Reading 13: A Survey of Behavioral Finance －LOS b efficient, discuss

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CFA Institute Area 3-5, 7, 12, 14-18: Portfolio Management
Session 3: Behavioral Finance
Reading 13: A Survey of Behavioral Finance
LOS b: Explain how the statement there is no free lunch can be valid in both efficient and inefficient markets, and discuss its relationship to the statement prices are right.

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When implementing a trade to take advantage of a potential mispricing opportunity, which of the following implementation costs are least readily calculated?

A) Impact costs.

B) Commissions.

C) Short sale borrowing fees.

D) Research costs.

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Answer and Explanation

Impact costs are the least readily calculated implementation costs.

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Profiting from a perceived mispricing is greatest when which of the following is the smallest?

A) Deviation from CAPM price.

B) Difference in fundamental and market price.

C) Implementation costs.

D) Discount rates.

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Answer and Explanation

Implementation costs reduce mispricing profits. The greater the implementation costs, the lower the profit.

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Which of the following are NOT necessarily connected to mispricing calculations?

A) Projected cash flows.

B) Cash flow discount rates.

C) Current market price.

D) Short sale constraints.

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Answer and Explanation

Short sale constraints are not necessary to calculate potential mispricing. Short sale constraints are implementation costs that must be incurred after a mispricing calculation has been completed.

miguelliu

 s

pundit

A