Board logo

标题: Portfolio Management and Wealth Planning【Reading 9】 [打印本页]
作者: hinsafdar    时间: 2012-3-23 11:00     标题: [2012 L3] Portfolio Management and Wealth Planning【Session 3 - Reading 9】

All of the following are behavioral investor types identified by Pompian EXCEPT the:
A)
guardian.
B)
active accumulator.
C)
friendly follower.


The guardian is from the Bailard, Biehl, and Kaiser (BB&K) five-way model which classifies investors along two dimensions according to how they approach life in general. The first dimension, confidence, identifies the level of confidence usually displayed when the individual makes decisions. Confidence level can range from confident to anxious. The second dimension, method of action, measures the individual’s approach to decision making. Depending on whether the individual is methodical in making decisions or tends to be more spontaneous, method of action can range from careful to impetuous. The five behavioral types identified by the BB&K five-way model are the: adventurer, celebrity, individualist, guardian, and straight arrow.
The Pompian behavioral model identifies four behavioral investor types (BITs): passive preserver, friendly follower, independent individualist, and active accumulator. The Passive Preserver and the Active Accumulator tend to make emotional decisions whereas the Friendly Follower and Independent Individualist tend to use a more thoughtful approach to decision making.
作者: hinsafdar    时间: 2012-3-23 11:00

Which of the following is most likely not one of the behavioral investor types identified by Pompian?
A)
The adventurer.
B)
The Independent individualist.
C)
The adventurer.


The adventurer is from the Bailard, Biehl, and Kaiser (BB&K) five-way model which classifies investors along two dimensions according to how they approach life in general. The first dimension, confidence, identifies the level of confidence usually displayed when the individual makes decisions. Confidence level can range from confident to anxious. The second dimension, method of action, measures the individual’s approach to decision making. Depending on whether the individual is methodical in making decisions or tends to be more spontaneous, method of action can range from careful to impetuous. The five behavioral types identified by the BB&K five-way model are the: adventurer, celebrity, individualist, guardian, and straight arrow.
The Pompian behavioral model identifies four behavioral investor types (BITs): passive preserver, friendly follower, independent individualist, and active accumulator. The Passive Preserver and the Active Accumulator tend to make emotional decisions whereas the Friendly Follower and Independent Individualist tend to use a more thoughtful approach to decision making.
作者: hinsafdar    时间: 2012-3-23 11:01

Which of the following is least likely a limitation of classifying an investor into a behavioral type?
A)
Even though two individuals may fall into the same behavioral investor type, the individuals should not necessarily be treated the same due to their unique circumstances and psychological traits.
B)
The client portfolio constructed by the adviser most likely will not fall on the efficient frontier.
C)
Individuals tend to act irrationally at unpredictable times because they are subject to their own specific psychological traits and personal circumstances. In other words, people don’t all act irrationally (or rationally) at the same time.

The client portfolio constructed by the adviser not falling on the efficient frontier is not a limitation but the result of classifying an investor into a behavioral type. It results in a portfolio that is better suited to the client given their behavioral biases.
Limitations of classifying investors into the various behavioral investor types include:
作者: hinsafdar    时间: 2012-3-23 11:01

Limitations of classifying investors into behavioral types would include all of the following EXCEPT:
A)
the resulting client portfolio is not the “rational” portfolio.
B)
individuals may simultaneously display both emotional biases and cognitive errors all the while seeming to act rationally, making it difficult to classify the individual according to behavioral biases.
C)
as investors age, they will most likely go through behavioral changes, usually resulting in decreased risk tolerance along with becoming more emotional about their investing.

The client portfolio constructed by the adviser not falling on the efficient frontier (the rational portfolio) is not a limitation but the result of classifying an investor into a behavioral type. It results in a portfolio that is better suited to the client given their behavioral biases.
Limitations of classifying investors into the various behavioral investor types include:
作者: hinsafdar    时间: 2012-3-23 11:01

Which of the following are uses of classifying investors into various types? Classifying investors into behavioral types:
A)
helps the advisor understand their client resulting in better overall investment decisions being made that are closer to the efficient frontier.
B)
allows the advisor to have a better understanding of how to approach their client when educating them on traditional finance concepts.
C)
gives the adviser the tools to be able to explain to the client why their portfolio should resemble the “rational portfolio” based on traditional finance concepts.


The goal of viewing the client/adviser relationship from a psychological perspective as compared to a purely traditional finance perspective is for the adviser to better understand their client and to make better investment decisions. By incorporating behavioral biases into clients’ IPSs, clients’ portfolios will tend to be closer to but not on the efficient frontier (the rational portfolio), and clients will be more trusting and satisfied and tend to stay on track with their long-term strategic plans. Ultimately, since everyone is happy, the result is a better overall working relationship between client and adviser. Clients who are at the extremes of risk aversion tend to approach investing very emotionally and are not interested in traditional finance concepts therefore educating them on these concepts is of little value to them and does not work.
作者: hinsafdar    时间: 2012-3-23 11:02

Jean Stall, CFA, has just completed the yearly review for one of her clients Jeff Schaller. During the review she went over the original questionnaire he filled out to make sure the current portfolio has not drifted too far from the original asset allocation as determined by the questionnaire. The questionnaire was well designed to quantitatively determine Schaller’s level of risk aversion. One of Schaller’s statements in the questionnaire was that he was comfortable investing in stocks but did not want to lose any money in the stock market. As a result Stall took a portion of his non-retirement money and put it in an indexed annuity which is a long term investment guaranteed not to lose any money but will participate in any market gains. Which of the following is NOT an error that Stall committed?
A)
There is no mention that behavioral traits were addressed in the questionnaire.
B)
Stall took Schaller’s comment too literally and may have placed him in a potentially inapproan inappropriate product with the indexed annuity.
C)
Stall met with Schaller on a yearly basis.


