Behavioral Finance
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Course Introduction
Behavioral Finance explores the psychological influences and cognitive biases that affect the financial behaviors of investors and markets. This course examines how traditional economic theories often fail to account for real-world investor behavior, introducing concepts such as prospect theory, herding, overconfidence, loss aversion, and mental accounting. Through the analysis of empirical studies and market phenomena, students learn how behavioral biases impact investment decision-making, asset prices, and market anomalies. Practical applications include understanding and mitigating irrational financial decisions, developing strategies to recognize market inefficiencies, and designing financial products that align with actual investor behavior.
Recommended Textbook
Investments Concepts and Applications 5th Edition by Richard Heaney
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Chapter 1: The Investment Decision
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Sample Questions
Q1) An investor purchased the investment above.What is the value-weighted return on the portfolio?
A) \(-1.2 \%\)
B) \(1.2 \%\)
C)\(2.3 \%\)
D) \(2.5\%\)
Answer: B
Q2) Which of the following is true regarding the investor's life cycle of Seigal (1991)?
A) As investors age, less wealth is allocated to risky investments
B) As investors age, their wealth increases
C) Younger investors tend to make better investments
D) Investment composition changes little with age
Answer: A
Q3) The use of discrete returns ignores compounding.
A)True
B)False
Answer: True
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Page 3
Chapter 2: Australian Financial Markets
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Sample Questions
Q1) Company ABC has a share price of $10 and has 400 000 shares on issue.If the company makes a bonus issue of 100 000 additional shares,calculate the ex-bonus price of shares in ABC.
A) \(\$ 2.00\)
B) \(\$ 5.00\)
C) \(\7.50\)
D) \(\$ 8.00\)
Answer: D
Q2) In Australia,the main organized securities markets available to investors included: A) ASX
B) \(\mathrm{ASX} 24\)
C) \(\text { Chi-X }\)
D) \(\text { All of the above }\)
Answer: D
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Chapter 3: The International Investment Environment
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Sample Questions
Q1) The Australian dollar was pegged to a basket of currencies during what period?
A) \(1944 \text { to } 1961\)
B) \(1960 \text { to } 1971\)
C) \(1974 \text { to } 1978\)
D) \(1976 \text { to } 1983\)
Answer: C
Q2) Australia is different to most other foreign markets in that it uses the direct method of quotation.
A)True
B)False
Answer: False
Q3) In mid-1997,which part of the world struggled in financial crisis?
A) South-east Asian market
B) New Zealand market
C) Asian market
D) USA market
Answer: C
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Chapter 4: Financial Management: Derivative Instruments
and Information Sources
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Sample Questions
Q1) Which type of contract is highly standardised?
A) option contract
B) Warrant contract
C) equity futures contract
D) all of the aboye
Q2) Equity futures contracts,warrant contracts and option contracts are all forms of non-standardised forms of derivatives.
A)True
B)False
Q3) Which is the largest market for currency futures trading?
A) International Money Market
B) Chicago Board of Trade
C) Sydney Futures Exchange
D) New York Stock Exchange
Q4) Much of the security-specific information is publicly available through sources such as the ASX and the world wide web.
A)True
B)False
Page 6
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Chapter 5: Money Market Securities
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Sample Questions
Q1) The risk that is associated with the difficulty to find a buyer or seller when it is necessary to buy or sell securities is known as:
A) interest rate risk
B) liquidity risk
C) default risk
D) none of the aboye
Q2) Suppose the expected one-month rates of return are 3% p.a. ,4.5% p.a.and 7% p.a.for the month ending in one,two and three months' time respectively.Further,it is found that the liquidity premium for the second and third month is 1.75% and 2.40% respectively.According to the liquidity premium theory,what is the three-month yield?
A) \( 3.91 \% \)
B) \( 4.27 \% \)
C) \( 4.79 \% \)
D) \( 6.25 \% \)
Q3) The elasticity of commercial bill changes in the yield is the time to maturity.
A)True
B)False
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Page 7
Chapter 6: Bonds
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Sample Questions
Q1) The value of a bond measured at a duration date will vary with a change in the yield.
A)True
B)False
Q2) What is the purchase price of a bond bought on 1 March 2005,paying semi-annual coupons of 6.0% p.a.and maturing on 15 June 2007? The coupons are paid on 15 June and 15 December each year,and each compounding period has 181 days.The bond has a face value of $100 000 and a yield of 7% p.a.
A) \( \$ 98 \quad 668.76 \)
B) \( \$ 98 \quad 595.77 \)
C) \( \$ 99 \quad 145.75 \)
D) \( \$ 99 \quad 498.14 \)
Q3) The following statement,"investors must forgo some yield when compared with straight bonds because of the lower risk,and the market should price these accordingly",refers to index-linked bonds.
