Question

QUESTION 45

1. An investor buys a stock at $60 because that is well below its 52 week high of $80. He continues to hold the stock even after it declines to $40 because he doesn't want to recognize what he feels is only a 'paper loss.' Which two behavioral mistakes is he likely making? (1) Cognitive dissonance. (2) Gambler's fallacy. (3) Anchoring. (4) Loss aversion.

   		a. 1 and 2.
   		b. 2 and 3.
   		c. 2 and 4.
   		d. 3 and 4.

QUESTION 46

1. Jack Kearns only invests in companies based in his metro area because he believes he is more familiar with these companies than Wall Street analysts. He trades frequently whenever he feels the market is misjudging a company's value. Which behavioral mistake is Jack making?

   		a. Hindsight bias.
   		b. Illusion of control.
   		c. Mental accounting.
   		d. Regret aversion.

Answer 1

Question 45:
Answer: d. 3 & 4.

Explanation:
Anchoring: it is a decision-making process based upon the past.
The past can be past results, prices, returns.
For example: Investors holding onto stock just because they have traded at a much higher price in the past.

Loss aversion: it is a mistake in which investors sell winners too soon and hold onto losers for too long.

Question 46:
The answer is b. The illusion of control.

When an investor does a lot of research into the stock-picking process and thinks he is an of the market, the investor is illustrating the illusion of control.