Stall made several errors regarding the questionnaire and subsequent meeting:
作者: hinsafdar    时间: 2012-3-23 11:02

Which of the following is least likely a way the success of the client / adviser relationship is measured?
A)
The adviser acts as the client expects.
B)
Both client and adviser benefit from the relationship.
C)
The adviser has been able to successfully grow their business year after year.


The success of the typical client/adviser relationship can be measured in four areas with each one being enhanced by incorporating behavioral finance traits:
作者: hinsafdar    时间: 2012-3-23 11:03

All of the following are prescribed methods of measuring the success of the client / adviser relationship EXCEPT the:
A)
client is satisfied with the return they are getting from their portfolio.
B)
adviser understands the long-term financial goals of the client.
C)
adviser maintains a consistent approach with the client.


The success of the typical client/adviser relationship can be measured in four areas with each one being enhanced by incorporating behavioral finance traits:
作者: hinsafdar    时间: 2012-3-23 11:03

All of the following are potential benefits of defining portfolio objectives in terms of client objectives EXCEPT:
A)
it allows the investor to better connect the probability of goal attainment with investment policy.
B)
it may improve the likelihood that the investor will adhere to investment policy.
C)
the optimal portfolio can then be determined analytically.


Choosing the optimal portfolio is still a matter of judgement—a tradeoff between risk and return, but the specification of risk is often much easier for the investor to understand. Both remaining statements are correct.
作者: hinsafdar    时间: 2012-3-23 11:04

Defining investor objectives in terms of mean and standard deviation:
A)
may make it easier to estimate the probability that the objectives will be realized.
B)
may make selecting an asset allocation more difficult for the individual.
C)
usually makes it less likely that the investor will deviate from the investment policy because of current market conditions.


Defining investor objectives in terms of mean and standard deviation may make selecting an asset allocation more difficult for the individual, since it can be hard to see how the choices affect the probability of success. In addition, this method of goal definition often makes it can make it difficult to estimate the probability that the objectives will be realized, and may make it more likely that deviations from policy will occur.
作者: hinsafdar    时间: 2012-3-23 11:04

Defining investor objectives in terms of mean and standard deviation:
A)
can make it difficult to estimate the probability that the objectives will be realized.
B)
will increase the complexity of the process for the investment advisor.
C)
may make it easier for the investor to make a connection between the investment policy and the investor’s own goals.


Defining investor objectives in terms of mean and standard deviation can make it difficult to estimate the probability that the objectives will be realized. Therefore, this also often makes it more difficult for the investor to see the connection between policy and their own goals, and may make it more likely that deviations from policy will occur. It also simplifies the process for the investment advisor.
作者: hinsafdar    时间: 2012-3-23 11:05

Jack Melby places his investments into different “mental accounts” with each investment being tied to accomplishing a different goal. All the investments together comprise a pyramid where the most conservative investments are on the bottom layer to meet his most immediate and important goals. Riskier investments are represented higher up in the pyramid and used to meet less immediate goals. This behavioral trait is:
A)
perceived as being inefficient and the investment adviser should try to persuade the investor to allocate their assets to resemble an allocation based on traditional finance theory.
B)
not the most efficient from a traditional finance perspective but acceptable because the portfolio tends to be fairly well diversified and if constructed properly from a behavioral finance perspective will help the client stay on track with their long term investing goals.
C)
called “mental accounting” and is not thought to be an acceptable way for investors to allocate their assets.


Investors exhibit behavioral biases when they construct portfolios in layers, comprising a pyramid with each layer having a specific purpose in achieving a different goal. This is also referred to as mental accounting because the assets in each layer of the pyramid are viewed separately from each other with no regard to how they are correlated. In the pyramid structure, the most pressing goals are placed on the bottom layer and are met using low-risk, conservative investments. Each successive layer going toward the top of the pyramid is comprised of riskier assets to accomplish less immediate or less important goals. In the pyramid approach, investors see each layer as having a separate level of risk. Advisers with clients who view their portfolios in layered pyramids can help them understand which mental accounts they have and the risk the client is assigning to each account.
This is in contrast to traditional finance theory, which constructs a portfolio based on viewing the assets as working together as one unit, taking into consideration the correlation between those assets. In this scenario, the portfolio is viewed as having a single measure of risk.
作者: hinsafdar    时间: 2012-3-23 11:05

Gina Arturo has an online brokerage account in which she frequently places trades. Which of the following behavioral traits is she most likely exhibiting?
A)
Overconfidence.
B)
Disposition effect.
C)
Home bias effect.


When retail investors trade their brokerage accounts excessively this is thought to be caused by overconfidence based on a false sense of insight into the investment’s future performance. The typical result is lower overall returns due to trading costs as well as from selling winners too soon and holding losers too long. Selling winners too soon and holding onto losers too long is called the disposition effect. There is no evidence in this question that Arturo is exhibiting the disposition effect. Many retail investors also typically display the home bias effect which is the behavioral trait of investors placing a high proportion of their assets in the stocks of firms in their own country. This is closely related to familiarity where investors invest in stocks they are familiar with such as domestic stocks or their own company stock.
作者: hinsafdar    时间: 2012-3-23 11:05

Investor X works for company A and investor Y works for company B. Company A makes a matching contribution into their employees’ retirement funds in cash whereas company B matches with company stock. Which of the following are the most likely behavioral traits exhibited by both employees?
A)
Both investor X and Y will purchase company stock in approximately the same proportions so the final allocation of company stock is actually higher in investor Y’s plan.
B)
Investor Y will purchase more company stock than investor X.
C)
Investor X will purchase more company stock than investor Y with the final proportions being approximately equal in their retirement plans.