A)True
B)False
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Chapter 7: Investor Preferences and Portfolio Concepts
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Sample Questions
Q1) An investor wishes to earn a portfolio with a standard deviation of 5%,by placing funds in the risk-free and risky asset portfolios.If the risky asset portfolio has a standard deviation and return of 10% and 5% respectively,calculate the weight that needs to be invested in the risky asset to achieve a standard deviation of 5%.
A) \( 20 \% \)
B) \( 40 \% \)
C) \( 50 \% \)
D) \( 75 \% \)
Q2) Which of the following is typically used as a proxy for a risk-free asset?
A) Corporate Bond
B) Consumer Price Index
C) All-Ordinaries
D) None of these choices
Q3) As the number of assets increases,the variance of an equally weighted portfolio approaches the average covariance.
A)True
B)False
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Page 9
Chapter 8: Risky Asset Pricing Models and the Capm
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Sample Questions
Q1) Testing the CAPM is difficult,as empirical tests have to rely on __________ data,whereas the CAPM is an __________ model.
A) ex-ante; ex-ante
B) ex-ante; ex-post
C) ex-post; ex-ante
D) ex-post; ex-post
Q2) CBA has a beta of 1.6 and WPL has a beta of 1.8.Given this,calculate the beta for a portfolio consisting of 65% in CBA and 35% in WPL.
A) \( 0.65 \)
B) \( 1.10 \)
C) \( 1.30 \)
D) \( 1.67 \)
Q3) According to the CAPM,if the expected return on the market return is 5% and the risk-free rate is 2%,the beta of a portfolio with a 6.5% return is 2.0.
A)True
B)False
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Chapter 9: Alternative Risky Asset Pricing Models
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Sample Questions
Q1) The three factors that appear to be most relevant when testing the APT relate to:
A) unexpected interest rates, inflation and economic growth
B) expected interest rates, inflation and economic growth
C) expected and unexpected interest rates and economic growth
D) expected and unexpected interest rates and inflation
Q2) Calculate the consumption beta for an asset with a standard deviation of 10%,where the variance of consumption growth is 10% and the covariance between the growth rate in consumption and the asset is 0.015.
A) \( 0.15 \)
B) \( 0.50 \)
C) \( 0.75 \)
D) \( 1.50 \)
Q3) In a study of the Australian equity market,Faff (1988)identifies up to three priced factors.
A)True
B)False
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11
Chapter 10: Concepts and Applications of Market Efficiency
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Sample Questions
Q1) Beedles,Dodd and Officer (1988)find that Australian small firms have risk-adjusted returns of around 8% p.a.
A)True
B)False
Q2) Which of the following strategies will be profitable if the market overreacts?
A) selling an undervalued security
B) buying an overvalued security
C) selling an overvalued security
D none of these choices
Q3) The more profitable IPO investments seem to be those:
A) associated with established companies
B) of a relatively large size
C) issued in a cold market
D) all of these choices
Q4) Positive autocorrelation implies that negative price changes are followed by positive price changes.
A)True
B)False
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Chapter 11: Equity Valuation Models
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Q1) You work for an arm of a major merchant bank specialising in Australian equity stocks.It is company policy to use the earnings capitalisation model for valuation purposes and to calculate EPS forecasts using two approaches;a random walk (RW)and a random walk with $0.05 drift (RWD).The EPS for PF Corporation is currently $0.50,and in the previous year EPS was $0.52.PF Corporation has a current share price of $5.60 and a cost of capital of 8%.Which of the following best represents your recommendation about PF Corporation under each approach?
A) both the RW and RWD approaches suggest buying the stock
B) both the RW and RWD approaches suggest short-selling the stock
C) the RW suggests a buy strategy, while the RWD suggests a short-sell strategy
D) the RWD suggests a buy strategy, while the RW suggests a short-sell strategy
Q2) Most firms exhibit constant rates of growth in their dividend series.
A)True
B)False
Q3) If a share is trading above its P/E multiplier,then it is trading at a discount.
A)True
B)False
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Chapter 12: Macro- and Industry Analysis of Share Markets
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Sample Questions
Q1) Which of the following does Harvey (1988)believe is a useful leading indicator for predicting future economic growth?
A) stock exchange index
B) Composite Leading Index
C) yield curve slope
D) futures contract prices
Q2) Macro-analysis of stocks involves consideration of assigning weights between all of the following except:
A) equities
B) bonds
C) real estate
D) growth stocks
Q3) An indexed-linked bond is one where the price is linked to the:
A)All-Ordinaries
B)Consumer Price Index
C)world equity market index
D)industrial production index
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Page 14
Chapter 13: Qualitative Stock Selection
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Sample Questions
Q1) Which of the following is NOT one of Reilly and Norton's (1995)competition determinants?
A) bargaining power of suppliers
B) leverage of the firm
C) threat of new entrants
D) potential substitutes
Q2) Fama and French (1992)showed that,over 20 years,value firms outperformed growth firms in the USA by approximately __________ p.a.
