UNSW FINS 3655 BEHAVIOURAL FINANCE | 550 PRACTICE
QUESTIONS WITH CORRECT ANSWERS | COMPREHENSIVE
MCQ QUESTION BANK | 2026 UPDATE | 100% CORRECT.
229 Questions with Answers and Detailed Rationales
100 PERCENT GUARANTEED PASS
INSTANT DOWNLOAD ANSWERS INCLUDED
IMPORTANCE OF THIS DOCUMENT
This comprehensive examination preparation guide has been meticulously developed to help you succeed in the
UNSW FINS 3655 BEHAVIOURAL FINANCE | 550 PRACTICE QUESTIONS WITH CORRECT ANSWERS |
COMPREHENSIVE MCQ QUESTION BANK | 2026 UPDATE | 100% CORRECT.. It contains 229 carefully
selected questions that reflect the most current exam content and testing strategies. Each question is
accompanied by a correct answer and a detailed rationale that explains the underlying pathophysiology,
pharmacology, or clinical reasoning.
Self-Assessment – Test your knowledge and Exam Preparation – Familiarize yourself with the
identify areas requiring further question format and content
study areas
Concept Reinforcement – Deepen your Confidence Building – Develop test-taking
understanding through strategies and reduce
evidence-based exam anxiety
rationales
Time Management – Practice answering
questions under simulated
exam conditions
Review Summary 229 Questions
Foundations - Application - UNSW FINS 3655 Behavioural Finance 550 WITH Correct Comprehensive
MCQ BANK 2026 Update 100 Correct Behavioural Finance Undergraduate YEAR 3 / Graduate
All answers with rationales
,Table of Contents
Content Area Questions Key Topics
Introduction TO Behavioural 1-39 Theory, Behavior, Market, Directly, Stocks
Finance
Prospect Theory AND LOSS 40-78 Market, Theory, Stocks, Behavioural, Directly
Aversion
Heuristics AND Biases 79-117 Behavioral, Portfolio, Market, Theory, Investors
Overconfidence AND 118-156 Behavioral, Stock, Market, Directly, Price
Miscalibration
Emotions AND Financial 157-195 Behavioral, Effect, Theory, Market, Context
Decision-making
Market Anomalies AND 196-229 Behavioral, Markets, Stock, Context, Likely
Behavioural Explanations
TOTAL 229 All questions include answers and detailed rationales
,Section A - Introduction TO Behavioural Finance
Q1.
An investor's utility function exhibits loss aversion with a loss-aversion coefficient of 2.5.
She is offered a gamble with a 50% chance to win $200 and a 50% chance to lose $100.
According to prospect theory, what is her decision?
A. Accept the gamble because expected B. Reject the gamble because the expected
value is positive. prospect value is negative.
C. Accept the gamble because the utility of D. Reject the gamble because the
gains outweighs the disutility of losses. probability weighting for losses is
overweighted.
Correct: B - Reject the gamble because the expected prospect value is negative.
Rationale:Prospect theory values gains and losses relative to a reference point, with losses
weighted more heavily. The prospect value is 0.5*v(200) + 0.5*v(-100). Using a power value
function with loss aversion, v(200) = 200^ and v(-100) = -2.5*100^. For typical <1, the
negative term dominates, yielding negative expected prospect value. Thus, the investor
rejects the gamble, despite positive expected value, due to loss aversion.
Q2.
In the context of limits to arbitrage, which of the following scenarios BEST illustrates the
'noise trader risk' that can deter rational arbitrageurs from correcting a mispricing?
A. A stock is overvalued due to a temporary B. A mispriced asset becomes even more
fad, but arbitrageurs cannot short because mispriced in the short run, causing
of high borrowing costs. mark-to-market losses for arbitrageurs who
must liquidate early.
C. Fundamental risk is high, but arbitrageurs D. An arbitrageur faces legal restrictions on
have long horizons and can wait out the short selling, but can use derivatives to
mispricing. replicate the short position.
Correct: B - A mispriced asset becomes even more mispriced in the short run, causing
mark-to-market losses for arbitrageurs who must liquidate early.
Rationale:Noise trader risk refers to the risk that mispricing worsens in the short term due to
unpredictable sentiment of noise traders, which can force arbitrageurs to close positions at a
loss. This is distinct from fundamental risk or implementation costs. Option B directly
describes this scenario. Option A describes implementation costs, C describes long horizons
mitigating risk, and D describes alternative implementation.
