Equity Investments - Equity Investments Section 1
- Option : B
- Explanation : Conservatism is the behavioral finance theory in which investors tend to be slow to react to new information and continue to maintain their prior views and forecasts. Narrow framing involves investors focusing on issues in isolation while representativeness involves investors assessing probabilities of outcomes depending on how similar they are to the current state.
87. Which of the following statements is/are correct?
Statement 1: The size effect and the value effect are cross-sectional anomalies in the financial market.
Statement 2: The overreaction effect and the closed end fund discount are cross-sectional anomalies in the financial market.
- Option : A
- Explanation : The size effect and the value effect are the cross-sectional anomalies in the financial market.
- Option : C
- Explanation : In herding, investors ignore their private information and act
as other investors do.
89. Which of the following behavioral biases most likely causes overreaction in the market?
- A
Preference shares have characteristics of both debt and equity securities.
- B
Preference shareholders rank below subordinated bondholders with respect to claims on the company’s net assets upon liquidation.
- C
The price of convertible preference shares tends to be more volatile than their underlying common shares.
- Option : C
- Explanation : The price of convertible preference shares tends to be less volatile than their underlying common shares because they do not allow investors to share in profits of the company and the dividends on preference shares are fixed.
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