投资学10版习题答案12
CHAPTER 12: BEHAVIORAL FINANCE
AND TECHNICAL ANALYSIS
PROBLEM SETS
1. Technical analysis can generally be viewed as a search for trends
or patterns in market prices. Technical analysts tend to view
these trends as momentum, or gradual adjustments to ‘correct’
prices, or, alternatively, reversals of trends. A number of the
behavioral biases discussed in the chapter might contribute to
such trends and patterns. For example, a conservatism bias might
contribute to a trend in prices as investors gradually take new
information into account, resulting in gradual adjustment of
prices towards their fundamental values. Another example derives
from the concept of representativeness, which leads investors to
inappropriately conclude, on the basis of a small sample of data, that a pattern has been established that will continue well into
the future. When investors subsequently become aware of the fact
that prices have overreacted, corrections reverse the initial
erroneous trend.
2. Even if many investors exhibit behavioral biases, security prices
might still be set efficiently if the actions of arbitrageurs move prices to their intrinsic values. Arbitrageurs who observe
mispricing in the securities markets would buy underpriced
securities (or possibly sell short overpriced securities) in order to profit from the anticipated subsequent changes as prices move to their intrinsic values. Consequently, securities prices would still exhibit the characteristics of an efficient market.
3. One of the major factors limiting the ability of rational investors
to take advantage of any ‘pricing errors’ that result from the
actions of behavioral investors is the fact that a mispricing can get worse over time. An example of this fundamental risk is the
apparent ongoing overpricing of the NASDAQ index in the late 1990s.
Related factors are the inherent costs and limits related to short selling, which restrict the extent to which arbitrage can force
overpriced securities (or indexes) to move towards their fair values. Rational investors must also be aware of the risk that an apparent mispricing is, in fact, a consequence of model risk; that is, the perceived mispricing may not be real because the investor has used a faulty model to value the security.
4. There are two reasons why behavioral biases might not affect
equilibrium asset prices: first, behavioral biases might contribute to the success of technical trading rules as prices gradually
adjust towards their intrinsic values, and second, the actions of arbitrageurs might move security prices towards their intrinsic
values. It might be important for investors to be aware of these
biases because either of these scenarios might create the potential for excess profits even if behavioral biases do not affect
equilibrium prices.
In addition, an investor should be aware of his personal behavioral biases, even if those biases do not affect equilibrium prices, to help avoid some of these information processing errors (e.g.
overconfidence or representativeness).
5. Efficient market advocates believe that publicly available
information (and, for advocates of strong-form efficiency, even
insider information) is, at any point in time, reflected in
securities prices, and that price adjustments to new information
occur very quickly. Consequently, prices are at fair levels so that active management is very unlikely to improve performance above
that of a broadly diversified index portfolio. In contrast,
advocates of behavioral finance identify a number of investor
errors in information processing and decision making that could
result in mispricing of securities. However, the behavioral finance literature generally does not provide guidance as to how these
investor errors can be exploited to generate excess profits.
Therefore, in the absence of any profitable alternatives, even if securities markets are not efficient, the optimal strategy might
still be a passive indexing strategy.
6. a. Davis uses loss aversion as the basis for her decision making.
She holds on to stocks that are down from the purchase price in the hopes that they will recover. She is reluctant to accept a loss.
7. a. 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.
8. a. Investors attempt to avoid regret by holding on to losers hoping
the stocks will rebound. If the stock rebounds to its original
purchase price, the stock can be sold with no regret. Investors
also may try to avoid regret by distancing themselves from their
decisions by hiring a full-service broker.
9. a. iv
b. iii
c. v
d. i
e. ii
10. Underlying risks still exist even during a mispricing event. The
market mispricing could get worse before it gets better. Other
adverse effects could occur before the price corrects itself (e.g., loss of clients with no understanding or appetite for mispricing opportunities).
11. Data mining is the process by which patterns are pulled from data.
Technical analysts must be careful not to engage in data mining as great is the human capacity to discern patterns where no patterns exist. Technical analysts must avoid mining data to support a
theory rather than using data to test a theory.
12. Even if prices follow a random walk, the existence of irrational
investors combined with the limits to arbitrage by arbitrageurs may allow persistent mispricings to be present. This implies that
capital will not be allocated efficiently —capital does not
immediately flow from relatively unproductive firms to relatively productive firms.
13. Trin =advancing Num ber /advancing V olum e declining Num ber /declining V olum e =
This trin ratio, which is above 1.0, would be taken as a bearish signal.
14. Breadth:
Breadth is negative —bearish signal (no one would actually use a one-
day measure).
15. This exercise is left to the student; answers will vary, but
successful students should be able to identify time periods when upward or downward trends are obvious. This exercise also shows the benefit of hindsight, which investors do not possess when
making current decisions.
