2019 CFA level 3 qbank reading 7 the behavioral finance perspective questions

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Learning Management System

Question #1 of 18
The tendency for individuals to identify outcomes as gains or losses in the editing phase of
decision making would most likely be an example of:

A) combination.
B) codi cation.

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C) simpli cation.

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Question #2 of 18
To satis ce means the investor:

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A) takes steps to achieve intermediate goals that help them get closer to the desired goal.
B) gathers all the relevant information available to them and using heuristics they make
the optimally maximizing decision.

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C) achieves intermediate goals that lead to the utility maximizing choice.

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Question #3 of 18

Which of the following actions is most likely the result of applying Bayes' theorem of

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conditional probability? A fundamental analyst revises a stock recommendation when:

A) she revises her in ation expectations.
B) the rm issues a revised earnings report.
C) the rm experiences a major re that destroys its production line.

Question #4 of 18

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Which of the following steps is least likely to be included in the process of developing heuristicdriven bias?

A) Making mistakes.
B) Reliance on rules of thumb for investment decisions.
C) Receiving bad advice.

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Question #5 of 18
What is the purpose of using Baye's formula in the investment decision making process?

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A) Incorporate new information into previous forecasts updating those forecasts which
aids in the investment decision making process.

B) Assign probabilities to various outcomes helping the investor gain insight into the range

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of those possible outcomes.

C) Incorporate some quantitative aspects into the portfolio construction process.

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Question #6 of 18

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Which of the following statements best de nes satis ce?

A) The investor gathers adequate information to make the utility maximizing choice.

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B) Making a decision in which you are satis ed.
C) Investors make a satisfactory choice based on the information gathered.

Question #7 of 18
Assume there are two investments to choose from: investment A has an expected return of
10% and a standard deviation of 15%, and investment B also has an expected return of 10% but
its standard deviation is 20%. The risk neutral investor would:

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Learning Management System

A) not choose investment B because it has a higher level of risk with no additional
compensation.
B) choose either investment A or B since they are not concerned about the level of risk but

only with the level of return.
C) choose investment A because it has a higher return for a given level of risk.

Question #8 of 18

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Martina Blackwood has not been doing well with her investments. She consults Ben Haifen,
CFA, for some advice. Which of Haifen's following statements indicates that Blackwood is using

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heuristics?

A) Blackwood doesn't like xed-income investments because she doesn't understand
them.

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B) Blackwood tends to hold onto her losers too long.

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C) Blackwood's most valuable lessons were learned through her own mistakes.

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Question #9 of 18

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Which of the following statements most correctly describes the shift in focus when moving
from a traditional nance to a behavioral nance investment process, and what is the most

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pronounced result of this shift?

A) The de nition of investor motives shifts to a focus on emotions, and the most
pronounced result is that the de nition of risk changes from dispersion-based
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B) The goal de nition shifts from statistical measures of risk and return to lifestyle-based
objectives, and the most pronounced result is that the de nition of risk changes from
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C) The de nition of investor motives shifts to a focus on emotions, and the most

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pronounced result is the development of measures to quantify how emotions a ect the
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Question #10 of 18
Which of the following statements best exempli es the di erence between behavioral and
traditional nance? Traditional nance:

A) assumes investors make rational decisions whereas behavioral nance attempts to
explain why investors act the way they do.
B) views portfolio construction from an historical perspective whereas behavioral nance
incorporates modern up-to-date techniques in the portfolio construction process.
C) does not take into consideration the behavioral aspects of investing which if considered

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would lead to better portfolio construction.

Question #11 of 18

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The inability of technical trading rules to consistently provide excess returns is most likely used
as proof that a market is at least:

A) weak-form e cient.
B) strong-form e cient.

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C) semi-strong form e cient.

Question #12 of 18

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The isolation e ect seen in the editing phase of prospect theory is thought to be the result of:

A) combination.
B) cancellation.
C) dominance.

Question #13 of 18
When an investor considers wealth fungible:
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A) he will create a layered portfolio with each layer consisting of di erent assets
designated to meet a speci c goal.
B) he may create and hold a single portfolio to meet lifetime consumption.
C) he will put investments into separate mental accounts.

Question #14 of 18

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Which of the following statements best describes bounded rationality?

decision.

B) Individuals act rationally within de ned limits.

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A) Individuals recognize they do not have all the information necessary to make a rational

C) Individuals make rational decisions within the con nes of knowing they don’t have all

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Question #15 of 18

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the information or the ability to fully interpret it.

Basing trading decisions on available public information, Carla Maplewood, CFA, is consistently

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able to identify and pro t on mispriced securities. Based on her successful trading strategy, we

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would most likely conclude that the market is at best:

A) strong-form e cient.

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B) semi-strong form e cient.
C) weak-form e cient.

Question #16 of 18
Which of the following is least likely a heuristic learning process?

A) Experimentation.
B) Trial and error.
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C) Research.

Question #17 of 18
According to prospect theory, investors are generally more concerned with:

A) fear of regret, which suggests that the prospect for outperforming a benchmark is the
primary concern for these investors.

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B) avoiding losses, which suggests that risk of loss may be the best measure of risk.

Question #18 of 18

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than risk to these investors.

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C) diminishing marginal utility, which suggests that expected return is more important

An individual is presented with a number of choices, with only two outcomes each: one positive
and one negative. If the individual's selection is a ected by whether only the positive or

characteristic known as:

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A) mental accounting.

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negative outcome of each choice is stated, the individual is most likely subject to the behavioral

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B) self-control bias.

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C) framing.

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