Bus 405 Week 2 Chapter 8 Behavioral Finance And The Psychology Of Investing

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This document of BUS 405 Week 2 Chapter 8 Behavioral Finance and the Psychology of Investing includes: 1. What is the area of finance called that addresses issues such as how reasoning errors affect investment decisions? 2. Which one of the following is the basis for prospect theory? 3. Which one of the following defines frame dependence? 4. Mental accounting is the process of associating a stock with its: 5. Loss aversion is defined as: 6. Representativeness heuristic is best explained as: 7. The belief that information you hold is superior to information held by other investors best describes: 8. An unwillingness to take a risk after a loss describes: 9. Which one of the following is the tendency to believe that random events that occur in clusters are not really random? 10. Which one of the following best describes heuristics? 11. The concept that well-capitalized, rational traders may be unable to correct a mispricing defines which one of the following terms? 12. Which one of the following is a trader whose trades are not based on meaningful financial analysis or information? 13. Which one of the following risks is related to irrational beliefs? 14. Technical analysis is the study of which one of the following as the basis for trading? 15. 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 16. According to Elliott wave theory, market predictions should be based on which one of the following? 17. The minimum price at which a security is expected to trade is called the: 18. The maximum price at which a security is expected to trade is called the: 19. The measure of performance of one investment compared to another investment is called the: 20. Prospect theory is based on the concept that investors are: 21. Which one of the following statements is correct regarding prospect theory? 22. 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 behaviour is he displaying if he spins the wheel? 23. Investors tend to make better decisions when looking at a decision: 24. Which one of the following is an example of mental accounting? 25. According to the concept of loss aversion, individual investors are most apt to do which one of the following? 26. According to the concept of house money, individual investors are most apt to do which one of the following? 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: 28. The tendency to overvalue an item because you own it is referred to as which one of the following? 29. 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? 30. Ted constantly ignores the effects of inflation on money. Ted is suffering from which one of the following? 31. Investors who tend to invest too heavily in the securities issued by their employer suffer from the condition known as: 32. Which one of the following statements appears to be correct based on current research? 33. The increased cash flows into mutual funds that have recently had superior returns is most associated with which one of the following characteristics? 34. 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: 35. 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: 36. According to the theory of recency bias, investors tend to believe the financial markets will: 37. Which one of the following is a characteristic of the self-attribution bias? 38. 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 39. Which one of the following market sentiment index (MSI) values represents the best buying opportunity? 40. Which one of the following market sentiment index (MSI) values indicates that all polled investors were bearish? 41. Which one of the following indicates the long-run direction of the market according to Dow Theory? 42. What is the primary purpose of Dow theory? 43. According to Dow theory, which one of the following is the primary means of eliminating secondary market trends? 44. If you are a proponent of the Elliott wave theory, you are most apt to do which one of the following? 45. According to technical analysis, which one of the following is best seen as a buying opportunity? 46. 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? 47. Which one of the following advance/decline lines is the most bullish signal? 48. 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 49. If the closing tick of the day is +32, this means that the: 50. Which one of the following Arms values is the most bearish? 51. 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: 52. A "block trade" is a trade in excess of how many shares? 53. Which one of the following statements is correct concerning an open-high-low-close bar chart? 54. According to technical analysts, pricing patterns such as the head and shoulders are indicators of potential: 55. Which one of the following is correct concerning a head and shoulders top pattern? 56. Which one of the following statements is correct regarding moving averages? 57. Assume the 50-day moving average is currently intersecting the 200-day moving average. Also assume the 50-day average is downward sloping and the 200-day average is upward sloping. Which one of the following statements is accurate based on this information? 58. Bollinger bands: 59. A stock's price has been relatively constant for an extended period of time. In this instance, the Bollinger bands are: 60. Investors who use the MACD indicator as a signal for trading are most apt to buy a security when the MACD: 61. Which of the following are considered in the computation of money flows? I. last trade price II. current trade price III. volume of each trade IV. time of each trade 62. Assume a stock's price remains relatively stable while the money flow becomes highly positive. Which one of the following is most expected given this scenario? 63. Fibonacci numbers: 64. Some technical analysts use Fibonacci numbers to predict: 65. Which one of the following is seen as a bearish indicator? 66. A survey of 55 of your fellow classmates determines that 20 of them are bullish on the market while the remainder is bearish. What is the market sentiment index for this group of individuals? 67. A recent survey indicates that 1,731 people are bearish on the market for every 1,000 that are bullish. What is the value of the market sentiment index based on this information? 68. Given the following information, what is the value of the advance/decline line on the third day of this 3-day period? 69. Given the following information, what is the value of the advance/decline line on the second day of this 3-day period? 70. Given the following information, what is the value of the closing Arms? 71. Given the following information, what is the value of the closing Arms? 72. Last year, Kathy purchased 2 shares of stock A at $60 a share. At the same time, she purchased 3 shares of stock B at $40 a share. Today, stock A is valued at $70 a share and stock B is worth $47 a share. What is the relative strength of stock A as compared to stock B? 73. What is the 3-day simple moving average as of day 5, given the following information? 74. What is the 4-day simple moving average as of day 7, given the following information? 75. What is the 3-day exponential moving average as of day 4 assuming that a weight of 70 percent is placed on the most recent price? 76. What is the 3-day exponential moving average as of day 5 assuming that a weight of 60 percent is placed on the most recent price? 77. Given the following information, what is the net money flow at the end of the trading day? 78. Given the following information, what is the net money flow at the end of the trading day? 79. The series of Fibonacci numbers contains the sequential values of 610 and 987. What is the next number in this series? 80. The price of a stock increased from $21 to $26. Using phi, what are the primary and secondary support areas for the stock? 81. Altoona Train stock increased from $18 a share to $25 a share. Based on phi, what are the primary and secondary support areas for this stock? 82. Draw a basic Elliott Wave Pattern. Identify each wave and indicate the waves that are "corrective" and those that are "impulsive". 83. Explain the basics of prospect theory and provide an example that illustrates this theory. 84. Give some examples of how overconfidence affects investor behavior along with the results that might be expected based on that behavior.

