Investments, tenth edition

  KEY TERMS 

  PROBLEM SETS  

Basic

 Example  

Characteristic 

  a.   Investors are slow to update their beliefs when given new 

evidence. 

 i. Disposition effect. 

  b.   Investors are reluctant to bear losses caused by their 

unconventional decisions. 

 ii. Representativeness bias. 

  c.   Investors exhibit less risk tolerance in their retirement 

accounts versus their other stock accounts. 

 iii. Regret avoidance. 

  d.  Investors are reluctant to sell stocks with “paper” losses. 

 iv. Conservatism bias. 

  e.   Investors disregard sample size when forming views about 

the future from the past. 

 v. Mental accounting. 

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  Behavioral Finance and Technical Analysis  

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   10.  What do we mean by fundamental risk, and why may such risk allow behavioral biases to 

 persist for long periods of time?  

   11.  What is meant by data mining, and why must technical analysts be careful not to engage in it?  

   12.  Even if prices follow a random walk, they still may not be informationally efficient. Explain 

why this may be true, and why it matters for the efficient allocation of capital in our economy.     

    13.  Use  the  data  from   The Wall Street Journal  in  Figure 12.5  to verify the trin ratio for the NYSE. Is 

the trin ratio bullish or bearish?  

   14.  Calculate breadth for the NYSE using the data in  Figure 12.5 . Is the signal bullish or bearish?  

   15.  Collect data on the DJIA for a period covering a few months. Try to identify primary trends. 

Can you tell whether the market currently is in an upward or downward trend?  

   16.  Suppose Baa-rated bonds currently yield 6%, while Aa-rated bonds yield 5%. Suppose that due 

to an increase in the expected inflation rate, the yields on both bonds increase by 1%. What 

would happen to the confidence index? Would this be interpreted as bullish or bearish by a 

technical analyst? Does this make sense to you?  

   17.   Table 12A  presents price data for Computers, Inc., and a computer industry index. Does Com-

puters, Inc., show relative strength over this period?  

   18.  Use again the data in  Table 12A  to compute a 5-day moving average for Computers, Inc. Can 

you identify any buy or sell signals?  

   19.  Yesterday, the Dow Jones industrials gained 54 points. However, 1,704 issues declined in price 

while 1,367 advanced. Why might a technical analyst be concerned even though the market 

index rose on this day?  

Intermediate