Research has shown that employees who can choose where the employer match is invested allocate a smaller amount of their own funds to their employer’s stock than when the employer match is made with company stock. In other words the employee who is receiving a retirement match in company stock is more likely to purchase more company stock with their own funds than an employee who receives a retirement match in cash. This behavioral bias is a type of framing because the employee may be interpreting the company’s match in company stock as implicit advice regarding the stock.
作者: hinsafdar    时间: 2012-3-23 11:06

Which of the following behavioral biases are most commonly seen in employee retirement plans?
A)
Familiarity, overconfidence, and naively extrapolating past returns.
B)
Status quo bias and naïve diversification also referred to as 1/n naïve diversification.
C)
Framing, loyalty effect, and financial incentives.


Two biases commonly seen in defined contribution retirement plans are the status quo bias and naïve diversification also known as 1/n naïve diversification. When the employee is subject to status quo bias, he leaves his initial asset allocation as is without adjusting it for changing circumstances, even as he ages and his wealth and risk tolerance change. Naïve diversification, also referred to as 1/n naïve diversification, is allocating an equal proportion of their retirement assets to each fund alternative. The other behavioral biases are commonly seen when an investor purchases their own company’s stock.
作者: hinsafdar    时间: 2012-3-23 11:06

According to behavioral finance, which of the following best describes how investors will invest their retirement portfolio?
A)
The investor will put most of their money in the less risky assets on the menu of their employer’s defined contribution plan.
B)
The investor will put most of their money in the less risky assets on the menu of their employer’s defined contribution plan unless the employer forces them to put the majority of the funds in the company’s stock.
C)
The investor will put an equal dollar amount in each mutual fund on the menu of their employer’s defined contribution plan.


According to behavioral finance, investors will diversify the portfolio for their defined contribution pension using 1/n diversification. In 1/n diversification, an employee puts an equal amount in each fund on the employer’s defined contribution pension plan menu. For example, if there are eight mutual funds available, the employee will put one-eighth of their contribution in each fund. Note that in the U.S., an employer cannot force an employee to put more than 10% of their retirement funds in company stock.
作者: hinsafdar    时间: 2012-3-23 11:06

According to behavioral finance, which of the following best represents how investors will diversify a portfolio for their defined contribution pension?
A)
Using modern portfolio theory.
B)
Using 1/n diversification.
C)
According to their employer’s advice.


Investors will diversify a portfolio for their defined contribution pension using 1/n diversification. If their employer offers ten mutual funds, employees will tend to put one-tenth of their contribution in each mutual fund.
作者: hinsafdar    时间: 2012-3-23 11:07

According to behavioral finance, which of the following best describes the components of individual investors’ portfolios?
A)
Their portfolios will be over concentrated in their employer’s stock and risky securities.
B)
Their portfolios will be over concentrated in risky securities.
C)
Their portfolios will be over concentrated in their employer’s stock and domestic securities.


According to behavioral finance, individuals invest in securities they are familiar with. They are over concentrated in their employer’s stock and in domestic securities. Their portfolios will exhibit a home bias, with few international assets.
作者: hinsafdar    时间: 2012-3-23 11:07

Joseph Brophy and Pamela Carr work in the collections department of Swank's, an upscale department store in downtown Cleveland. Swank's is a publicly traded company with more than 400 locations nationwide, and is also rated by national publications as one of the best places to work. Brophy and Carr like their jobs, and like the company for which they work.
Swank's recently switched from a defined-benefit plan to a defined-contribution plan, and employees with vested pension assets were given lump sums, with the option of investing that money in the new plan. Both Brophy and Carr have worked for Swank's for more than 10 years, and as such receive sizable payments, which they intend to move into the new plan.
On the day enrollment forms arrive at the Cleveland office, Brophy and Carr have lunch together to discuss the new pension plan. The investment packet contains a short newsletter that provides historical performance data on the investment options. Here are the choices:
Brophy and Carr know nothing about investing, but the past returns of the funds look pretty high, and Swank's stock has done very well in recent years. Carr, who is 15 years younger than Brophy, likes the returns on some of the stock funds and on Swank's stock. Brophy is five years away from retirement and feels he's too old to learn about financial management. During his discussion with Carr, he remembers an article he read in Forbes years ago. He can recall nothing about the article except that the writer said diversification was a good idea. Carr responds by warning that you have to make bets on a winner if you expect to earn good returns.
Brophy assumes that Swank's wouldn't recommend any funds unless they were good, and in an effort to diversify, puts 10% of his money into each option.
Carr wants to earn the biggest returns possible, so she invests 50% of her money in Swank's stock and split the remaining cash between the small-cap growth fund and the aggressive-growth fund.
Twelve months after the start of the new pension plan, all Swank's employees have the opportunity to change their investment elections. Brophy sees that his portfolio is up roughly in line with the S&P 500 Index, so he leaves his elections intact. Carr notes that Swank's stock has fallen 25%, and the portfolio was roughly flat with year-earlier levels. Grumbling, she changes her allocation so the portion currently in Swank's stock is divided between the available bond funds.
Which of the following least likely reflects Brophy's portfolio decisions?
A)
Availability bias.
B)
1/n diversification.
C)
Familiarity.


Brophy's original allocation was a classic example of 1/n diversification, with 10% in each of 10 investments. Brophy's focus on recent results is an example of the availability bias. Familiarity addresses such biases as favoring company stock. That's not an issue for Brophy. (Study Session 3, LOS 9.c)
Carr's initial investment choices show she avoided falling into which behavioral characteristic?
A)
Representativeness.
B)
Pyramiding.
C)
Overconfidence.


