1. The major difference between the traditional and behavioural theories of capital structure is that

a) the behavioural theory focuses on market timing by managers

b) the traditional theory focuses on managerial needs for financial flexibility

c) behavioural theories assume managers are always over-optimistic

d) there is no major difference between them in practice - both lead to similar conclusions on capital structure

e) none of the above

2.Forecasting errors are potentially important because

a) research suggests that people overweight recent information.

b) research suggests that people underweight recent information.

c) research suggests that people correctly weight recent information.

d) either a) or b) depending on whether the information was good or bad.

e) none of the above.

3.Herd behaviour is when ____(i)______ investors imitate the behaviour of other investors rather than attempting to trade on the basis of fundamental values. For example, this herd momentum can carry a stock price ____(ii)______ than its fundamental value, even leading to a ____(iii)______.

a) (i) uninformed; (ii) lower; (iii) speculative bubble

b) (i) uninformed; (ii) higher; (iii) speculative bubble

c) (i) informed; (ii) lower; (iii) speculative bubble

d) (i) informed; (ii) higher; (iii) market crash

e) none of the above

4. Which of the following is NOT an assumption or finding in behavioural finance?:

a) people are over confident

b) people treat paper gains/losses and realised gains/losses differently

c) people make systematic errors in their thinking

d) people anchor on long term experience and under appreciate recent experience

e) people are influenced by prior outcomes