1.Which of the following statements is not correct?

The equity premium puzzle refers to the fact that historical excess returns are too high to be consistent with economic theory.

The degree of risk aversion that would be necessary to explain the historical excess returns is not consistent with reasonable levels of risk aversion.

The equity premium puzzle refers to the fact that historical excess returns are too low to be consistent with economic theory.

The equity premium refers to the difference between return provided by the equity market over the risk-free rate.

2.Which of the following describes the behavioral explanation to the equity premium puzzle?

Myopic loss aversion

Conservatism

Representativeness

Regret theory

3.The long-term Price/Earnings (P/E) ratio for the overall market...

has some predictive power, but is not very precise.

is a sure way to make money.

has no predictive power.

can explain the house-money effect.

4.The volatility puzzle can be explained by which of the following biases:

(Select all that apply).

Representative bias

Conservatism bias

Overconfidence bias

Confirmation bias

5.

Which of the following characterizes a closed-end fund?

After the initial offering, the amount of shares issued is fixed.

The law of one-price rule is valid.

Shares are always sold in the net asset value.

What applies for open-end funds is also the case for closed-end funds.

6.

Individual investors are more likely to be subject to shifting moods of optimism or pessimism, which we call investor sentiment. Which of the following statements is incorrect if the closed-end fund discount is driven by changes in investor sentiment?

If the return to small stocks goes up on average, as investors become more optimistic, then we should observe the discounts narrowing.

If the return to small stocks goes up on average, as investors become more optimistic, then we should observe the discounts getting bigger.

If the number of IPOs goes up, then we should observe narrowing of the discounts.

There is correlation between the relative performance of small stocks and the closed-end fund discounts.