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Exam 22: Behavioral Finance: Implications for Financial Management

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Question 1

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When weighing a decision,Kate places greater emphasis on opinions that match her own than she does on opinions offered by others that disagree with her personal point of view.Kate illustrates which one of the following?

A) frame dependence
B) overconfidence
C) gambler's fallacy
D) confirmation bias
E) overoptimism

F) A) and D)
G) A) and E)

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Question 2

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Kate is attempting to sell her house for $260,000.Fred lives across the street in an identical house.Fred recently stated to his wife that Kate's house is probably worth only $250,000 but that once she sells her house,he would like to put their house on the market at $285,000 and then move into a condominium.Which one of the following behaviors applies to Fred?

A) myopic loss aversion
B) house money effect
C) money illusion
D) self-attribution bias
E) endowment effect

F) A) and E)
G) B) and D)

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Question 3

Multiple Choice

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AB Industries is an all-equity firm that has $10 per share in cash and a book value per share of $12.At which one of the following market prices would you know with absolute certainty that the stock was mispriced?

Amy is the chief financial officer of a retail toy store.Recently,she decided that the firm should expand its operations and open two additional stores.Within a very brief period,it was obvious that Amy had made a very bad decision in opening those stores,given that the economy is in the middle of a severe recession.In reflecting back on her decision,Amy realizes that she made a bad decision due to a reasoning error.Which one of the following areas of study best applies to this situation?

Which one of the following best illustrates an error which you,as a manager,might make due to overconfidence?

Old Country Productions requires skilled furniture finishers to put the final touches on all of the furniture it produces.The firm hired two individuals last year who had been students in Mr.Tedwell's wood shop class in high school.Both of these employees have demonstrated exceptional skills and have already been promoted to senior finishing positions.The firm currently has an opening for one additional finisher.Tom,the head of the finishing section,has stipulated that he only wants to interview candidates who have completed Mr.Tedwell's course.Tom's behavior is typical of someone who has which one of the following characteristic behaviours?

Explain 1)the concept of house money,2)why the house money concept is such a common behavior for so many individuals and 3)why house money is an irrational behavior.

Which of the following statements are correct? I.Many professional fund managers are paid well but fail to outperform as expected. II.Professional fund managers that have tenures in excess of ten years,tend to consistently outperform the market on a long-term basis. III.If a market is truly efficient,then all investments in that market are zero net present value opportunities. IV.Actively managing a fund appears to be the key to outperforming the market.

You started an online business three weeks ago.Thus far,you have averaged 10 sales a day,which is one sale for every five hits.You are now considering giving up your day job and becoming a full-time online retailer.You have calculated the amount of income you can earn based on 10 sales a day and know that level of income would support you in a comfortable fashion.The belief that you will have 10 sales per day on average if this becomes your full-time occupation is based on which one of the following?

You don't particularly like to shop so only go to the mall once a month.To help make the trek more enjoyable,you always have lunch at the restaurant located inside the mall.Since you are such a creature of habit,you always order the same meal.You've noticed that the price of that meal has increased every time you have been there over the past six months.Thus,you expect the meal to increase in price next month.This is an example of which one of the following?

Which one of the following statements is true?

The tendency for a decision maker to search for confirmation that a recent decision he or she made was a good decision represents which one of the following characteristics?

Assume you are an overconfident manager.You are most apt to do which one of the following more so than you would if you were not overconfident?

Phyllis is planning for her retirement in fifteen years.She knows that she can currently live reasonably well on $38,000 a year given that she is debt-free.Based on her family history she expects to die ten years after she retires.Thus,she computes her retirement need as $38,000 a year for 10 years.Which one of the following behaviors applies to Phyllis?

In an efficient market,it is believed by some individuals that the actions of traders who constantly buy and sell on any perceived market mispricings will in effect cause market prices to correctly reflect asset values.A person who believes that the actions of these traders will not result in correctly valued prices are most apt to believe in which one of the following?

Bill feels that he possesses a good dose of "street smarts".Thus,he makes his business decisions based on how a project feels to him rather than taking the time to financially analyze a project.This type of behavior is referred to as:

You are the manager of a retail store.You believe the economy is in a recession and that sales for the month will be unusually slow.Since you have complete discretion over the pricing at your location,you decide to have a store-wide sale and offer 10 percent off all merchandise for a 3-day period.You don't expect your superiors to criticize this decision as you believe they,along with the majority of the other store managers,feel the same way about the economy as you do.Which one of the following applies to you?

Recently,a neighbor you have known for years won a lottery and received a $250,000 prize.This neighbor decided to invest all of his winnings in a new business venture that he knew only had a five percent chance of success.Previous to this,the neighbor had always been ultra conservative with his money and had refused to invest in this business venture as recently as last week.Which one of the following behaviors most applies to your neighbor's decision to invest in this business venture now?

You are employed as a commission-based sales clerk for a cosmetics retail store.You know that on average,exactly 50 percent of the customers that enter your store will make at least one purchase.Thus far this morning,you have waited on eight customers without making a single sale.You are convinced that the next customer you wait on will buy something.This belief is known as:

Stewart is a fellow finance student at your school who is addicted to day trading and thus buys and sells stocks between classes and over his lunch break.He never has time to really analyze a security so just trades the stock symbols that other investors appear to be trading.Stewart is which one of the following?