Practice Multiple Choice Questions (Pre-Midterm)

Question 1

What do rational investors of standard finance care about as customers?

Answer 1

The expressive and emotional benefits of wealth

Question 2

What kind of cognitive error is influenced by advertisements of mutual fund companies

Answer 2

Availability error

Question 3

How do normal investors with weak self-control manage their spending temptations?

Answer 3

By framing wealth into distinct mental account “buckets”

Question 4

What do investment professionals perform for investment amateurs?

Answer 4

System 2 functions

Question 5

What cognitive error leads investors to believe that most mutual funds are five-star funds?

Answer 5

Availability error

Question 6

Which of the following best describes the cognitive shortcut of “representativeness”?

Choosing mutual funds based on advertising
Limiting choices to simplify decision-making
Relying on feelings of ease in interactions
Forecasting stock market trends based on recent patterns
Associating high costs with high-quality

Answer 6

Forecasting stock market trends based on recent patterns

Question 7

What is the primary difference between rational and normal people in terms of cognitive capacity?

Answer 7

Normal people regularly forgo reflection after using system 1

Question 8

What is the main reason for using System 2 when choosing mutual funds for retirement?

Answer 8

To think reflectively and avoid errors

Question 9

Assuming no taxes, which of the following statements is consistent with Miller and Modigliani’s (1961) article on dividends?

• Normal people always prefer more wealth to less
• Normal people are never confused between earning dividend income and enjoying capital gains
• Normal people are indifferent between company-paid dividends and “homemade dividends”
• individuals can create homemade dividends for a company whose’ stock they hold in their portfolio by selling the company shares
• none of the above

Answer 9

None of the above

Question 10

Which of the following best describes “mental accounting”

• The process of mentally ranking and evaluating financial choices
• The tendency to rely on mental shortcuts in decision-making
• The practice of keeping detailed financial records
• The mental process of calculating potential investment returns
• The tendency to segregate money based on its source or intended use

Answer 10

The tendency to segregate money based on its source or intended use

Question 11

The belief that good outcomes are the result of skill while bad outcomes are due to bad luck is known as:

Answer 11

Self-attribution bias

Question 12

What do marketing efforts contribute to more than investment performance in mutual funds?

Answer 12

Asset growth

Question 13

Which of the following is NOT listed as a reason for why wealth is important to investors based on the text?

Help children become successful
Increase my social status
Purchase luxury items
Financial security
Educate children

Answer 13

Purchase luxury items

Question 14

What was the primary answer by investors to the survey question, “Why is wealth important to you?”

Answer 14

Financial security

Question 15

According to the text, how do many normal investors define being “rich”?

Answer 15

By comparison groups

Question 16

What enhances the social status of investors in hedge funds?

Their high returns
Their investment strategies
Their exclusivity
Their global presence
Their ownership of exclusive art pieces

Answer 16

Their exclusivity

Question 17

What did the Indian state of Jammu and Kashmir implement to restrain status competition?

Answer 17

Capped the number of guests and dishes at weddings

Question 18

Which of the following is a correct statement

• As investment professionals, mutual-fund managers are rational and therefore never incorporate their personal values when managing their fund’s portfolio
• The popularity of SRI and ESG investing demonstrates that investors choose to investments that align with their personal values
• Normal investors separate personal values from investments
• Vanguard is one of the pioneers in SRI and ESG investing
• none of the above

Answer 18

The popularity of SRI and ESG investing demonstrates that investors choose to investments that align with their personal values

Question 19

How did Vanguard respond to concerns about tobacco holdings or other potentially objectionable investments in 1996?

Answer 19

They stated that the funds’ sole purpose is to pursue the maximum return possible

Question 20

A renowned economist had a presentation where she stated that it is likely Canada will enter a recession next year. She recommends that momentum clients shift their assets into investment-grade bonds and noncyclical stocks. She states that she has a prediction record second to none as she has been successful in predicting sessions over the past 15 years and is certain of her forecasts. What characteristic does this person demonstrate?

Overconfidence
Framing
Availability
Representativeness
None of the above

Answer 20

Overconfidence

Question 21

A portfolio manager frequently bases her investment decisions on the most recent quarterly reports, often overlooking longer historical data. This tendency is indicative of which bias?

Answer 21

Availability

Question 22

After a downturn in the market, your professor often remarks, “I saw that coming”, even when he hadn’t voiced any prior concerns. This behaviour reflects which bias?

Answer 22

Hindsight

Question 23

At the start of each fiscal year, an investor sets a specific target rate of return for his investments based on the previous year’s performance. Despite market fluctuations and changing economic indicators, he remains fixated on achieving this target, often making decisions in reference to it. This behaviour best exemplified which bias?

Answer 23

Anchoring

Question 24

When presented with research that challenges his overall outlook, an analyst tends to only acknowledge studies or reports that validate his initial investment recommendations. This tendency is indicative of which bias?

Answer 24

Confirmation

Question 25

A portfolio manager is overly optimistic about her investment picks, often dismissing potential risks highlighted by her team. This is a sign of which bias?

Answer 25

Confidence

Question 26

In discussions, your colleague references successful trades they made years ago as evidence of their current strategy validity. This behaviour suggests which bias?

Answer 26

Hindsight

Question 27

When discussing the outcomes of potential trades, an investments specialist often describes them as “opportunities for growth” rather than “risks of decline”. this choice of language is a reflection of which bias?

Answer 27

Framing