment decisions and market prices. Some believe that cognitive errors by investors lead to inefficient markets as the irrational actions of some investors can not always be immediately corrected by the arbitrage activities of rational investors. 88. Present some arguments for and against the usefulness of technical analysis as a means of predicting future market prices. Student answers will be quite varied but should present some degree of intellectual understanding of technical analysis. One argument for its usefulness is the point that if sufficient numbers of investors believe in technical analysis and therefore react in a predictable manner based on that analysis, they might have a noticeable effect on the market, which in turn might be predictable. A key argument against its usefulness is the efficient markets hypothesis provided that you believe the market is at least weak-form efficient. This question can also be used as a lead-in to a class discussion on the topic.

2009 McGraw-Hill Ryerson Ltd.

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