Carr's investment choices clearly show overconfidence in her ability to predict which investments will do well. Her choices are driven by an emotional desire to make bets and win big thus she is extrapolating favorable past returns into the future referred to as representativeness. However, Carr has one goal, and that's to maximize returns. She is most certainly not creating a portfolio pyramid. (Study Session 3, LOS 8.d)
Brophy's initial investment choices show he has fallen prey to which of the following traps?
A)
Naive diversification.
B)
Status quo bias.
C)
Familiarity.


Allocating an equal amount of retirement savings to each investment choice is called naive diversification or 1/n naive diversification. Familiarity and status quo bias do not come into play with Brophy's initial investment decision. (Study Session 3, LOS 9.c)
Swank's wants to improve its defined-contribution pension plan. Which of the following actions will be least helpful to employees?
A)
Allow the employees to change their allocations more than once a year.
B)
Provide detailed financial and performance data on the company stock.
C)
Increase the number of fund options.


Companies cannot force employees to invest in their stock, but many strongly encourage such investment. Even if the stock is a good investment, such an emphasis is not always a good idea, as employees may see such information as a strong endorsement for investing in company stock. Increased fund options and more frequent allocations give employees additional flexibility in their investments. (Study Session 3, LOS 9.c)
Brophy appears to be:
A)
frame dependent.
B)
loss averse.
C)
prone to regret.


Brophy read an article on diversification in Forbes, then reinforced the ideas based on the newsletter. His frame is diversification, and he does what he thinks is best in purchasing an equal-dollar amount of all 10 choices. There is no evidence that Brophy is particularly loss averse or prone to regret, just inexperienced. (Study Session 3, LOS 8.b)

Neither Brophy nor Carr made optimal investment decisions. In the wake of the portfolio rebalancing, which of the following statements best reflect the situation of which employee?
Has best-allocated portfolioExhibits herding behavior
A)
CarrNeither Carr nor Brophy
B)
BrophyNeither Carr nor Brophy
C)
CarrBrophy


After the rebalancing, Brophy most likely has more than 80% of his assets in equities, which is almost certainly too much for a working man five years from retirement. Carr, on the other hand, has about 38% of her assets in bonds, which is probably closer to the optimum level for a worker with at least 10 years of experience but who is still about 20 years from retirement. Neither Carr nor Brophy appear to be influenced by anyone else's investment decisions, so neither is exhibiting herding mentality. (Study Session 3, LOS 9.f)
作者: hinsafdar    时间: 2012-3-23 11:08

Steve Perlewitz, a retirement plan specialist for Mercantile Asset Advisors (MAA), is discussing the behavioral characteristics of individual investors in defined contribution retirement plans in an effort to educate MAA’s sales team as they sell MAA’s services. In his presentation, Perlewitz makes the following comments:
Comment 1: An investor whose decisions are impacted by mental accounting are likely to hold on to losing investments too long, and sell winning investments too soon.
  
Comment 2: Since mental accounting tends to guide investors toward more conservative asset classes, the portfolio of an investor impacted by mental accounting will tend to be more conservative than that of an investor who is not, assuming similar return objectives.
  
Comment 3: The 1/n diversification methodology used by many DC plan participants is an example of naïve diversification.
  
Comment 4: If a defined contribution plan investor has an appropriate allocation in their retirement plan, the same allocation should also apply to their other investment accounts.

After listening to Perlewitz’s presentation, sales team leader Vicki Bruning would be CORRECT to agree with:
A)
Comment 3 only.
B)
Comments 1, 2, and 4 only.
C)
Comments 2 and 3 only.


Perlewitz is only correct with respect to Comment 3. With 1/n diversification, where a DC plan participant divides his investment dollars equally across available investment options, diversification is by chance only and is not part of a total portfolio perspective. Such a diversification methodology is reflective of naïve diversification. The other comments are incorrect. An investor whose decisions are impacted by mental accounting will look at investments as separate, focusing on the risk of investments in isolation. This means that the investor dismisses the effects of correlation, thus leading to more risky portfolios than an investor who does consider correlation. Note that the disposition effect refers to holding on to losing investments too long and selling winners too soon. Finally, diversification from an efficient perspective may allocate investments in tax-deferred accounts (like a retirement plan) differently than investments in taxable accounts, while still focusing on the investor’s allocation as a whole.
作者: hinsafdar    时间: 2012-3-23 11:08

Typical individual investors tend not to understand the effects of correlation on their portfolio. Which of the following characteristics of a DC plan participant’s portfolio best reflects the attempt to derive benefits from the effects of correlation even though the participant does not understand those effects?
A)
1/n diversification heuristics.
B)
Familiarity.
C)
Status quo bias.


Feeling that they should spread out their risk, but not knowing how leads to the 1/n diversification heuristic. Often times, participants will only have a rough understanding of the effects of correlation and diversification and will simply divide their assets equally over the investment options in the plan in an attempt diversify their portfolio.
作者: hinsafdar    时间: 2012-3-23 11:09

Leonard Busch is a employee of Matrix Technologies, and a participant in the Matrix Technologies defined contribution plan. The assets in the plan are the only investments he owns. Busch’s investment allocation is shown below.
AllocationInvestment Option
20% Yukon Large Cap Growth Fund
40% Matrix Technologies Company Stock
15% Yukon Intermediate Bond Fund
10% Yukon Money Market Fund
15% Yukon International Stock Fund
Which of the following factors is most likely to drive Busch’s investment allocation?
A)
Status quo bias.
B)
Familiarity.
C)
1/n diversification heuristics.


