Equity Investments MCQ - Equity Investments Section 1

81 Some observed anomalies that are not violations of market efficiency could rather be:

Some observed anomalies are not violations of market efficiency, but rather are the result of statistical methodologies used to detect the anomalies. As a result, if the methodologies are corrected, most of these anomalies disappear.

82 The tendency of people to dislike losses more than they like comparable gains is most likely referred to as:

According to the loss aversion arguments, investors dislike losses more than they like comparable gains.

83 According to behavioral finance, the investor bias in which investors assess new informationand probabilities of outcomes based on similarity to the current state is best described as:

Representativeness is where investors assess new information and probabilities of outcomes based on similarity to the current state or to a familiar classification.

84 Lin Xiu, a well-respected financial analyst, buys a stock after utilizing her analytical experience and up-to-date information. Her friends imitate Lin’s actions and also buy the same stock. Which of the following statements is most accurate?

This behavioral bias is an example of an information cascade wherein the transmission of information is from those participants who act first and whose decisions influence the decisions of others. The behavior of informed traders acting first and uninformed traders imitating the informed traders is consistent with rationality. The imitation trading by the uninformed traders helps the market incorporate relevant information and improves market efficiency

85 You are a well-respected financial and a charterholder. You continuously use your skills and analytical expertise along with up-to-date information to make investment decisions. Your close friends imitate your decision and buy or sell in accordance with your investment decisions. Which of the following statements is least likely accurate with regards to the behavioral exhibited by your close friends?

This behavioral bias is an example of an information cascade wherein the transmission of information is from those participants who act first (i.e. you) and whose decisions influence the decisions of others (your friends). The behavior of informed traders acting first and uninformed traders imitating the informed traders is consistent with rationality. The imitation trading by the uninformed traders helps the market incorporate relevant information and improves market efficiency.