16. The confidence index increases from (5%/6%) = 0.833 to (6%/7%)
= 0.857.
This indicates slightly higher confidence which would be
interpreted by technicians as a bullish signal. But the real
reason for the increase in the index is the expectation of
higher inflation, not higher confidence about the economy.
17. At the beginning of the period, the price of Computers, Inc.
divided by the industry index was 0.39; by the end of the period, the ratio had increased to 0.50. As the ratio increased over the period, it appears that Computers, Inc. outperformed other firms in its industry. The overall trend, therefore, indicates relative
strength, although some fluctuation existed during the period, with the ratio falling to a low point of 0.33 on day 19.
18. Five day moving averages:
Days 1 – 5: (19.63 + 20 + 20.5 + 22 + 21.13) / 5 = 20.65
Days 2 – 6 = 21.13
Days 3 – 7 = 21.50
Days 4 – 8 = 21.90
Days 5 – 9 = 22.13
Days 6 – 10 = 22.68
Days 7 – 11 = 23.18
Days 8 – 12 = 23.45 Sell signal (day 12 price < moving
average)
Days 9 – 13 = 23.38
Days 10 – 14 = 23.15
Advances
Declines
Net Advances 1,455 1,553 -98
Days 11 – 15 = 22.50
Days 12 – 16 = 21.65
Days 13 – 17 = 20.95
Days 14 – 18 = 20.28
Days 15 – 19 = 19.38
Days 16 – 20 = 19.05
Days 17 – 21 = 18.93Buy signal (day 21 price > moving
average)
Days 18 – 22 = 19.28
Days 19 – 23 = 19.93
Days 20 – 24 = 21.05
Days 21 – 25 = 22.05
Days 22 – 26 = 23.18
Days 23 – 27 = 24.13
Days 24 – 28 = 25.13
Days 25 – 29 = 26.00
Days 26 – 30 = 26.80
Days 27 – 31 = 27.45
Days 28 – 32 = 27.80
Days 29 – 33 = 27.90Sell signal (day 33 price < moving
average)
Days 30 – 34 = 28.20
Days 31 – 35 = 28.45
Days 32 – 36 = 28.65
Days 33 – 37 = 29.05
Days 34 – 38 = 29.25
Days 35 – 39 = 29.00
Days 36 – 40 = 28.75
19. This pattern shows a lack of breadth. Even though the index is up,
more stocks declined than advanced, which indicates a “lack of
broad-based support” for the rise in the index.
20.
Day Advances Declines
Net
Advances
Cumulative
Breadth
1 906 704 20
2 202
2 65
3 986 -333 -131
3 721 789 - 68 -199
4 503 968 -46
5 -664
5 497 1,095 -598 -1,262
6
970 702 268 -994 7
1,002 609 393 -601 8
903 722 181 -420 9
850 748 102 -318 10 766 766 0 -318
The signal is bearish as cumulative breadth is negative; however, the negative number is declining in magnitude, indicative of improvement. Perhaps the worst of the bear market has passed.
21. Trin =
936.0906/m illion 330704/m illion 240advancing Num ber /advancing V olum e declining Num ber /declining V olum e == This is a slightly bullish indicator, with average volume in advancing issues a bit greater than average volume in declining issues.
22. Confidence Index =
bonds corporate grade -te intermedia on Y ield bonds corporate rated -on top Y ield This year: Confidence index = (8%/10.5%) = 0.762
Last year: Confidence index = (8.5%/10%) = 0.850
Thus, the confidence index is decreasing.
23. Note: In order to create the 26-week moving average for the S&P 500,
we converted the weekly returns to weekly index values, with a base of 100 for the week prior to the first week of the data set. The
following graph shows the S&P 500 values and the 26-week moving
average, beginning with the 26th week of the data set.
a. The graph summarizes the data for the 26-week moving average.
The graph also shows the values of the S&P 500 index.
b. The S&P 500 crosses through its moving average from below 14
times, as indicated in the table below. The index increases
seven times in weeks following a cross-through and decreases
seven times.
Date of Cross-Through
Direction of S&P 500 in Subsequent
Week
05/18/01 Decrease 06/08/01 Decrease 12/07/01 Decrease 12/21/01 Increase 03/01/02 Increase 11/22/02 Increase 01/03/03 Increase
03/21/03 Decrease 04/17/03 Increase 06/10/04 Decrease 09/03/04 Increase 10/01/04 Decrease 10/29/04 Increase
04/08/05 Decrease
c. The S&P 500 crosses through its moving average from above 14
times, as indicated in the table below. The index increases nine times in weeks following a cross-through and decreases five times.
