2019 CFA level 3 qbank reading 8 the behavioral biases of individuals questions

10/11/2018 Learning Management System Question #1 of 21 Which of the following cognitive errors would be due to information processing? A) Anchoring and adjustment bias B) Loss aversion, overcon dence, and self-control biases .in C) Status quo, endowment, and regret-aversion biases en tre Question #2 of 21 Assuming a stock will perform well in the future because the company just released a good earnings report usually results in: bo ok c A) the stock becoming overpriced and underperforming B) no change in value since in an e cient market the intrinsic value of the stock is already re ected in its price .o m C) the stock becoming a “winner” and outperforming w w Question #3 of 21 What kind of behavioral bias is an investor most likely displaying when they tend to hold on to w their earlier beliefs and fail to fully incorporate new information about a stock into their forecast? A) Hindsight bias B) Anchoring and adjustment bias C) Conservatism bias Question #4 of 21 https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83413546/print 1/7 10/11/2018 Learning Management System Which of the following statements best describes cognitive errors and emotional bias? A) A cognitive error is the result of the inability to analyze all the information or from a lack of information whereas an emotional bias is caused by individuals' feelings, impulses, i ii B) A cognitive error is the result of having inadequate information whereas an emotional bias is having a decision be unduly in uenced by feelings C) A cognitive error is an error in faulty reasoning whereas an emotional bias is based on in feelings en tre Question #5 of 21 Which of the following does NOT re ect the most likely asset allocation as a result of incorporating behavioral biases into the portfolio construction process? bo ok c A) Create a portfolio that accommodates the investor’s behavioral risk and return preferences B) Arrange the assets that relate to the investor’s speci c goals in layers resembling a pyramid with the most conservative assets in the bottom layer and the most risky m h C) Create a portfolio in which all of the investor’s assets are viewed together taking the f li w w h o correlation between those assets into consideration assigning a single measure of risk w Question #6 of 21 Which of the following best describes myopic loss aversion and a way to address its a ect? A) Investors tend to focus too much on the short term and view investments separately instead of in a portfolio context A remedy is to perform fundamental analysis on the i h ld l l d ll i B) The investor focuses too much on long term strategic asset allocation without considering tactical asset allocation The remedy is to periodically review and adjust h i f li i j i ih i l k i C) The investor becomes too focused on short term pro ts without keeping the long term strategic asset allocation in mind The remedy is to create an IPS that incorporates long l d f li i h l https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83413546/print 2/7 10/11/2018 Learning Management System Question #7 of 21 Which of the following statements would most likely be classi ed as a cognitive error? The investor: A) acts defensively when asked why he made a poor investment decision B) tends to take more risk rather than sell a stock at a loss .in C) has a tendency to place information into categories en tre Question #8 of 21 Dan Chechele is getting nervous that the market has experienced several consecutive days of losses and is getting uncomfortable having experienced many market downturns throughout bo ok c his lifetime Based on his past experience he is subconsciously putting the recent market activity into the category of a market trend Which of the following biases is Chechele exhibiting? A) Loss aversion bias w w o C) Con rmation bias m B) Representativeness bias w Question #9 of 21 Some proponents of behavioral nance believe that investors structure their portfolios as pyramids Which of the following best represents the resulting structure of their portfolios? A) The bottom layer of an investor’s pyramid will be invested in stock with higher layers invested in bonds and cash B) The bottom layer of an investor’s pyramid will be invested in bonds and cash with higher layers invested in stock C) Several pyramids of di erent sizes will be formed, each representing a di erent funding requirement https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83413546/print 3/7 10/11/2018 Learning Management System Question #10 of 21 Bu alo Manufacturing has just announced earnings that are 3% higher than analysts' forecasts Panda Technologies has just announced earnings that are 4% less than analysts' forecasts According to the representative heuristic description of investor behavior, what is the most likely future performance of each stock as they revert to their intrinsic values? A) Bu alo Manufacturing stock will outperform in the future while Panda Technologies stock will underperform in the future .in B) Bu alo Manufacturing stock will underperform in the future while Panda Technologies stock will outperform in the future en tre C) Both Bu alo