Looking at Busch’s allocation, he obviously has a disproportionate amount of Matrix Technologies company stock. DC participants tend to hold excess stock of the company they work for due to familiarity and a perceived endorsement by management. Familiarity refers to investors selecting stocks with which they are comfortable with or have a proximity to. If company stock is offered as an investment option in a defined contribution plan, participants may feel a sense of control or allegiance to the firm and hold more company stock than is sensible, which is an effect of familiarity. Note that Busch’s assets are not equally divided among investment options, which means the 1/n diversification heuristic would not seem to apply. Status quo bias is clearly not the best answer given the weight in company stock.
作者: hinsafdar    时间: 2012-3-23 11:09

Many defined contribution plan participants tend to hold a large amount of assets in company stock relative to other asset classes. Which of the following characteristics of a DC plan participant’s portfolio best reflects the reason behind this tendency?
A)
Familiarity.
B)
Status quo bias.
C)
Naive diversification.


DC participants tend to hold excess stock of the company they work for due to familiarity which is the tendency for individuals to invest in where they are most comfortable or familiar which could be the company they work for. Naive diversification is allocating an equal amount of retirement savings to each investment option. Note that the status quo bias refers to a lack of action on the part of the participant.
作者: hinsafdar    时间: 2012-3-23 11:09

Kelly Lieb and Don Carsner are discussing their investments in the Shrader Tire 401(k) defined contribution plan. Lieb and Carsner make the following statements in their conversation:
Lieb:"Most of the money I have invested in our 410(k) plan is in Shrader Tire stock. Management would not give it to us as a company match if it were not a good investment.
Carsner:"I allocate most of my money to Shrader Tire Company stock as well. I don't know anything about the other investment options, and I want to be loyal to the company."

Which of the following factors behind holding company stock best reflects Lieb’s comment and Carsner’s comment respectively?
Lieb's CommentCarsner's Comment
A)
Familiarity biasFamiliarity bias
B)
FramingFamiliarity bias
C)
FramingFraming


Even without direct encouragement by the plan sponsor, employees tend to invest more in their company’s stock that would be warranted from a diversification standpoint. Lieb’s and Carsner’s comments are reflective of the two primary factors that contribute to DC plan participants holding company stock: framing and familiarity bias. Lieb’s comment reflects framing which refers to the misconception that by matching the employee's contribution with company stock the sponsor is implicitly endorsing it as a good investment. Carsner’s comment is reflective of familiarity bias, which refers to investors selecting stocks with which they are comfortable with or have a proximity to. If company stock is offered as an investment option in a defined contribution plan, participants may feel a sense of control or allegiance to the firm and hold more company stock than is sensible, which is an effect of familiarity.
作者: hinsafdar    时间: 2012-3-23 11:10

An investor selling winning securities too soon and holding losing positions too long is an example of:
A)
the disposition effect.
B)
representativeness.
C)
overconfidence.


This is the definition of the disposition effect.
作者: hinsafdar    时间: 2012-3-23 11:10

Which of the following is least likely to be a common bias found in analyst research?
A)
The analyst makes a decision based on incomplete information knowing the outcome could be unfavorable.
B)
The analyst finds evidence that confirms their forecast.
C)
The analyst inappropriately tries to apply a probability to a random event.


Biases specific to analysts performing research are usually related to the analysts collecting too much information, which leads to the illusions of knowledge and control and to representativeness, all of which contribute to overconfidence. Two other common biases found in analysts’ research are the confirmation bias and the gambler’s fallacy.
The confirmation bias (related to confirming evidence) relates to the tendency to view new information as confirmation of an original forecast.
The gambler’s fallacy, in investing terms, is thinking that there will be a reversal to the long-term mean more frequently than actually happens. A representative bias is one in which the analyst inaccurately extrapolates past data into the future. An example of a representative bias would be classifying a firm as a growth firm based solely on previous high growth without considering other variables affecting the firm’s future.
作者: prashantsahni    时间: 2012-3-23 11:12

Which of the following statements best reflects the relationship between company management presenting reports in a favorable light and analysts’ forecasts?
A)
The way company management presents reports generally influences analysts because they are also susceptible to behavioral biases.
B)
Analysts can be unduly influenced by the way management presents and frames company reports thus analysts should be aware of the various biases management can be susceptible to.
C)
The way company management presents reports influences analysts but they possess the skills to be able to mitigate the influence by company management.


The way a company’s management presents (frames) information can influence how analysts interpret it and include it in their forecasts. There are three cognitive biases frequently seen when management reports company results: (1) framing, (2) anchoring and adjustment, and (3) availability.
Framing refers to a person’s inclination to interpret the same information differently depending on how it is presented. In the case of company information, analysts should be aware that a typical management report presents accomplishments first.
Anchoring and adjustment refers to being “anchored” to a previous data point. The way the information is framed (presenting the company’s accomplishments first), combined with anchoring (being overly influenced by the first information received), can lead to overemphasis of positive outcomes in forecasts.
Availability refers to the ease with which information is attained or recalled. The enthusiasm with which managers report operating results and accomplishments makes the information very easily recalled and, thus, more prominent in an analyst’s mind.
Analysts should also look for self-attribution bias in which management has overemphasized the positive as well as the extent to which their personal actions influenced the operating results leading to excessive optimism (overconfidence).
To help avoid the undue influence in management reports, analysts should focus on quantitative data that is verifiable and comparable rather than on subjective information provided by management. The analyst should also be certain the information is framed properly and recognize appropriate base rates (starting points for the data) so the data is properly calibrated.
作者: prashantsahni    时间: 2012-3-23 11:13

Which of the following is least likely a way to reduce overconfidence in analyst forecasts?
A)
The analyst should seek a contrary opinion to their forecast based on evidence along with using a large enough sample size and Bayes’ formula.
B)
The analyst is properly self-calibrated through feedback from colleagues and superiors along with a structure that rewards accuracy and forecasts that are unambiguous and detailed.
C)
Gather a large amount of data from which to develop a forecast.


