Behavioral Finance amity assignments

Section A MBA Assignments

Instant Downloadable Solution

Solution of Any 3 Answer only

1: What do you mean by Noise –trader risk.
2: Explain the term systematic investor sentiment.
3: What do you mean by bubbles
4: Explain the significance of understanding Efficient Markets Hypothesis.
5: Explain the term “Behavioral Finance.
6: What do you mean by Arbitrage. How Long-short trades help a arbitrager to make money.
7: Explain the methodology behind predictability of bonds.
8: Explain the significance of Pro-EMH evidence.

Section B MBA Case Study Assignments

Case Study

Legend has it that once upon the time two economists were walking together when one of them saw something that struck his mind. “Look,” he exclaimed, “here’s a great research topic!” “Nonsense,” the other one said, “If it were, someone would have written a paper on it by now.”

 

For a long time this attitude governed the view of economists toward the stock market. Economists simply believed that the stock market was not a proper subject for serious study. Indeed, most of the pre-1960 research on security prices was actually done by statisticians.

 

The Pre-History: Statistical Research

Most of the early statistical research of the stock market concentrated around the same question: are security prices serially correlated? Do security prices follow a random walk? Are prices on any given day as likely to go up as they are to go down? A number of studies concluded that successive daily changes in stock prices are mostly independent. There seemed to be no pattern that could predict the future direction of price movements. One of the most interesting (and currently relevant) research projects of that earlier era was undertaken by Harry Roberts, a statistician at the University of Chicago. In his paper, “Stock Market =Patterns’ and Financial Analysis,” published in the Journal of Finance in 1959, Roberts wrote:

If the stock market behaved like a mechanically imperfect roulette wheel, people would notice the imperfections and, by acting on them, remove them. This rationale is appealing, if for no other reason than its value as counterweight to the popular view of stock market “irrationality,” but it is obviously incomplete.

Roberts generated a series of random numbers and plotted the results to see whether any patterns that were known to technical analysts would be visible. Figure 1 provides an example of Roberts‘ plot:

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Conclusion

We conclude this presentation by quoting Meir Statman: People are “rational” in standard finance; they are “normal” in behavioral finance. Rational people care about utilitarian characteristics, but not value- expressive ones, are never confused by cognitive errors, have perfect self- control, are always averse to risk, and are never averse to regret. Normal people do not obediently follow that pattern. Standard finance asks for too much when it asks for market efficiency in the rational sense, and investment professionals ask for too much when they insist that the primary contribution of behavioral finance is its potential help in beating the market. Accepting market efficiency in the sense of beating the markets and rejecting it in the sense of rationality would allow finance researchers to ask questions about the roles of investment professionals that go beyond the role of beating the market. Investment professionals belong to many groups, and we need to understand the benefits, both utilitarian and value expressive, they provide.

Q: Q.No 1: Efficient Market Hypothesis And Behavioral Finance – Is A Compromise In Sight? Justify.

Section – C – Ojbective Type Question MBA Assignments

Q1: Find the forward rate of foreign currency Y if the spot rate is $4.50, the domestic interest rate is 6 percent, the foreign interest rate is 7 percent, and the forward contract is for nine months.
(A):5.104
(B): 4.458
(C): 4.532
(D): 4.468

Q2: Which of the following has the right to sell an asset at a predetermined price?
(A): A call buyer.
(B): A put writer.
(C): A put buyer.
(D): A call writer.

Q3: Which of the following is potentially obligated to sell an asset at a predetermined price?
(A): A call buyer.
(B): A put writer.
(C): A put buyer.
(D): A call writer.

Q4: Futures prices differ from spot prices by which one of the following factors?
(A): the systematic risk
(B): the risk premium
(C): the spread
(D): the cost of carry

Q5: Loan syndication helps
(A): companies
(B): Govt
(C): SEBI
(D): stock exchange

Q6: There are three major versions of the hypothesis
(A): weak
(B): semi strong
(C): strong
(D): all of the above

Q7: The strong-form EMH additionally claims that prices instantly reflect even hidden or “insider” information.
(A): weak
(B): semi strong
(C): strong
(D): all of the above

Q8: Suppose there is a risk premium of $0.50. The spot price is $20 and the futures price is $22. What is the expected spot price at expiration?
(A): 21.5
(B): 24.5
(C): 22.5
(D): 20.5

Q9: …………….“asserts that financial markets are “informationally efficient”.
(A): EMH
(B): TMH
(C): SMH
(D): RMH

Q10: In the event of an interim price decline, the short seller will profit, since the cost of repurchase will be less than the proceeds received upon the initial (short) sale
(A): TRUE
(B): FALSE
(C): can’t be said
(D): is decided by the exchange

Q11: Which of the following is a major difference between swaps and futures contracts?
(A): Swaps are usually marked to market, whereas futures contracts are not.
(B): A futures contract involves only one future transaction, whereas a swap typically involves several future transactions.
(C): Swaps are derivative securities, but futures contracts are not.
(D): Swaps are typically short term, whereas futures contracts tend to extend over several years

Q12: EMH allows that when faced with new information, some ………… may overreact and some may underreact.
(A): investors
(B): arbitrageurs
(C): hedgors
(D): companies

Q13: Which of the following contract terms is not set by the futures exchange?
(A):
the price

