The Measurement Approach to Decision Usefulness

Multiple Choice

100

Reasons underlying the market inefficiency:

a. Biased investors who do not take all the publicly available information into account when making their decision

b. Noise traders

c. Rational investors attribute to the inefficiency to investor learning over time

d. Rational investors attribute the inefficiency to higher order beliefs

e. All the above

e. All the above

200

Which of the following is not true about stock market bubbles?

a. Bubble behavior can continue for some time and is difficult to predict when it will end

b. Bubbles derive from a combination of motivated reasoning and momentum

c. Share prices rise far above fundamental values

d. Stock market bubbles is an extreme case of market volatility

b. Bubbles derive from a combination of motivated reasoning and momentum

300

Which of the following scenarios exhibit the behaviour of self attribution bias?

a. A student attributes good test scores to his own intelligence; yet when he performs badly, he blames it on the difficulty of the tests

b. An employee gets fired due to his bad work ethics whereas another employee gets hired based on pure luck

c. Investors only focus on information in the financial statements but overlook information from current news, press releases, and notes disclosed

d. A man is confident and optimistic with the good news regarding a stock he is planning to purchase but puts little emphasis on bad news from other sources

a. A student attributes good test scores to his own intelligence; yet when he performs badly, he blames it on the difficulty of the tests

400

Which of the following models increases usage of current values and relevance but decreases reliability?

a. Information Approach

b. Measurement Approach

c. Historical Cost Accounting

d. Decision Theory

b. Measurement Approach

500

Which of the following is incorrect:

a. Net income only attributes to 2%-7% in explaining abnormal variability of narrow-window security returns around earnings announcement date

b. Securities markets may not be as efficient as we previously believed, therefore investors need more help in assessing future firm performance

c. Under ideal conditions, we still cannot expect net income to explain all of a security's abnormal return

d. Recognition lag lowers R^2 and ERC by waiting longer than the market before recognizing value-relevant events

c. Under ideal conditions, we still cannot expect net income to explain all of a security's abnormal return

Definitions

100

When reinforced confidence following a share price increase leads to more share purchases

What is price momentum?

200

The theory that an investor considering a risky investment will separately evaluate prospective gains and losses

What is Prospect Theory

300

When share price rise above fundamental values in extreme cases of volatility

What is Bubbles?

400

Also called residual income model

What is Ohlson' Clean Surplus Theory?

500

Information is not processed into the efficient market price as quickly as expected.

What is Post Announcement Drift?

Concepts

100

A student attributes good test scores to their own intelligence, yet when they perform badly blame it on the difficulty of the test

What is the Self Attribution Bias?

200

The fundamental characteristic that is sacrificed for the measurement approach.

What is reliability?

300

Approach to financial reporting under which accountants undertake a responsibility to incorporate current values into financial statements

What is Measurement approach

400

The model that views Beta as the only relevant risk measure.

What is CAPM, capital asset pricing model?

500

Some investors don't have the time, inclination, or ability to process all the information about a company.

What is limited attention?

Various

100

What behavioural finance term best describes the following: investor holds on to losing stocks and sells winning stocks; and may even purchase more of the loser security?

What is disposition effect?

200

What are potential causes that lead to Post Announcement Drift?

a. Earnings Volatility

b. Limited attention of investors

c. Investors do no anticipate inflation and effects of it on a firm's future profits.

d. all of the above

d. all of the above

300

Which of the following is true regarding market response to accruals?

a. Accruals are more persistent and reliable than cash flows.

b. Share returns of high positive accrual firms tend to drift downward over time rather than fall right away

c. Share returns of high positive accrual firms drift upward.

d. The more reliable the accrual component, the more investors overestimate the earnings persistenace which lead to greater share mispricing.

b. Share returns of high positive accrual firms tend to drift downward over time rather than fall right away

400

When individuals accept at face value information that is consistent with their preferences

What is motivated reasoning?

500

If post-announcement drift occurs, there is an opportunity for investors.

What is arbitrage profits?

Exam Tips

100

Complete all the suggested textbook questions.

How can I study for the exam?

200

Application, theory, and multiple choice

What types of questions are on the exam?

300

120 minutes

How long is the exam?

400

Microsoft Word or Excel

What software can I use for the exam?

500

Modules 4, 5, and 6

What modules does the exam cover?