Page 3
, Section A - Introduction TO Behavioural Finance
Q3.
A fund manager exhibits the 'disposition effect' by holding winners too long and selling
losers too quickly. Which combination of cognitive biases most directly explains this
behavior?
A. Overconfidence and self-attribution bias B. Loss aversion and mental accounting
C. Anchoring and confirmation bias D. Herd behavior and regret aversion
Correct: B - Loss aversion and mental accounting
Rationale:The disposition effect arises because investors are loss-averse and evaluate each
stock in a separate mental account. They are reluctant to realize losses (to avoid the pain of
loss) and eager to realize gains (to lock in gains). This combination of loss aversion and
mental accounting directly explains the tendency to sell winners and hold losers. Other biases
may contribute but are not the primary drivers.
Q4.
In the context of behavioural corporate finance, which of the following describes the
'market timing' theory of capital structure, as supported by empirical evidence on equity
issuance?
A. Firms prefer internal financing over B. Managers issue equity when they believe
external financing due to information the stock is overvalued and repurchase
asymmetry. when undervalued, leading to persistent
effects on capital structure.
C. Firms maintain a target debt-to-equity D. Managers time the market based on
ratio and adjust gradually toward it. interest rate forecasts to minimize the cost
of debt.
Correct: B - Managers issue equity when they believe the stock is overvalued and
repurchase when undervalued, leading to persistent effects on capital structure.
Rationale:The market timing theory posits that managers exploit temporary mispricing by
issuing equity when stock prices are high and repurchasing when low. Empirical evidence
(e.g., Baker & Wurgler) shows that such timing has long-lasting effects on capital structure, as
firms do not fully rebalance. Option A describes the pecking order theory, C describes the
trade-off theory, and D refers to debt market timing, not equity issuance.
Q5.
A stock's price has been rising for several months. An analyst predicts that this trend will
continue because 'the market is in a bull phase.' Which cognitive bias is most directly
reflected in this prediction?
A. Hindsight bias B. Gambler's fallacy
Page 4
QUESTIONS WITH CORRECT ANSWERS | COMPREHENSIVE
MCQ QUESTION BANK | 2026 UPDATE | 100% CORRECT.
229 Questions with Answers and Detailed Rationales
100 PERCENT GUARANTEED PASS
INSTANT DOWNLOAD ANSWERS INCLUDED
IMPORTANCE OF THIS DOCUMENT
This comprehensive examination preparation guide has been meticulously developed to help you succeed in the
UNSW FINS 3655 BEHAVIOURAL FINANCE | 550 PRACTICE QUESTIONS WITH CORRECT ANSWERS |
COMPREHENSIVE MCQ QUESTION BANK | 2026 UPDATE | 100% CORRECT.. It contains 229 carefully
selected questions that reflect the most current exam content and testing strategies. Each question is
accompanied by a correct answer and a detailed rationale that explains the underlying pathophysiology,
pharmacology, or clinical reasoning.
Self-Assessment – Test your knowledge and Exam Preparation – Familiarize yourself with the
identify areas requiring further question format and content
study areas
Concept Reinforcement – Deepen your Confidence Building – Develop test-taking
understanding through strategies and reduce
evidence-based exam anxiety
rationales
Time Management – Practice answering
questions under simulated
exam conditions
Review Summary 229 Questions
Foundations - Application - UNSW FINS 3655 Behavioural Finance 550 WITH Correct Comprehensive
MCQ BANK 2026 Update 100 Correct Behavioural Finance Undergraduate YEAR 3 / Graduate
All answers with rationales
,Table of Contents
Content Area Questions Key Topics
Introduction TO Behavioural 1-39 Theory, Behavior, Market, Directly, Stocks
Finance
Prospect Theory AND LOSS 40-78 Market, Theory, Stocks, Behavioural, Directly
Aversion
Heuristics AND Biases 79-117 Behavioral, Portfolio, Market, Theory, Investors
Overconfidence AND 118-156 Behavioral, Stock, Market, Directly, Price
Miscalibration
Emotions AND Financial 157-195 Behavioral, Effect, Theory, Market, Context
Decision-making
Market Anomalies AND 196-229 Behavioral, Markets, Stock, Context, Likely
Behavioural Explanations
TOTAL 229 All questions include answers and detailed rationales
,Section A - Introduction TO Behavioural Finance
Q1.