(B):
the deliverable commodities

(C): the dates on which delivery can occur
(D): the size of the contract

Q14: Margin in a futures transaction differs from margin in a stock transaction because

(A): stock transactions are much smaller
(B): delivery occurs immediately in a stock transaction
(C):
no money is borrowed in a futures transaction

(D): futures are much more volatile

Q15:
Which of the following is not a forward contract?
(A): an automobile lease non-cancelable for three years
(B): a signed contract to buy a house in six months
(C): a long-term employment contract at a fixed salary
(D): a rain check

Q16: One of the advantages of forward markets is
(A):
the contracts are private and customized

(B): trading is conducted in the evening over computers
(C): performance is guaranteed by the G-30
(D):
trading is less costly and governed by more rules

Q17: Which of the following best describes normal contango?
(A): the futures price is less than the spot price
(B): the cost of carry is negative
(C): the expected spot price is less than the futures price
(D): the spot price is less than the futures price

Q18: Which of the following strategies will be profitable if the price of the underlying asset is expected to decrease? (There may be more than one correct response.)
(A): Buying a put.
(B): Selling a put.
(C): Selling a call.
(D): Buying a call.

Q19: ………..for performing investment or securities accounting services and computing the net asset value
(A): custody fees
(B): fund administration fees
(C): fund accounting fees
(D): registration fees

Q20: …………for 24F-2 fees owed to the SEC for net sales of registered fund shares and state blue sky fees owed for selling shares to residents of states
(A): custody fees
(B): fund administration fees
(C): fund accounting fees
(D): registration fees

Q21: All that is required by the EMH is that investors’ reactions be random and follow a normal distribution pattern so that the net effect on market prices cannot be reliably exploited to make an abnormal profit, especially when considering transaction costs
(A): TRUE
(B): FALSE
(C): can’t be said
(D): is decided by the exchange

Q22: future ………… movements are determined entirely by information not contained in the price series
(A): money market
(B): cost
(C): price
(D): all of the above

Q23: prices must follow a random walk.
(A): TRUE
(B): FALSE
(C): can’t be said
(D): is decided by the exchange

Q24: Class ………. shares don’t have a front-end sales load. Instead they, have a high contingent deferred sales charge
(A): A
(B): B
(C): C
(D): D

Q25: Class ………..shares have a high 12b-1 fee and a modest contingent deferred sales charge that is discontinued after one or two years
(A): A
(B): B
(C): C
(D): D

Q26: Suppose you sell a three-month forward contract at $35. One month later, new forward contracts are selling for $30. The risk-free rate is 10 percent. What is the value of your contract?
(A): 4.55
(B): 4.96
(C): 4.92
(D): 5

Q27: Which of the following investment strategies has unlimited profit potential?
(A): Protective put.
(B): Covered call.
(C): Bull spread.
(D): Writing a call

Q28: Noise in the sense of a large number of small events is often a cause factor much more powerful than a small number of large events can be
(A): TRUE
(B): FALSE
(C): can’t be said
(D): is decided by the exchange

Q29: Most futures contracts are closed by
(A): exercise
(B): offset
(C): default
(D): delivery

Q30: Class ……….. shares usually charge a front-end sales load together with a small 12b-1 fee.
(A): A
(B): B
(C): C
(D): D

Q31: ……………is the practice of selling securities or other financial instruments, with the intention of subsequently repurchasing them (“covering”) at a lower price.
(A): short selling
(B): long selling
(C): short buying
(D): long buying

Q32: one cannot consistently achieve returns in excess of average market returns on a risk-adjusted basis, given the information available at the time the investment is made.
(A): TRUE
(B): FALSE
(C): can’t be said
(D): is decided by the exchange

Q33: The ………….form EMH claims that prices on traded assets (e.g., stocks, bonds, or property) already reflect all past publicly available information.
(A): weak
(B): semi strong
(C): strong
(D): all of the above

Q34: The ………..-form EMH claims both that prices reflect all publicly available information and that prices instantly change to reflect new public information.
(A): weak
(B): semi strong
(C): strong
(D): all of the above

Q35: The ………..-form EMH claims both that prices reflect all publicly available information and that prices instantly change to reflect new public information.
(A): weak
(B): semi strong
(C): strong
(D): all of the above

Q36: A noise trader also known informally as idiot trader
(A): TRUE
(B): FALSE
(C): can’t be said
(D): is decided by the exchange

Q37: Fund managers counter that fees are determined by a ………… competitive market
(A): highly
(B): low
(C): great
(D): no

Q38: while EMH predicts that all price movement (in the absence of change in fundamental information) is …………… (i.e., non-trending), many studies have shown a marked tendency for the stock markets to trend over time periods
(A): known
(B): known
(C): close
(D): open

Q39: Which of the following is not a characteristic of option contracts that trade on the Chicago Board Options Exchange?
(A): The contracts are standardized.
(B): Option holders must take physical delivery of the underlying asset.
(C): Option writers are required to put up collateral
(D): It is easy to transfer the contracts between investors.

Q40: Which of the following actions will not close a long position in a call option?
(A): Allowing the call to expire.
(B): Exercising the call.
(C): Selling a call with the same strike price, expiration, and underlying asset
(D): Buying a put with the same strike price, expiration, and underlying asset.