Behevioral Fiannce

Examination

Behavioural Finance

Final examination

May 2010

FIRST PART: Multiple choice questions (30 points)

You must answer 10 multiple-choice questions. Please check the correct answers in the boxes. Only one answer is correct per question and you should check only one box. For each question, first you have the number of points given for a correct answer and then the points subtracted for a wrong answer. If you do not answer a question it will count as zero points. If you change your mind, circle the marked answer. The answer surrounded with a circle will not count.

Advice (3 points / -1 point)

Investment advice is based on three aspects of risk: risk ability, risk preference and risk awareness. Which of these aspects can be corrected by the client advisor because he has superior knowledge of the markets?

❑ Risk ability; since it is a property of the client`s wealth that needs to be specified by the adviser.

❑ Risk preference is a property of the client that the advisor needs to elicit but then need to change because of the advisor`s superior knowledge.

❑ Risk awareness is a property of the client that the adviser should change

because he has superior knowledge.

Asset Allocation of Mean-Variance (3 points / -1 point)

How is risk ability and risk preference accustomed for by mean-variance analysis?

❑ By holding more or less cash.

❑ By the asset split, i.e. by devoting save assets for hard liabilities and only investing the remaining assets freely.

❑ None of the above answers is correct.

Mean-Variance Analysis and Independence Axiom (3 points / -1 point)

One requirement for rational decisions is the independence axiom, i.e. in the comparison of two alternatives one should restrict attention to those aspects in which the two alternatives differ. Does the mean-variance decision rule always satisfy this requirement?

❑ Yes, mean-variance...