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Business - General Business Week One Week 1 – DQ1 - Blume’s Formula, Allocation, and Selection From Chapter 1, answer Concept Question 5: What is Blume’s formula? When would you want to use it in practice? Also, from Chapter 2, answer Concept Question 4: What is the difference between asset allocation and security selection? Remember to complete all parts of the questions and support your answers with examples from the text and other resources. Week 1 – DQ2 - Money Market Funds From Chapter 4, complete Problem 4: The Aqua Liquid Assets Money Market Mutual Fund has a NAV of $1 per share. During the year, the assets held by this fund appreciated by 2.5 percent. If you had invested $50,000 in this fund at the start of the year, how many shares would you own at the end of the year? What will the NAV of this fund be at the end of the year? Why? Remember to complete all parts of the question, show your work, and report the results of your analysis. Assignment Week 1- Assignment - Annualized Returns – Chapter 3 problem 18 Complete problem 18 in Chapter 3 (shown below) and submit to the instructor. Show your work to find the annualized return for each of the listed share prices. Write a 100 word analysis of the process to calculate these annualized returns. Suppose you have $28,000 to invest. You’re considering Miller-Moore Equine Enterprises (MMEE), which is currently selling for $40 per share. You also notice that a call option with a $40 strike price and six months to maturity is available. The premium is $4.00. MMEE pays no dividends. What is your annualized return from these two investments if, in six months, MMEE is selling for $48 per share? What about $36 per share? Week Two Readings Chapter 5: The Stock Market Chapter 6: Common Stock Valuation Chapter 7: Stock Price Behavior and Market Efficiency Chapter 8: Behavioral Finance and the Psychology of Investing Discussions Week 2 – DQ1 - Primary and Secondary Markets Complete Concept Question 1 from Chapter 5: If you were to visit your local Chevrolet retailer, there is both a primary and a secondary market in action. Explain. Is the Chevy retailer a dealer or a broker? Remember to complete all parts of the question and support your answers with examples from the text and other resources. Week 2 – DQ2 - Contrarian Investing Complete Concept Question 9 from Chapter 8: What does it mean to be a contrarian investor? How would a contrarian investor use technical analysis? Post your answers to the discussion board. Remember to complete all parts of the question and support your answers with examples from the text and other resources. Assignment Week 2 – Assignment - Abbott Laboratories Problem After reading the Value Line figures and information on Abbott Laboratories in the Questions and Problems section of Chapter 6 (just before Problem 27), complete Problems 27, 28, 29, 30, and 31 and submit to your instructor. Show your calculations and in your response to problem 31 write a 100 to 200 word defense of your position as to the value of Abbott Laboratories stock at its current price of $50 per share. 27. What is the sustainable growth rate and required return for Abbott Laboratories? Using these values, calculate the 2010 share price of Abbott Laboratories Industries stock according to the constant dividend growth model. 28. Using the P/E, P/CF, and P/S ratios, estimate the 2010 share price for Abbott Laboratories. Use the average stock price each year to calculate the price ratios. 29. Assume the sustainable growth rate and required return you calculated in Problem 27 are valid. Use the clean surplus relationship to calculate the share price for Abbott Laboratories with the residual income model. 30. Use the information from the previous problem and calculate the stock price with the clean surplus dividend. Do you get the same stock price as in the previous problem? Why or why not? 31. Given your answers in the previous questions, do you feel Abbott Laboratories is overvalued or undervalued at its current price of around $50? At what price do you feel the stock should sell? Week Three Discussions Week 3 – DQ1 - Forward Interest Rates Complete Problem 16 from the Questions and Problems section of Chapter 9: According to the pure expectations theory of interest rates, how much do you expect to pay for a one-year STRIPS on February 15, 2011? What is the corresponding implied forward rate? How does your answer compare to the current yield on a one-year STRIPS? What does this tell you about the relationship between implied forward rates, the shape of the zero coupon yield curve, and market expectations about future spot interest rates? Remember to complete all parts of the questions, and report the results of your analysis. Week 3 – DQ2 - Bond Prices versus Yields Complete Concept Question 9 of Chapter 10: (a) What is the relationship between the price of a bond and its YTM? (b) Explain why some bonds sell at a premium to par value, and other bonds sell at a discount. What do you know about the relationship between the coupon rate and the YTM for premium bonds? What about discount bonds? For bonds selling at par value? (c) What is the relationship between the current yield and YTM for premium bonds? For discount bonds? For bonds selling at par value? Remember to complete all