Date of Cross-Through Direction of S&P
500 in
Subsequent Week
Date of
Cross-
Through
Direction of S&P
500 in Subsequent
Week
06/01/01 Increase 03/28/03 Increase
06/15/01 Increase 04/30/04 Decrease
12/14/01 Increase 07/02/04 Decrease
02/08/02 Increase 09/24/04 Increase
04/05/02 Decrease 10/15/04 Decrease
12/13/02 Increase 03/24/05 Increase
01/24/03 Decrease 04/15/05 Increase
d. When the index crosses through its moving average from below,
as in part (b), this is regarded as a bullish signal. In our
sample, the index is as likely to increase as it is to
decrease following such a signal. When the index crosses
through its moving average from above, as in part (c), this is
regarded as a bearish signal. In our sample, contrary to the
bearish signal, the index is actually more likely to increase
than it is to decrease following such a signal.
24. In order to create the relative strength measure, we converted the
weekly returns for the Fidelity Banking Fund and for the S&P 500 to weekly index values, using a base of 100 for the week prior to the first week of the data set. The first graph shows the resulting
values, along with the relative strength measure (× 100). The
second graph shows the percentage change in the relative strength measure over five-week intervals.
a. The following graph summarizes the relative strength data for
the fund.
b. Over five-week intervals, relative strength increased by more
than 5% 29 times, as indicated in the table and graph below.
The Fidelity Banking Fund underperformed the S&P 500 index 18 times and outperformed the S&P 500 index 11 times in weeks
following an increase of more than 5%.
Date of Increase
Performance of
Banking Fund in
Subsequent Week
Date of
Increase
Performance of
Banking Fund in
Subsequent Week
07/21/00 Outperformed 03/09/01 Outperformed 08/04/00 Outperformed 03/16/01 Underperformed 08/11/00 Underperformed 03/30/01 Underperformed 08/18/00 Outperformed 06/22/01 Underperformed 09/22/00 Outperformed 08/17/01 Underperformed 09/29/00 Underperformed 03/15/02 Outperformed 10/06/00 Underperformed 03/22/02 Underperformed 12/01/00 Underperformed 03/28/02 Outperformed 12/22/00 Underperformed 04/05/02 Outperformed 12/29/00 Outperformed 04/12/02 Underperformed 01/05/01 Underperformed 04/26/02 Outperformed 01/12/01 Underperformed 05/03/02 Underperformed 02/16/01 Underperformed 05/10/02 Underperformed 02/23/01 Outperformed 06/28/02 Underperformed 03/02/01 Underperformed
c. Over five-week intervals, relative strength decreases by more
than 5% 15 times, as indicated in the graph above and table below. The Fidelity Banking Fund underperformed the S&P 500 index six times and outperformed the S&P 500 index nine times in weeks following a decrease of more than 5%.
Date of Decrease
Performance of
Banking Fund in
Subsequent Week
Date of
Decrease
Performance of
Banking Fund in
Subsequent Week
07/07/00 Underperformed 04/16/04 Underperformed
07/14/00 Outperformed 04/23/04 Outperformed
05/04/01 Underperformed 12/03/04 Outperformed
05/11/01 Outperformed 12/10/04 Underperformed
10/12/01 Outperformed 12/17/04 Outperformed
11/02/01 Outperformed 12/23/04 Underperformed
10/04/02 Outperformed 12/31/04 Underperformed
10/11/02 Outperformed
d. An increase in relative strength, as in part (b) above, is
regarded as a bullish signal. However, in our sample, the
Fidelity Banking Fund is more likely to underperform the S&P 500 index than it is to outperform the index following such a signal.
A decrease in relative strength, as in part (c), is regarded as
a bearish signal. In our sample, contrary to the bearish signal,
the Fidelity Banking Fund is actually more likely to outperform
the index increase than it is to underperform following such a
signal.
25. It has been shown that discrepancies of price from net asset value in
closed-end funds tend to be higher in funds that are more difficult to arbitrage such as less-diversified funds.
CFA PROBLEMS
1. i. Mental accounting is best illustrated by Statement #3.
Sampson’s requirement that his income needs be met via
interest income and stock dividends is an example of mental
accounting. Mental accounting holds that investors segregate
funds into mental accounts (e.g., dividends and capital gains),
maintain a set of separate mental accounts, and do not combine
outcomes; a loss in one account is treated separately from a
loss in another account. Mental accounting leads to an investor
preference for dividends over capital gains and to an inability
or failure to consider total return.
ii. Overconfidence(illusion of control) is best illustrated by Statement #6. Sampson’s desire to select investments that are
inconsistent with his overall strategy indicates
overconfidence. Overconfident individuals often exhibit risk-
seeking behavior. People are also more confident in the
validity of their conclusions than is justified by their
success rate. Causes of overconfidence include the illusion of
control, self-enhancement tendencies, insensitivity to
predictive accuracy, and misconceptions of chance processes.
iii. Reference dependence is best illustrated by Statement #5.
