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Multiple Choice Quiz
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1
Managers and investors tend to associate higher expected returns with lower risk because of biases such as
A)Affect
B)Representativeness
C)Overconfidence
D)Both a and b
E)A, b and c are correct
2
Typically financial analysts and managers
A)Both expect high-beta stocks to earn higher returns than low beta stocks.
B)Both expect small-capitalization stocks to earn higher returns than large-capitalization stocks
C)Both expect high book-to-market stocks to perform worse than low book-to-market stocks
D)Both expect high-beta stocks to earn lower returns than low beta stocks.
E)None of the above
3
Typically analysts
A)Are excessively optimistic
B)Are subject to potential conflicts of interest
C)Perceive the risk-return relationship differently from executives
D)All of the above
E)None of the above.
4
The affect heuristic
A)Makes managers assign affective labels or tags to company images, leading them to believe that good companies are good stocks to own
B)Is a mental shortcut that managers use to search for benefits and avoid risks
C)Leads managers to believe that there is a negative relationship between risk and return
D)Reinforces the representativeness heuristic
E)All of the above
5
Investors who are prone to the extrapolation bias
A)Will tend to be excessively optimistic during bull markets and excessively pessimistic during bear markets
B)Will tend to overweight base rate information
C)Will not be subject to the representativeness bias
D)Will be under-confident
E)Like playing basketball
6
Gamblers at a craps table who believe that a 3 or a 4 is likely because it has not been rolled recently
A)Are correctly estimating probabilities
B)Are overweighting the probability of an event that has not occurred recently
C)Are over-confident in their abilities
D)Are second-guessing themselves
E)Are cheating
7
Survey evidence on project discount rates typically shows that a majority of managers tend to use
A)One discount rate for the whole company
B)A discount rate for the country or overseas market
C)A divisional discount rate
D)A different discount rate for each component of the cash flow with different risks
E)None of the above
8
Survey evidence on the market risk premium typically shows that
A)Managers extrapolate recent market performance too far when estimating the market risk premium
B)Managers believe that recent market performance is representative of the correct market risk premium
C)Managers believe that at the current level of the market, expected returns and risk are negatively related
D)All of the above
E)None of the above
9
Using one discount rate for the whole company
A)Is correct because some divisions have more risk than others and on average, the risk will wash out.
B)Leads to risky projects being favored over safe projects, all else being equal.
C)Is incorrect because managers are underestimating the risk of the company as a whole this way.
D)Leads managers to focus on systematic rather than on idiosyncratic risk
E)None of the above





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