An investor's utility function exhibits loss aversion with a loss-aversion coefficient of 2.5.
She is offered a gamble with a 50% chance to win $200 and a 50% chance to lose $100.
According to prospect theory, what is her decision?
A. Accept the gamble because expected B. Reject the gamble because the expected
value is positive. prospect value is negative.
C. Accept the gamble because the utility of D. Reject the gamble because the
gains outweighs the disutility of losses. probability weighting for losses is
overweighted.
Correct: B - Reject the gamble because the expected prospect value is negative.
Rationale:Prospect theory values gains and losses relative to a reference point, with losses
weighted more heavily. The prospect value is 0.5*v(200) + 0.5*v(-100). Using a power value
function with loss aversion, v(200) = 200^ and v(-100) = -2.5*100^. For typical <1, the
negative term dominates, yielding negative expected prospect value. Thus, the investor
rejects the gamble, despite positive expected value, due to loss aversion.
Q2.
In the context of limits to arbitrage, which of the following scenarios BEST illustrates the
'noise trader risk' that can deter rational arbitrageurs from correcting a mispricing?
A. A stock is overvalued due to a temporary B. A mispriced asset becomes even more
fad, but arbitrageurs cannot short because mispriced in the short run, causing
of high borrowing costs. mark-to-market losses for arbitrageurs who
must liquidate early.
C. Fundamental risk is high, but arbitrageurs D. An arbitrageur faces legal restrictions on
have long horizons and can wait out the short selling, but can use derivatives to
mispricing. replicate the short position.
Correct: B - A mispriced asset becomes even more mispriced in the short run, causing
mark-to-market losses for arbitrageurs who must liquidate early.
Rationale:Noise trader risk refers to the risk that mispricing worsens in the short term due to
unpredictable sentiment of noise traders, which can force arbitrageurs to close positions at a
loss. This is distinct from fundamental risk or implementation costs. Option B directly
describes this scenario. Option A describes implementation costs, C describes long horizons
mitigating risk, and D describes alternative implementation.
Page 3
, Section A - Introduction TO Behavioural Finance
Q3.
A fund manager exhibits the 'disposition effect' by holding winners too long and selling
losers too quickly. Which combination of cognitive biases most directly explains this
behavior?
A. Overconfidence and self-attribution bias B. Loss aversion and mental accounting
C. Anchoring and confirmation bias D. Herd behavior and regret aversion
Correct: B - Loss aversion and mental accounting
Rationale:The disposition effect arises because investors are loss-averse and evaluate each
stock in a separate mental account. They are reluctant to realize losses (to avoid the pain of
loss) and eager to realize gains (to lock in gains). This combination of loss aversion and
mental accounting directly explains the tendency to sell winners and hold losers. Other biases
may contribute but are not the primary drivers.
Q4.
In the context of behavioural corporate finance, which of the following describes the
'market timing' theory of capital structure, as supported by empirical evidence on equity
issuance?
A. Firms prefer internal financing over B. Managers issue equity when they believe
external financing due to information the stock is overvalued and repurchase
asymmetry. when undervalued, leading to persistent
effects on capital structure.
C. Firms maintain a target debt-to-equity D. Managers time the market based on
ratio and adjust gradually toward it. interest rate forecasts to minimize the cost
of debt.
Correct: B - Managers issue equity when they believe the stock is overvalued and
repurchase when undervalued, leading to persistent effects on capital structure.
Rationale:The market timing theory posits that managers exploit temporary mispricing by
issuing equity when stock prices are high and repurchasing when low. Empirical evidence
(e.g., Baker & Wurgler) shows that such timing has long-lasting effects on capital structure, as
firms do not fully rebalance. Option A describes the pecking order theory, C describes the
trade-off theory, and D refers to debt market timing, not equity issuance.
Q5.
A stock's price has been rising for several months. An analyst predicts that this trend will
continue because 'the market is in a bull phase.' Which cognitive bias is most directly
reflected in this prediction?
A. Hindsight bias B. Gambler's fallacy
Page 4
