Financial Market Anomalies

Description: This quiz covers various financial market anomalies, which are deviations from the efficient market hypothesis. Test your knowledge of these anomalies and their implications for investors.
Number of Questions: 15
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Tags: financial markets behavioral finance market anomalies
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What is the term for the tendency of investors to overreact to new information, leading to excessive price movements?

  1. Overreaction

  2. Herding

  3. Momentum

  4. Mean Reversion


Correct Option: A
Explanation:

Overreaction refers to the phenomenon where investors react too strongly to new information, causing prices to move excessively in one direction. This can lead to market inefficiencies and opportunities for investors who can identify and capitalize on these overreactions.

Which anomaly suggests that stocks with low price-to-book ratios tend to outperform stocks with high price-to-book ratios over the long term?

  1. Value Investing

  2. Momentum Investing

  3. Growth Investing

  4. Contrarian Investing


Correct Option: A
Explanation:

Value investing is an investment strategy that involves buying stocks that are trading at a discount to their intrinsic value. The value premium anomaly suggests that these stocks tend to outperform stocks with high price-to-book ratios over the long term.

What is the term for the tendency of investors to follow the crowd and buy stocks that are already rising in price?

  1. Herding

  2. Overreaction

  3. Momentum

  4. Mean Reversion


Correct Option: A
Explanation:

Herding refers to the behavior of investors who follow the actions of others, often without conducting their own independent research. This can lead to market bubbles and crashes, as investors pile into popular stocks and drive up prices to unsustainable levels.

Which anomaly suggests that stocks with high momentum, or strong price trends, tend to continue performing well in the near future?

  1. Momentum Investing

  2. Value Investing

  3. Growth Investing

  4. Contrarian Investing


Correct Option: A
Explanation:

Momentum investing is an investment strategy that involves buying stocks that have been performing well recently, with the expectation that they will continue to perform well in the near future. The momentum anomaly suggests that these stocks tend to outperform stocks with low momentum over short periods.

What is the term for the tendency of investors to sell stocks that have recently declined in price, even if the fundamentals of the company remain strong?

  1. Selling Climax

  2. Overreaction

  3. Herding

  4. Mean Reversion


Correct Option: A
Explanation:

A selling climax occurs when investors panic and sell stocks indiscriminately, often driving prices down to extreme lows. This can be caused by negative news or events, but it can also be triggered by technical factors, such as a break below a key support level.

Which anomaly suggests that stocks with high dividend yields tend to outperform stocks with low dividend yields over the long term?

  1. Value Investing

  2. Momentum Investing

  3. Growth Investing

  4. Dividend Investing


Correct Option: D
Explanation:

Dividend investing is an investment strategy that involves buying stocks that pay regular dividends. The dividend yield anomaly suggests that these stocks tend to outperform stocks with low dividend yields over the long term.

What is the term for the tendency of investors to buy stocks that are popular and well-known, even if they are overvalued?

  1. Familiarity Bias

  2. Overreaction

  3. Herding

  4. Mean Reversion


Correct Option: A
Explanation:

Familiarity bias refers to the tendency of investors to favor stocks that they are familiar with, even if they are not necessarily the best investments. This can lead to investors overpaying for stocks that are popular and well-known, while overlooking undervalued stocks that are less familiar.

Which anomaly suggests that stocks that have recently performed poorly tend to rebound and outperform stocks that have performed well?

  1. Mean Reversion

  2. Momentum Investing

  3. Growth Investing

  4. Contrarian Investing


Correct Option: A
Explanation:

Mean reversion is the tendency of prices or returns to move back towards their long-term average. The mean reversion anomaly suggests that stocks that have recently performed poorly are more likely to rebound and outperform stocks that have performed well.

What is the term for the tendency of investors to buy stocks that are recommended by analysts or other experts, even if they have not conducted their own independent research?

  1. Analyst Recommendations

  2. Overreaction

  3. Herding

  4. Confirmation Bias


Correct Option: A
Explanation:

Analyst recommendations refer to the practice of financial analysts providing buy, sell, or hold recommendations on stocks. Investors often follow these recommendations, even if they have not conducted their own independent research. This can lead to market inefficiencies and opportunities for investors who can identify and capitalize on overvalued or undervalued stocks.

Which anomaly suggests that stocks with high institutional ownership tend to outperform stocks with low institutional ownership?

  1. Institutional Ownership

  2. Momentum Investing

  3. Growth Investing

  4. Contrarian Investing


Correct Option: A
Explanation:

Institutional ownership refers to the percentage of a company's shares that are held by institutional investors, such as pension funds, mutual funds, and hedge funds. The institutional ownership anomaly suggests that stocks with high institutional ownership tend to outperform stocks with low institutional ownership.

What is the term for the tendency of investors to buy stocks that have recently had a positive earnings surprise?

  1. Earnings Surprise

  2. Overreaction

  3. Herding

  4. Momentum


Correct Option: A
Explanation:

Earnings surprise refers to the difference between a company's actual earnings and the earnings that analysts had forecast. Investors often react positively to positive earnings surprises, which can lead to short-term price increases. This is known as the earnings surprise anomaly.

Which anomaly suggests that stocks with high short interest tend to underperform stocks with low short interest?

  1. Short Interest

  2. Momentum Investing

  3. Growth Investing

  4. Contrarian Investing


Correct Option: A
Explanation:

Short interest refers to the number of shares of a stock that have been sold short. The short interest anomaly suggests that stocks with high short interest tend to underperform stocks with low short interest. This is because short sellers are betting that the stock price will decline, and they are forced to buy back the stock if the price rises.

What is the term for the tendency of investors to buy stocks that are included in popular stock indices, such as the S&P 500 or the Nasdaq 100?

  1. Index Inclusion

  2. Overreaction

  3. Herding

  4. Momentum


Correct Option: A
Explanation:

Index inclusion refers to the practice of adding a stock to a popular stock index, such as the S&P 500 or the Nasdaq 100. This can lead to increased demand for the stock, as investors who track the index are forced to buy it. This is known as the index inclusion anomaly.

Which anomaly suggests that stocks that have recently been added to a popular stock index tend to outperform stocks that have not been added?

  1. Index Inclusion

  2. Momentum Investing

  3. Growth Investing

  4. Contrarian Investing


Correct Option: A
Explanation:

The index inclusion anomaly suggests that stocks that have recently been added to a popular stock index tend to outperform stocks that have not been added. This is because investors who track the index are forced to buy the newly added stocks, which can lead to increased demand and higher prices.

What is the term for the tendency of investors to buy stocks that are recommended by friends, family, or colleagues, even if they have not conducted their own independent research?

  1. Word-of-Mouth

  2. Overreaction

  3. Herding

  4. Confirmation Bias


Correct Option: A
Explanation:

Word-of-mouth refers to the practice of investors sharing stock recommendations with friends, family, or colleagues. This can lead to increased demand for the stock, as investors who receive the recommendation may buy it without conducting their own independent research. This is known as the word-of-mouth anomaly.

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