Collecting a large amount of data can lead to overconfidence in analysts’ forecasts referred to as the illusion of knowledge when the analyst thinks they are smarter than they are. This, in turn, makes them think their forecasts are more accurate than the evidence indicates.
Self-calibration is the process of remembering their previous forecasts more accurately in relation to how close the forecast was to the actual outcome. Getting prompt and immediate feedback through self evaluations, colleagues, and superiors, combined with a structure that rewards accuracy, should lead to better self-calibration. Analysts’ forecasts should be unambiguous and detailed, which will help reduce hindsight bias.
Analysts should seek at least one counterargument, supported by evidence, for why their forecast may not be accurate. They should also consider sample size. Basing forecasts on small samples can lead to unfounded confidence in unreliable models. Lastly, Bayes’ formula is a useful tool for reducing behavioral biases when incorporating new information.
作者: prashantsahni    时间: 2012-3-23 11:13

Analyst M routinely adjusts his previously vague forecasts to fit new information that has just been made available making his forecast look better than it actually was. Analyst Q judges the probability of her forecast being correct on how well the available data fits the outcome. Which of the following behavioral biases are M and Q displaying? M is displaying:
A)
illusion of knowledge and Q is displaying availability bias.
B)
hindsight bias and Q is displaying representativeness.
C)
illusion of knowledge and Q is displaying availability bias.


Hindsight bias is when the analyst selectively recalls details of the forecast or reshapes it in such a way that it fits the outcome.
In representativeness, an analyst judges the probability of a forecast being correct on how well the available data represent (i.e., fit) the outcome. The analyst incorrectly combines two probabilities: (1) the probability that the information fits a certain information category, and (2) the probability that the category of information fits the conclusion.
Illusion of knowledge is when the analyst thinks they are smarter than they are. This, in turn, makes them think their forecasts are more accurate than the evidence indicates. The illusion of knowledge is fueled when analysts collect a large amount of data.
The illusion of control bias can lead analysts to feel they have all available data and have reduced or eliminated all risk in the forecasting model; hence, the link to overconfidence.
The availability bias is when the analyst gives undue weight to more recent, readily recalled data. Being able to quickly recall information makes the analyst more likely to “fit” it with new information and conclusions.
In self-attribution bias analysts take credit for their successes and blame others or external factors for failures. Self-attribution bias is an ego defense mechanism, because analysts use it to avoid the cognitive dissonance associated with having to admit making a mistake.
作者: prashantsahni    时间: 2012-3-23 11:14

Terry Shiver and Mary Trickett are portfolio managers for High End Investment Managers. High End provides investment advice to wealthy individuals. As part of their annual review of their client portfolios, they review the appropriateness of their client portfolios given their clients’ return objective, risk tolerance, time horizon, liquidity constraints, tax situation, regulatory situation, and unique circumstances.
Their boss, Jill Castillo, is concerned that Shiver and Trickett allow the clients’ behavioral biases to enter into the asset allocation decision. She has asked them to review their notes from meetings with clients and examine the clients’ statement for potential biases. The information below is excerpts from their notes, along with the client’s name.
Tom Heggins: “In the past five years, I have consistently outperformed the market averages in my stock portfolio. It really does not take a genius to beat a market average, but I am proud to say that I have beaten the market averages by at least 2 percent each year and have not once lost money. I would continue managing my portfolio myself because I know I could keep beating the averages, but with a new baby on the way and a promotion to Senior Vice President at my technology firm, I just don’t have the time.”
Joanne McHale: “The last three quarters were bad for my portfolio. I have lost about a third of my portfolio’s value, primarily because I invested heavily in two aggressive growth mutual funds whose managers had off quarters. I need to get back that one-third of my portfolio’s value because I am only fifteen years away from retirement and I don’t have a defined-benefit pension plan. Because of this, I am directing Mary Trickett to invest my savings in technology mutual funds. Their potential return is much higher and I believe I can make back that loss with an investment in them.”
Jack Sims: “I enjoy bird watching and hiking outdoors. I am an avid environmental advocate and will only invest in firms that share my concern for the environment. My latest investment was in Washington Materials. Washington was recently featured in an environmental magazine for their outstanding dedication to environmental protection. The CEO of Washington was also featured on the cover of Fortune magazine. He has turned the firm around in the three years he has been there. The firm was near bankruptcy, but now Washington is the leader in its niche market, which is waterproof fabric for outdoor clothing and equipment.” Which of the following best describes Tom Heggins’s behavioral characteristic in investment decisions?
A)
Tom uses frame dependence.
B)
Tom is overconfident.
C)
Tom uses anchoring.


Tom is overconfident. Tom believes that on the basis of his five-year record, he can continue to outperform a benchmark. His record could be due to luck and he may be not reporting his shortcomings as an investor. (Study Session 3, LOS 9.d)
Which of the following best describes the potential problem with Heggins’s investment strategy in regards to certainty overconfidence?
A)
He will underestimate the risk of his portfolio and overestimate the probability of success.
B)
He will underestimate the risk of his portfolio and set too narrow of confidence intervals.
C)
He will overestimate the risk of his portfolio and overestimate the impact of an event on stocks.


As an investor exhibiting certainty overconfidence, Heggins will tend to underestimate risk and will also tend to overestimate the probability of success. Prediction overconfidence is when too narrow of confidence intervals are assigned to possible outcomes. (Study Session 3, LOS 8.b)
Which of the following most likely explains Tom Heggins’s behavior in investment decisions?
A)
Tom uses anchoring to assess his skills.
B)
Tom is suffering from an illusion of knowledge in assessing his skills.
C)
Tom uses the ceteris-paribus heuristic to assess his skills.