Manufacturing stock and Panda Technologies stock will outperform in the Question #11 of 21 bo ok c future Tom Roberts loves to read about stocks He subscribes to the Los Angeles Times, the New York m Times, and Smart Money Magazine He respects the various publications but places more emphasis on Smart Money magazine because it specializes in investment issues What w w A) Anchoring .o behavioral characteristic does Roberts have as the basis for his decision making? B) Representativeness w C) Framing Question #12 of 21 Which of the following would be considered biases due to cognitive errors? A) Conservatism, hindsight, and framing biases B) Representativeness, mental accounting, and overcon dence biases C) Loss aversion, self-control, and regret-aversion biases https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83413546/print 4/7 10/11/2018 Learning Management System Question #13 of 21 An investor is averse to experiencing losses Which of the following behaviors will result from the loss aversion? It will lead to: A) risk-aversion behavior B) the buying of loser stocks .in C) risk-seeking behavior en tre Question #14 of 21 Which of the following is the best course of action an investor can take to reduce the bo ok c overcon dence bias? A) Seek the opinions of others to nd contrary viewpoints allowing for further scrutiny of predictions B) Keep detailed records of trades developing a track record of performance relative to m strategy determining when strategy led to success as compared to luck C) Increase the dence interval of forecasts since overcon dence tends to lead to w w o dence intervals that are too narrow w Question #15 of 21 Tommy Shaver is saving for his retirement Shaver invests as behavioral nance would predict According to behavioral nance, which of the following best represents how Shaver will fund this objective? A) Shaver will use a pyramid approach and fund it with safe investments at the bottom of the pyramid B) Shaver will use a modern portfolio approach and diversify across global stocks, bonds, and alternative assets https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83413546/print 5/7 10/11/2018 Learning Management System C) Shaver will use a pyramid approach and fund it with safe investments at the top of the pyramid Question #16 of 21 Which of the following would be considered emotional biases? A) Con rmation, control, and availability biases .in B) Status quo and endowment biases en tre C) Anchoring and adjustment bias bo ok c Question #17 of 21 Which of the following statements best describes the availability bias? An investor: A) bases a decision on how the information is presented B) associates new information with an easily recalled past event w w o m C) only notices information that agrees with their perceptions or beliefs Question #18 of 21 w Which of the following cognitive errors would be due to belief persistence? A) Conservatism, representativeness, and hindsight biases B) Control, rmation, and conservation biases C) Mental accounting, framing, and availability biases Question #19 of 21 Which of the following most closely de nes base rate neglect? https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83413546/print 6/7 10/11/2018 Learning Management System A) A type of representativeness bias in which the probability of the categorization is not adequately considered B) Found in conservatism bias where the investor places too little weight on new information C) When the investor considers the long run average of data and how new information relates to the past data .in Question #20 of 21 Jill Davis tells her broker that she does not want to sell her stocks that are below the price she en tre paid for them She believes that if she just holds on to them a little longer they will recover, at which time she will sell them What behavioral characteristic does Davis have as the basis for her decision making? bo ok c A) Loss aversion B) Representativeness m C) Conservatism w w o Question #21 of 21 Which of the following statements resembles the behavioral trait of conservatism bias most w accurately? A) The investor places an incorrect value on information because it readily ts into a category with which he has recent experience B) Rather than sell at a small gain, the investor waits for the stock to reach his forecasted target price C) The investor tends to avoid or ignore information that is contrary to his beliefs https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83413546/print 7/7 ... https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice /qbank/ 24 0 38 5 18/ quiz/ 83 4 135 46/print 4/7 10/11/20 18 Learning Management System Question # 13 of 21 An investor is averse to experiencing losses Which of the following... https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice /qbank/ 24 0 38 5 18/ quiz/ 83 4 135 46/print 6/7 10/11/20 18 Learning Management System A) A type of representativeness bias in which the probability of the categorization... https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice /qbank/ 24 0 38 5 18/ quiz/ 83 4 135 46/print 5/7 10/11/20 18 Learning Management System C) Shaver will use a pyramid approach and fund it with safe investments at the top of the pyramid