I.B Questions with Multiple Correct Answers

Please select ALL correct answers.

9. (4 points) Over-confident investors would:

   (a) Under-estimate the quality of their information. (b) Over-estimate the quality of their information.

   (c) Under-estimate their ability to interpret private information. (d) Over-estimate their ability to interpret private information.

10. (4 points) The traditional or the efficient markets view of financial markets posits that:

    1. (a) All investors make rational decisions.

    2. (b) Investors might make mistakes but their mistakes are not correlated.

    3. (c) Arbitrageurs are able to quickly correct the systematic mistakes of irrational in- vestors.

    4. (d) There are no limits to arbitrage.

11. (4 points) In financial markets, there could be limits to arbitrage because:

    (a) Arbitrageurs have limited investment horizons. (b) Arbitrageurs have limited capital.

    (c) Arbitrageurs face a variety of investment constraints. (d) Arbitrage is often risky.

    (e) Arbitrageurs may also exhibit behavioral biases. (f) Arbitrageurs may earn higher profits if the arbitrage opportunity persists.

12. (4 points) According to the behavioral finance view of the financial markets:

    1. (a) Investor sentiment may move stock prices away from the fundamental values.

    2. (b) The direction of mis-valuation can be predicted.

    3. (c) Arbitrage forces cannot always correct the mis-valuations generated by investor sentiment.

    4. (d) Prices are likely to be more inefficient for stocks with higher arbitrage costs.