FIN645 Midterm Exam Latest 2019 Question # 00603219 Course Code : FIN645 Subject: Business Due on: 07/16/2019 Posted On: 07/16/2019 01:03 PM Tutorials: 0 Rating: 4.8/5

Behavioral Finance- FIN 645

Midterm Exam Summer 2019

Caution:

Please note this is an individual exam only- and not a team
or group effort. All relevant UMUC policies- and especially those related to
Academic Honesty- will be in full force. So please keep that in mind at all
times.

INSTRUCTIONS:

Please answer all the following four (4) questions.

There is a maximum of 100 points for this test. Scores for
each question are shown in the parentheses at the end of each question. For
qualitative questions, maximum allowed pages are also given at the end of each
question.

You will have until 11:59 PM EST on Sunday, July 14th, to
submit your answers via the related file in your assignment folder. This gives
ample time for the exam

QUESTION 1. Excessive optimism or overconfidence is one of
the most commonly observed characteristics in human beings. Excessive optimism (overconfidence) leads to
which types (please list 3) or irrational of behavior in financial
markets? Explain in detail.

QUESTION 2. Between March and July 2000, Intel’s stock price
rose rapidly, to the point where in July Intel’s market capitalization was
above $500 billion, making it the largest firm in the world. Then on Thursday,
September 21, 2000, Intel issued a press release indicating that its revenue
for the third quarter would grow between 3 percent and 5 percent, not the 8 to
12 percent that analysts had been forecasting.

In response to this news, Intel’s stock price dropped by 30
percent over the next five days. Intel’s chairman, Craig Barrett, commented on
the reaction, stating: “I don’t know what you call it but an overreaction and
the market feeding on itself.” An academic study found that at the time,
virtually none of the analysts following Intel used discounted cash flow
analysis to estimate the fundamental value of Intel’s stock. Instead, the study
points out that analysts react to bad news in the same way that a bond-rating
agency reacts to bad news. Just as a bond-rating agency would downgrade the
firm’s debt, analysts downgrade their stock recommendations. After Intel’s
press release, approximately one-third of the analysts following the firm
downgraded their recommendations. Some of the recommendation changes were
extreme. Notably, the cumulative return to Intel’s stock, relative to the
S&P 500, displayed a negative trend for the period September 2000 through
September 2002.

In what some might see as a replay of history, consider an
event that took place at the online firm eBay during January 2005. Between the
end of 2002 and the end of 2004, eBay’s shares increased by over 200 percent.
During December 2004, eBay’s stock price peaked at $118, and its forward P/E
ratio was 73. At the time, the firm’s market value was $81.7 billion.
Fourth-quarter earnings for eBay grew by 44 percent to $205.4 million, or 30
cents a share.

Just as Intel had announced that its earnings growth would
be lower than forecast, eBay’s actual earnings for the fourth quarter of 2004
fell a penny below analysts’ consensus forecasts. Meg Whitman, eBay’s CEO,
stated that future earnings would be lower because of higher advertising costs
and reinvestment.

In response, eBay’s stock price fell from $103 to $81 per
share. The firm’s market value fell to $56 billion. Many analysts immediately
downgraded eBay’s stock. Rajiv Dutta, eBay’s CFO, issued a public statement to
say that his concern was managing eBay’s long-run prospects, not its stock
price.

On January 26, 2005, James Stewart wrote about eBay in his
Wall Street Journal column “Common Sense.” Stewart indicated that he would
consider purchasing eBay stock in the wake of its decline. While acknowledging
that eBay could not grow at a stratospheric rate forever, Stewart noted that
eBay is in the process of transforming world commerce and has a natural
monopoly. Were he to own just one Internet stock, Stewart said, eBay would be
that stock.

Questions Discuss whether the analysts following Intel
appear to have been influenced by any psychological phenomena, both generally
and in their reaction to Intel’s announcement in September 2000.

Discuss whether James Stewart’s assessment of eBay reflects
any psychological phenomena.

In what ways are the events described at Intel and eBay
similar and in what ways are they different?

QUESTION 3. Bias Identification, please identify the biases
and/or heuristics displayed by Professor French

Professor French tells you that South Africa’s stock market
undervalued and suggests that it is a good investment. You discover that South Africa is about to
impose a new tax on security transactions, which will results in lower
liquidity. The next class you bring this
to Professor French’s attention. Simultaneously,
another student mentions that as commodity prices recover South Africa’s stock
market will rise sharply. Dr. French
ignores the information you provide and congratulates the other student on
excellent research. Which type of bias
is Professor French displaying? Explain briefly.

While reviewing the most recent four quarters of earnings
estimates for MMM, Professor French notices that earnings growth rates were 15%
per quarter. He announces to the class
that MMM is a growth company. Which type
of bias or heuristic is Professor French falling victim too? Explain briefly.

Professor French’s father works for Boeing. Professor French holds 18% of his portfolio
in Boeing. Which type of bias or
heuristic is Professor French displaying? Explain briefly.

Question 4. What is
an anomaly in finance?

Give three examples of anomalies that academic research has
uncovered in the past two decades (make sure and explain these anomalies in
detail including references).

If markets are efficient what would you expect to happen to
these anomalies after they were discovered?.

What financial frictions might enable these anomalies to
persist (make sure and cite frictions that apply to the anomalies in part ‘b’)?