10191589
Description
Flashcards by Ryan Whitaker, updated more than 1 year ago
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Created by Ryan Whitaker
about 7 years ago
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| Question | Answer |
| DIscuss broadly the evidence regarding the EMH | Evidence suggests markets are weak / semi-strong form level - but not strong form efficient. Fund & Hedge fund managers believe markets are inefficient. Index fund managers and many finance academics believe they are fairly efficient. |
| What is the CONCEPTUAL FOUNDATION of the BEHAVIOURAL FINANCE HYPOTHESIS? | BF seeks to identify and recognise the importance of cognitive factors that impact rational behaviour. BF highlights inefficiencies in the markets, such as changes in market trends which aren't rationally supported by economic fundamentals. aka Class bubble or market crash |
| Discuss FOUR underlying reasons for the so-called irrational behaviour considered in behavioural finance. | The Investor is likely to be upset by a less than expected return on an investment than the investor will be pleased on profit. Over-confidence and over-pessimism in a falling market. May be drawn into herd instinct or noise. |
| Identify and explain three categories of INVESTOR BEHAVIOUR that have been formalised within the behavioural finance hypothesis. | (1) HEURISTIC BEHAVIOUR - Investors do not seek to maximise returns on investment, but are willing to accept a lesser outcome or return. (2) FRAMING BEHAVIOUR - investors influenced by the manner in which an investment is presented. (3) MARKET INEFFICIENCIES - factors create a mispricing that cannot be explained. |
| Describe the general goal of Behavioural Finance | BF deals with individual investor psychology and how it affects individuals actions as investors, analysts and portfolio managers. The goal of BF is to understand how psychological decisions affect markets. |
| Outline the concepts of FUSION INVESTING and any operational problems there may be in implementing it. | Fusion investing is the integration of two elements of investment valuation-fundamental value and investor sentiment. During some periods investor sentiment is strong and noise traders are active and market returns are more heavily impacted by investor sentiments. But what phase? |
| Explain the concept of overconfidence and give an example of it? | Seen in terms of lack of diversification and could be a cause of speculative bubbles. |
| Explain the concept of mental accounting and give an example. | Mental accounting is where people seperate decisons that could possibly be combined - e.g. evidence suggests people may be willing to spend more on a credit card purchase than a cash purchase. |
| Explain the concept of REPRESENTATIVENESS and give an example of it. | REPRESENTATIVENESS is where people underweigh long term averages and put too much weight on recent events. E.g. an investor experiences a negative return and assumes that this is now the norm and previous high returns are irrelevant. |
| Compare and contract MOMENTUM AND CONTRARIAN strategies | MOMENTUM STRATEGY - buying past winners and selling past losers - implies investors underweight previous performance. CONTRARIAN STRATEGY - Buying losers and selling winners - implies investors overweight previous performance. Both strategies rely on inefficiencies but couldn't be profitable at the same time. |
| The problem with Behavioural Finance is that all the evidence is gathered from experiments not in the markets. | Support for BF has been gathered in experimental settings. The issue becomes whether people behave in this way in real world investment settings. |
| Individual irrationality in markets doesn't equate to market irrationality. | The traditional view of individual investor irrationality is that it has no effect on the aggregate market. rational investors will clean up any mistakes made by irrational investors, therefore the market is not affected. |
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