Tom is suffering from an illusion of knowledge leading to overconfidence. Overconfident individuals will presume that because they are successful in one area of their life, they can be successful in other areas as well. (Study Session 3, LOS 9.d)
Which of the following best describes Joanne McHale’s behavioral characteristic in investment decisions?
A)
Joanne is loss averse.
B)
Joanne uses the ceteris-paribus heuristic.
C)
Joanne’s regret too heavily influences her investment decisions.


Joanne is loss averse. Because she dislikes losses so much, she is willing to take more risk to make up the losses in her portfolio. She is investing her savings in technology mutual funds that will have much higher risk. (Study Session 3, LOS 8.d)
Which of the following best describes Jack Sims’s behavioral characteristic in investment decisions?
A)
Jack is overconfident.
B)
Jack uses frame dependence.
C)
Jack uses representativeness.


Jack uses an if-then heuristic called representativeness to make investment decisions. He believes that just because a firm’s environmental policy and CEO are good, then the firm’s stock will be a good investment. He ignores the fact that the stock might be overvalued. (Study Session 3, LOS 8.b, c)
Which of the following would Heggins, McHale, and Sims be least likely to use when making investment decisions?
A)
Fundamental analysis.
B)
Feelings.
C)
Emotions.


These investors would be least likely to use fundamental analysis of financial statements. Behavioral investors who are overly risk averse or have a high tolerance for risk tend to make investment decisions based on feelings and emotions and not on scientific analysis. (Study Session 3, LOS 9.a)
作者: prashantsahni    时间: 2012-3-23 11:14

Bobby Steele, a software engineer at a local firm, has been investing for the past two years and has been very successful. He shuns professional investment advice and in fact provides advice to his neighbors and friends. He states that his investment philosophy consistently outperforms the experts. Which of the following best describes the implications of Steele’s investment style?
A)
Steele is likely to have low turnover in his portfolio and is likely to make unjustified bets.
B)
Steele is likely to have low turnover in his portfolio and is likely to base stock valuation on fundamental analysis.
C)
Steele is likely to have high turnover in his portfolio and is likely to make unjustified bets.


Steele is an overconfident investor. As a result, he will have high turnover in his portfolio because he will believe that he can accurately forecast the future performance of stocks. He will also make bets that are unjustified because he does not understand that he does not possess all the information necessary to form unbiased projections.
作者: prashantsahni    时间: 2012-3-23 11:15

Which of the following best characterizes overconfidence in expert forecasters, according to behavioral finance? Expert forecasters are overconfident in their forecasting ability because:
A)
they have access to information others do not.
B)
of the positive reinforcement they receive from the media.
C)
they feel their knowledge allows them to make more accurate forecasts.


According to behavioral finance, expert forecasters are overconfident in their forecasting ability because they feel their knowledge allows them to make more accurate forecasts. Because they believe their forecasts are based on skill, they blame some external factor when the forecasts turn out incorrect. Although the other responses may have some real world validity, they are not given as a reason for overconfidence, according to behavioral finance.
作者: prashantsahni    时间: 2012-3-23 11:15

According to behavioral finance, analysts often make excuses for their inaccurate predictions. Which of the following best represents the problem with this occurrence, from a behavioral finance view?
A)
The excuses will prevent analysts from recognizing their own limitations.
B)
The excuses allow poor forecasters to stay in their positions when they should be replaced.
C)
Other investors depend on these forecasts, resulting in aggregate investment losses.


According to behavioral finance, analysts often make excuses for their inaccurate predictions. The excuses will prevent them from recognizing their own limitations and allow them to continue to make inaccurate forecasts. Although there is an element of truth in the other responses, they are not the central problem in this case, according to behavioral finance.
作者: prashantsahni    时间: 2012-3-23 11:15

Mike McLaughlin is an economist who makes quarterly forecasts for the state of the economy and interest rates. Last quarter, the economy did not grow as fast as McLaughlin predicted. McLaughlin explains that his forecast was inaccurate by stating “This change in the economy was due to a real estate market that slowed faster than many forecasters, including myself, expected. If it weren’t for the real estate market, my projection for GDP would have been accurate.” Which of the following is the best interpretation of McLaughlin’s statement, from a behavioral finance view? McLaughlin is using:
A)
an “if-only” defense for his inaccurate forecasts and his recognition of it will sharpen his abilities.
B)
a self attribution defense for his inaccurate forecasts and this will prevent him from accurately evaluating his own abilities.
C)
hindsight bias as a defense for his inaccurate forecasts and this will prevent him from accurately evaluating his own abilities.


McLaughlin is using a self-attribution bias which is an ego defense mechanism where analysts take credit for their successes and blame others or external factors for their failures. According to behavioral finance, analysts will use excuses to justify their inaccurate forecasts. These excuses will prevent them from accurately evaluating their own abilities. As a result, they will persist in making the same mistakes. Hindsight bias is when the analyst selectively recalls details of the forecast and reshapes it in such a way that it fits the outcome.
作者: prashantsahni    时间: 2012-3-23 11:16

Heather Jones graduated from a prestigious Ivy League college in May, recently passed Level I of the CFA exam, and just landed her first professional job as a junior portfolio manager working with CFA charterholders for the Fortress mutual fund company. She works in a group setting comprised of a lead portfolio manager and one or more co- or junior portfolio managers who together make the investment management decisions for a single mutual fund. Jones has observed the following behavior during the committee meetings where the portfolio managers discuss which investments should be a part of the portfolio: analyst A always sides with and follows the lead of analyst B, analyst C tends to have a different opinion from the group view but fears being ostracized therefore he rarely voices his opinion, manager D is very aggressive and shoots down the opinions of others if they contradict his own and also likes to argue with people. Jones is starting to wonder whether or not she made the right decision by taking the job and has had several thoughts about the behavior at the meetings. Which of the following of her thoughts is least reflective of how financial decisions are typically made in a group setting?
A)
“These people are displaying irrational behavior which is typical of group settings!”
B)
“Decisions made at this level are made by professionals with similar backgrounds, the committee should be functioning in a more efficient and effective manner with little discord among the members!”
C)
“Their individual behavioral biases have become exacerbated in the group setting!”


