Behavioral Finance - Reading 9: Inefficient Markets: The Th Business, black, action, likely, explained

mayanfang1

Q2. The price action in Baker Business Systems can least likely be explained as:

A)   noise trading.

B)   representativeness.

C)   the Ebullience Cycle.

Q3. Lang's rebalancing activities suggest she is a:

A)   shifter.

B)   rigid valuator.

C)   formulaic rebalancer.

Q4. Which defense mechanism did Cambridge use?

A)   The "almost right" defense.

B)   The "single predictor" defense.

C)   The "ceteris-paribus" defense.

Q5. Which of the following points in Lang's e-mail is her weakest argument against Cambridge's specific trading strategy?

A)   "In this trading strategy, Cambridge did not provide us with a plan for diversifying away the fundamental risk."

B)   "How do we know the new, lower price isn't accurate? Perhaps the profit shortfall could affect Glenbrook's cash flows."

C)   "Good Eats is a much smaller, financially weaker company. Its risk profile is different than that of Glenbrook."

Q6. Which of the following statements is least representative of Lang's investment approach? Lang is:

A)   a beta grazer.

B)   overconfident in her ability to predict stock movements.

C)   a risk-averse arbitrageur.

mayanfang1

答案和详解如下：

Q2. Correct answer is C)

Traders who respond emotionally without fully evaluating the fundamentals are noise traders. Representativeness is the process by which investors make decisions based on past performance. Such thinking often leads to overreaction to both good and bad news. The Ebullience Cycle suggests that investors do not evaluate their portfolios during down markets. In this instance, we do not know if the market is going down, but we do know that a lot of investors are selling off their Baker holdings. As such, The Ebullience Cycle does not explain the price action.

Q3.Correct answer is C)

Lang's strategy is formulaic, adjusting the portfolio to match a set allocation mix. Shifters tend to react to non-market-related news, and Lang has shown little interest in such news. She is also not a valuator, because her rebalancing has nothing to do with her opinion about whether the market is cheap or rich. In addition, the adjective rigid doesn't really apply to valuators, because assessing valuation is by nature a subjective act.

Q4. Correct answer is B)

By admitting his mistake but reiterating other projections, Cambridge used the "single predictor" defense, inferring that a problem with one of his forecasts does not call the validity of other forecasts into question.

Q5. Correct answer is A)

While Cambridge indeed provided no way to diversify away the fundamental risk, that is not a weakness in this particular strategy, or for any such trading strategy. Fundamental risk cannot be diversified away, and the only way to avoid it is not to trade securities. The other arguments represent valid concerns.

Q6. Correct answer is B)

While Lang may be overconfident in her belief that Cambridge is wrong, nothing in her words or actions suggest she is overconfident in her ability to predict stock movements. In general, efficient market proponents aren't likely to make bold predictions regarding individual stocks. Lang's reluctance to accept advice from Cambridge suggests she doubts his (or anybody's) ability to predict the movement of individual stocks. Lang is well anchored in her investment approach, and new information does not sway her opinion. We have little information about her overall risk tolerance, but what we do know suggests she is particularly averse to taking on fundamental risk in arbitrage transactions.

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