A) \( 8 \% \)
B) \( 13 \% \)
C) \( 20 \% \)
D) \( 25 \% \)
Q3) A _________ is a value above which it is difficult for the market to rise.
A)book value
B)resistance level
C)support level
D)confidence level
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Page 15
Chapter 14: Quantitative Company Analysis
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Sample Questions
Q1) Which of the following contains a summary of the profitability of a firm over the reporting period?
A) profit and loss statement
B) balance sheet
C) statement of cash flow
D) none of these choices
Q2) Evidence shows that mandated disclosure:
A) increases risks associated with equity investments
B) decreases risks associated with equity investments
C) does not change risks associated with equity investments
D) none of the above
Q3) A firm has an ROE of 20% and a market-to-book ratio of 2.38.Its P/E ratio is
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Page 16
Chapter 15: Futures and Forward Contracts
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Sample Questions
Q1) Which of the following have been suggested as reasons for the existence of beneficial swaps to firms?
A) tax
B) regulatory change
C) lowest cost of borrowing
D) all of the aboye
Q2) Interest rate swaps involve the exchange of ________________.
A)actual fixed-rate bonds for actual floating-rate bonds
B)actual floating-rate bonds for actual fixed-rate bonds
C)net interest payments and an actual principal swap
D)net interest payments based on notional principal,but no exchange of principal
Q3) An investor who goes short in a futures contract will _____ any increase in value of the underlying asset and will _____ any decrease in value in the underlying asset.
A)pay;pay
B)pay;receive
C)receive;pay
D)receive;receive
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17
Chapter 16: Option Contracts
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Sample Questions
Q1) Assume a two-period world with a current share price of $21.00,an interest rate of 6.5% over the period,a price increase factor of 1.43 and a price decrease factor of 0.55.What are the possible end-of-period prices?
A) \( \$ 18.70 \) and \( \$ 8.71 \)
B) \( \$ 21.25 \) and \( \$ 9.64 \)
C) \( \$ 22.61 \) and \( \$ 10.78 \)
D) \( \$ 30.03 \) and \( \$ 11.55 \)
Q2) All else the same,an American style option will be ______ valuable than a ______ style option.
A)more;EuropeanB)less;EuropeanC)more;CanadianD)less;Canadian-
Q3) Given an expected price fall in the underlying asset,a reasonable strategy to profit from this information would be to sell a call written on the asset.
A)True B)False
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Chapter 17: Advanced Issues in Options
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Q1) Which of the following are features of LEPOs?
A) they are traded on the ASX
B) the exercise price is typically \( \$ 0.01 \)
C) they are European-type options
D) all of these choices
Q2) An Asian call option gives its holder the right to ____________.
A)buy the underlying asset at the exercise price on or before the expiration date
B)buy the underlying asset at a price determined by the average stock price during some specified portion of the option's life
C)sell the underlying asset at the exercise price on or before the expiration date
D)sell the underlying asset at a price determined by the average stock price during some specified portion of the option's life
Q3) The premium on a LEPO tends to move similarly to that of a futures contract.
A)True
B)False
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19
Chapter 18: Alternative Investments
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Sample Questions
Q1) Which of the following is type of private equity investors?
A) Internal investors who might best be regarded as entrepreneurs who create the business and typically invest both their effort and money
B) External investors who typically invest funds at a later stage of the business life cycle.
C) Both of these choices
D) None of these choices
Q2) Moskowitz and Vissing-Jørgensen (2002)estimate that,for those households that hold private equity,that investment represents 41% of household wealth.
A)True
B)False
Q3) Alternative investments (AI)do not generally represent an asset class that tends to be restricted to professional fund managers and very large private investors.
A)True
B)False
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Chapter 19: Portfolio Management
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Sample Questions
Q1) What the GFC taught advisers and __________________ in the most powerful and painful way possible was that _________________ is/are the most important factor/s for investors.
A) bankers; bottom up analysis
B) governments; top down analysis
C) self-directed investors; asset allocation
D) analysts; a combination of fundamental and technical analysis
Q2) An example of duration risk is where the yield curve is initially flat,but then shifts in an upward direction.
A)True
B)False
Q3) Tactical asset allocation does not involve the shifting of funds into or out of an asset class based upon mispricing in that market.
A)True
B)False
Q4) Superannuation involves only personal superannuation schemes.
A)True
B)False
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Chapter 20: Performance Evaluation of Managed Funds
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Q1) Volkman and Wohar (1995)find that __________ is associated with low management fees,whereas __________ tends to be associated with funds charging high management fees.
A) superior performance persistence; poor performance
B) poor performance; superior performance persistence
C) average performance; poor performance
D) average performance; superior performance
Q2) The major criticism of the Sharpe index is that it relies on:
A) the CML
B) the risk premium per unit
C) an efficiency measure
D) standard deviation
Q3) The reward-to-variability ratio is another name for the Treynor index.
A)True
B)False
Q4) The Treynor measure captures the risk-premium per unit of overall risk.
A)True
B)False
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