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Exam 22: Behavioral Finance: Implications for Financial Management

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Question 21

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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?

A) mental accounting
B) anchoring and adjustment
C) law of small numbers
D) bubble and crash theory
E) confirmation bias

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

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Question 22

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Over the past six months,you have watched as your parent's retirement savings have declined in value by 45 percent due to a severe financial market downturn.As a result,you have decided that you will never invest in stocks for your own retirement but will instead keep all of your money in an insured bank account.Which behavior characteristic have you developed as a result of the market downturn?

A) myopic loss aversion
B) get-evenitis
C) self-attribution bias
D) mental accounting
E) regret aversion

F) None of the above
G) D) and E)

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Question 23

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Amy has been investing in stocks so she can accumulate sufficient money to purchase her own home.These savings are currently valued at $82,500.As recently as last month,her savings were worth in excess of $110,000.Today,Amy found the perfect house.She knows she can withdraw her savings to pay on this house and borrow the remaining balance from her father at zero percent interest.However,Amy is refusing now to buy any house until her savings increase in value back to their $110,000 previous valuation.Amy is displaying which one of the following behaviors?

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?

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?

Peter has successfully managed the finances of A.D.Leadbetter in a manner that has yielded abnormally high returns.Due to this success,Peter has decided to publish a newsletter for financial executives so that he can share his superior financial wisdom with others.There is a very real probability that Peter has which one of the following characteristics?

Marzella Corp.is analyzing a project that involves expanding the firm into a new product line.The project includes the construction of a new manufacturing facility and the creation of a new distribution system.The project's financial projections will tend to have which one of the following characteristics if the person compiling those projections suffers from overoptimism?

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:

Up until three years ago,A.C.Dime opened an average of ten new retail stores a year.One of those stores had to be closed within two years due to poor sales.This 90 percent success ratio was fairly steady for over 30 years.Starting three years ago,the firm has opened 40 new stores and every one had significant profits within 6 months.Management believes their recent success is not just a random event and that all future stores will be profitable.Thus,the managers have decided to open a minimum of 15 new stores each year.The managers are suffering from:

General rules used as the basis for decision making are referred to as:

You are a hard-charging manager who doesn't really like to sit at a desk for too long.You prefer to gather information quickly,make a decision,and move on to the next item on your agenda.Which one of the following applies to you?

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

Which of the following create limits to arbitrage? I.risks related to an individual firm II.implementation costs III.rational traders IV.noise traders

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?

Steve purchased a stock last year for $34 a share.The stock increased in value to $36 a share before declining to its current value of $30.Steve has decided to sell the stock,but only if he can receive $34 a share or better.Steve is suffering most from which one of the following behavioral conditions?

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?

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?

You have saved a total of $200,000 over the past several years.Jane,a trusted business associate,recently approached you with an offer.She has offered you a partnership in a new firm that she expects to be exceedingly profitable.Your initial investment in the partnership would be $125,000.However,Jane cannot give you any odds on that success occurring.You have decided to keep your $125,000 and forego this opportunity simply because you don't know the probability of success.Which one of the following behavior characteristics do you have?

You recently overheard your boss telling someone that if he'd actually crunched some numbers and done some analysis instead of just going with his instincts that he never would have opened the new store in Centre City.Which one of the following caused your boss to make a bad decision?

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?