Behavioral Finance - Reading 13: Alpha Hunters and Beta Gra likely, market, overall, following, class

mayanfang1

Q1. Which of the following market actor’s trades would be most likely to dampen movements in the overall stock market?

A)   Shifters.

B)   Rebalancers.

C)   Momentum valuators.

Q2. Tom Dunn was just laid off from his job because his employer, Falcon Manufacturing, is downsizing. If Dunn and the other employees at his firm are shifters, what is the most likely direction of the stock market and what is the most likely impact of the Falcon employees on the aggregate stock market? The stock market is:

A)   declining and the actions of the Falcon employees will dampen the decline.

B)   rising and the actions of the Falcon employees will dampen the increase.

C)   declining and the actions of the Falcon employees will exacerbate the decline.

Q3. Jack Munyon monitors his portfolio and uses formulaic rebalancing. If the stock market increases, which of the following actions will Munyon most likely take?

A)   Munyon will utilize a formula based on market fundamentals to decide if any rebalancing should take place.

B)   Munyon will sell stock so that the equities are reduced below their original allocation.

C)   Munyon will sell stock so that the equities are rebalanced back to its original allocation.

Q4. The users of formulaic rebalancing argue that their strategy increases the portfolio’s performance when the overall stock market declines. The opposing argument would be that when the market temporarily declines, the users of formulaic rebalancing should actually:

A)   sell stock so that the equities are reduced below their original allocation.

B)   buy more stock than their original allocation.

C)   buy equities so that they are rebalanced back to their original allocation.

Q5. The users of formulaic rebalancing argue that their strategy is consistent with efficient markets. In regards to being consistent with efficient markets, the opposing argument would be that the users of formulaic rebalancing should actually:

A)   sell stock when the market declines.

B)   follow a buy and hold strategy to minimize transactions costs.

C)   buy stock when the market declines.

mayanfang1

答案和详解如下：

Q1. Correct answer is B)

Rebalancers tend to dampen overall market movements because they buy stock as the market falls and sell stock as the market rises. Momentum valuators and shifters tend to buy stock as the market rises and sell stock as the market falls so they accentuate market movements.

Q2. Correct answer is C)

If Falcon Manufacturing is downsizing, then it is likely that the economy is in a recession and that the stock market is declining. If Falcon employees are shifters, they respond to the loss of their job by shifting assets away from equities. This would exacerbate the decline of the stock market.

Q3. Correct answer is C)

In formulaic rebalancing, the investor sells stock when the market rises so equities are rebalanced back to their original allocation. Equities are bought when the market falls.

Q4. Correct answer is B)         

In formulaic rebalancing, the investor buys stock when the market falls so equities are rebalanced back to their original allocation. The argument is that they are buying stock when equities are cheap and this helps improve the portfolio’s performance. However, if equities really are so cheap, the formulaic rebalancers should actually buy more stock than their original allocation to equities.

Q5. Correct answer is A)

In formulaic rebalancing, the investor buys stock when the market falls so equities are rebalanced back to their original allocation. If they were actually consistent with efficient market theory however, they would reduce the allocation to equities in their portfolio because the allocation to equities in the market portfolio has also fallen.

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