In a group setting individual biases can be either diminished or amplified with additional biases being created. Research has shown that the investment decision making process in a group setting is notoriously poor. Committees do not learn from past experience because feedback from decisions is generally inaccurate and slow, so systematic biases are not identified.
The typical makeup of a committee coupled with group dynamics leads to the problems normally seen with committees typically comprised of people with similar backgrounds thus they approach problems in the same manner leading the group to start thinking as a single individual, individuals can sometimes follow the beliefs of a group, and some individuals may feel uncomfortable expressing their opinion if it differs with others or a powerful member of the group.
作者: prashantsahni    时间: 2012-3-23 11:16

Which of the following statements most accurately describes social proof bias? Social proof bias is when:
A)
the individuals in a group start thinking and acting as if they are a single individual.
B)
an individual in a group setting is perceived by the group as being socially adept and thus a functional member of the group.
C)
an individual follows the beliefs of a group.


Social proof bias is when individuals tend to follow the beliefs of a group. Group think is when the group setting is very amiable thus leading to little or no conflicting discussions resulting in the group making decisions as if the group was a single individual.
作者: prashantsahni    时间: 2012-3-23 11:17

Which of the following best exemplifies the structure of a committee that effectively makes decisions?
A)
The committee members get along well and there is little animosity or in-fighting between the committee members.
B)
The committee members are encouraged to speak out so different opinions are heard.
C)
The committee is comprised of individuals from different backgrounds and where the committee chair encourages people to voice their opinions even if it is contrary to the group’s view.


Effectively functioning groups would have the following features:
作者: prashantsahni    时间: 2012-3-23 11:17

Which of the following would least likely be viewed as rational behavior during a market bubble?
A)
Investors believe the price of a stock will continue to go up therefore they buy more.
B)
The investor knows she is in a bubble but she doesn’t know where the peak is.
C)
A real estate portfolio manager has no suitable alternative investments to switch to.


Financial bubbles and subsequent crashes are periods of unusual positive or negative returns caused by panic buying and selling, neither of which is based on economic fundamentals. The buying (selling) is driven by investors believing the price of the asset will continue to go up (down).
In bubbles, investors sometimes exhibit rational behavior—they know they are in a bubble but don’t know where the peak of the bubble is. Or, there are no suitable alternative investments to get into, making it difficult to get out of the current investment. For investment managers, there could be performance or career incentives encouraging them to stay invested in the inflated asset class.
作者: prashantsahni    时间: 2012-3-23 11:18

When an investor extrapolates past data from a small sample size into a forecast this is most likely indicative of:
A)
fear of regret.
B)
the recency bias.
C)
hindsight bias.


Herding is when investors trade in the same direction or in the same securities, and possibly even trade contrary to the information they have available to them. Two behavioral biases associated with herding are the availability bias (a.k.a. the recency bias or recency effect) and fear of regret. In the availability bias, recent information is given more importance because it is most vividly remembered. It is also referred to as the availability bias because it is based on data that are readily available, including small data samples or data that do not provide a complete picture. In the context of herding, the recent data or trend is extrapolated by investors into a forecast.
Regret is the feeling that an opportunity has passed by and is a hindsight bias. The investor looks back thinking they should have bought or sold a particular investment (note that in the availability bias, the investor most easily recalls the recent positive performance). Regret can lead investors to buy investments they wish they had purchased, which in turn fuels a trend-chasing effect. Chasing trends can lead to excessive trading, which in turn creates short-term trends.
作者: prashantsahni    时间: 2012-3-23 11:18

Which of the following would least likely be considered a market anomaly?
A)
Underperformance of stocks with relatively high PE ratios or low book-to-market values.
B)
The stock market continues to climb as investors are trading according to economic expectations.
C)
Bubbles and crashes.


Typically, in a bubble, the initial behavior is thought to be rational as investors trade according to economic changes or expectations. Later, investors start to doubt the fundamental value of the underlying asset, at which point the behavior becomes irrational.
Two anomalies discussed by Fama and French are associated with value and growth stocks. Value stocks have low price-to-earnings ratios, high book-to-market values, and low price-to-dividend ratios, with growth stocks having the opposite characteristics of high PE ratios, low book-to-market values, and high price to dividend ratios.
Financial bubbles and subsequent crashes are periods of unusual positive or negative returns caused by panic buying and selling, neither of which is based on economic fundamentals. The buying (selling) is driven by investors believing the price of the asset will continue to go up (down). A bubble or crash is defined as an extended period of prices that are two standard deviations from the mean. A crash can also be characterized as a fall in asset prices of 30% or more over a period of several months, whereas bubbles usually take much longer to form.
作者: prashantsahni    时间: 2012-3-23 11:18

After Polly Shrum sells a stock, she avoids following it in the media. She is afraid that it may subsequently increase in price. What behavioral characteristic does Shrum have as the basis for her decision making?
A)
Representativeness.
B)
Fear of regret.
C)
Anchoring.


Shrum refuses to follow a stock after she sells it because she does not want to experience the regret of seeing it rise. The behavioral characteristic used for the basis for her decision making is the fear of regret.



欢迎光临 CFA论坛 (http://forum.theanalystspace.com/) Powered by Discuz! 7.2