QUESTION 43

1. Which of the following statements correctly identify significant differences between modern portfolio theory (MPT) and behavior finance (BF)? (1) MPT assumes all investors have perfect knowledge of investments while BF assumes investors work with incomplete knowledge. (2) MPT assumes investors are averse to losses while BF assumes investors are averse to risk. (3) MPT assumes investors price securities heuristically while BF assumes investors price securities rationally. (4) MPT assumes new information is quickly priced into the market while BF assumes price adjustments are not immediate and incomplete.

   		a. 1 and 2.
   		b. 2 and 3.
   		c. 1 and 4.
   		d. 1, 2, 3 and 4.

QUESTION 44

1. Mutual funds A and B are both trading at $50. The manager for fund A predicts the fund will increase by 15%, while the manager for fund B indicates an expected price of $57.50. If an investor prefers fund A, he is making the behavioral mistake known as:

   		a. Narrow framing.
   		b. Framing.
   		c. Anchoring.
   		d. Cognitive dissonance.