parts of the questions, and report the results of your analysis. Assignment Week 3 – Assignment – Bootstrapping Chapter 10 Problem 31 Complete problem 31 of Chapter 10 (shown below), and submit to your instructor. Show your calculations and the algebraic manipulation of the price equation for the bond. In addition to solving the problem, write a 100 to 200 word essay on the term structure of fixed income securities. One method used to obtain an estimate of the term structure of interest rates is called bootstrapping. Suppose you have a one-year zero coupon bond with a rate of r1 and a two-year bond with an annual coupon payment of C. To bootstrap the two-year rate, you can set up the following equation for the price (P) of the coupon bond: /(1+r_1 )+(C_2+Par value)/(1+r_2 )^2 Because you can observe all of the variables except r2, the spot rate for two years, you can solve for this interest rate. Suppose there is a zero coupon bond with one year to maturity that sells for $949 and a two-year bond with a 7.5 percent coupon paid annually that sells for $1,020. What is the interest rate for two years? Suppose a bond with three years until maturity and an 8.5 percent annual coupon sells for $1,029. What is the interest rate for three years? Week Four Discussions Week 4 – DQ1 – Expected Returns and Deviation Complete Problems 1, 2, and 3 from the Questions and Problems section of Chapter 11 (shown below). Remember to complete all parts of the questions, and report the results of your analysis. a. Use the following information on states of the economy and stock returns to calculate the expected return for Dingaling Telephone. State of Economy Probability of State of the Economy Security Return if State Occurs Recession .30 -8% Normal .40 13 Boom .30 23 b. Using the information in the previous question, calculate the standard deviation of returns. c. Repeat Questions 1 2 assuming that all three states are equally likely. Week 4 – DQ2 – Portfolio Weights Complete Problem 10 from the Questions and Problems section of Chapter 12: A stock has a beta of .9 and an expected return of 9 percent. A risk-free asset currently earns 4 percent. a. What is the expected return on a portfolio that is equally invested in the two assets? b. If a portfolio of the two assets has a beta of .5, what are the portfolio weights? c. If a portfolio of the two assets has an expected return of 8 percent, what is its beta? d. If a portfolio of the two assets has a beta of 1.80, what are the portfolio weights? How do you interpret the weights for the two assets in this case? Explain. Assignment Week 4 – Assignment – Performance Metrics Chapter 13 Problem 22 Complete Problem 22 in the Questions and Problems section of Chapter 13 (shown below). When you pick the best choice for your portfolio, defend your decision in a 100 - 200 word essay. You have been given the following return information for two mutual funds (Papa and Mama), the market index, and the risk-free rate. Year Papa Fund Mama Fund Market Risk-Free 2008 -12.6% -22.6 -24.5% 1% 2009 25.4 18.5 19.5 3 2010 8.5 9.2 9.4 2 2011 15.5 8.5 7.6 4 2012 2.6 -1.2 -2.2 2 Calculate the Sharpe ratio, Treynor ratio, Jensen’s alpha, information ratio, and R-squared for both funds and determine which is the best choice for your portfolio. Week Five Discussions Week 5 – DQ1 – Hedging with Futures Complete Concept Question 7 from Chapter 14: The town of South Park is planning a bond issue in six months and Kenny, the town treasurer, is worried that interest rates may rise, thereby reducing the value of the bond issue. Should Kenny buy or sell Treasury bond futures contracts to hedge the impending bond issue? Remember to complete all parts of the question and support your answers with examples from the text and other resources. Week 5 – DQ2 – Option Strategies Complete Concept Question 12 from Chapter 15: Recall the options strategies of a protective put and covered call discussed in the text. Suppose you have sold short some shares of stock. Discuss analogous option strategies and how you would implement them. (Hint: They’re called protective calls and covered puts.) Remember to complete all parts of the question and support your answers with examples from the text and other resources. Final Project Week 5 – Final Project – Construct a well-diversified portfolio The student will construct a well-diversified portfolio using an initial investment stake of $50,000 (the portfolio should use 95% of the fund, but they may not use more than $50,000). The student may include stocks, common or preferred; bonds, corporate or U.S. Treasury bonds; mutual funds; and futures contract or options. The student will use the closing prices from the first day of the class to determine the price of each issue. Only whole lots of any issues may be acquired, that is no less than 100 shares of common or preferred stock; no less than 5 corporate bonds or $10,000 for U.S. Treasury Bonds; no fewer than the minimum required investment for any mutual fund; and no fewer than 5 contracts for any option or futures position. The settlement date will be the first day of Week 3. The student does not have to use all of the above mentioned securities, but they must use more than one class. Transaction costs are ignored in the creation of the portfolio.

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