Sampson’s desire to retain poor-performing investments and to
take quick profits on successful investments suggests reference
dependence. Reference dependence holds that investment
decisions are critically dependent on the decision-maker’s
reference point. In this case, the reference point is the
original purchase price. Alternatives are evaluated not in
terms of final outcomes but rather in terms of gains and losses
relative to this reference point. Thus, preferences are
susceptible to manipulation simply by changing the reference
point.
2. a. Frost's statement is an example of reference dependence. His
inclination to sell the international investments once prices
return to the original cost depends not only on the terminal
wealth value, but also on where he is now, that is, his
reference point. This reference point, which is below the
original cost, has become a critical factor in Frost’s
decision.
In standard finance, alternatives are evaluated in terms of
terminal wealth values or final outcomes, not in terms of gains
and losses relative to some reference point such as original cost.
b. Frost’s statement is an example of susceptibility to cognitive
error, in at least two ways. First, he is displaying the
behavioral flaw of overconfidence. He likely is more confident
about the validity of his conclusion than is justified by his
rate of success. He is very confident that the past performance
of Country XYZ indicates future performance. Behavioral
investors could, and often do, conclude that a five-year record
is ample evidence to suggest future performance. Second, by
choosing to invest in the securities of only Country XYZ, Frost
is also exemplifying the behavioral finance phenomenon of asset
segregation. That is, he is evaluating Country XYZ investment
in terms of its anticipated gains or losses viewed in isolation.
Individuals are typically more confident about the validity of
their conclusions than is justified by their success rate or by
the principles of standard finance, especially with regard to
relevant time horizons. In standard finance, investors know
that five years of returns on Country XYZ securities relative
to all other markets provide little information about future
performance. A standard finance investor would not be fooled by
this “law of small numbers.” In standard finance, investors
evaluate performance in portfolio terms, in this case defined
by combining the Country XYZ holding with all other securities
held. Investments in Country XYZ, like all other potential
investments, should be evaluated in terms of the anticipated
contribution to the risk–reward profile of the entire
portfolio.
c. Frost’s statement is an example of mental accounting. Mental
accounting holds that investors segregate money into mental
accounts (e.g., safe versus speculative), maintain a set of
separate mental accounts, and do not combine outcomes; a loss
in one account is treated separately from a loss in another
account. One manifestation of mental accounting, in which Frost
is engaging, is building a portfolio as a pyramid of assets,
layer by layer, with the retirement account representing a
layer separate from the speculative fund. Each layer is
associated with different goals and attitudes toward risk. He
is more risk averse with respect to the retirement account than
he is with respect to the speculative fund account. The money
in the retirement account is a downside protection layer,
designed to avoid future poverty. The money in the speculative
fund account is the upside potential layer, designed for a
chance at being rich.
In standard finance, decisions consider the risk and return
profile of the entire portfolio rather than anticipated gains
or losses on any particular account, investment, or class of
investments. Alternatives should be considered in terms of
final outcomes in a total portfolio context rather than in
terms of contributions to a safe or a speculative account.
Standard finance investors seek to maximize the mean-variance
structure of the portfolio as a whole and consider covariances
between assets as they construct their portfolios. Standard
finance investors have consistent attitudes toward risk across
their entire portfolio.
3. a. Illusion of knowledge: Maclin believes he is an expert on, and
can make accurate forecasts about, the real estate market
solely because he has studied housing market data on the
Internet. He may have access to a large amount of real estate-
related information, but he may not understand how to analyze
the information nor have the ability to apply it to a proposed
investment.
Overconfidence: Overconfidence causes us to misinterpret the
accuracy of our information and our skill in analyzing it. Maclin
has assumed that the information he collected on the Internet is
accurate without attempting to verify it or consult other sources.
He also assumes he has skill in evaluating and analyzing the real
estate-related information he has collected, although there is no
information in the question that suggests he possesses such
ability.
b. Reference point: Maclin’s reference point for his bond
position is the purchase price, as evidenced by the fact that he
will not sell a position for less than he paid for it. This
fixation on a reference point, and the subsequent waiting for
the price of the security to move above that reference point
before selling the security, prevents Maclin from undertaking a
risk/return-based analysis of his portfolio position.
c. Familiarity: Maclin is evaluating his holding of company stock
based on his familiarity with the company rather than on sound
investment and portfolio principles. Company employees, because
of this familiarity, may have a distorted perception of their
own company, assuming a “good company” will also be a good
investment. Irrational investors believe an investment in a
company with which they are familiar will produce higher returns
and have less risk than nonfamiliar investments.
Representativeness: Maclin is confusing his company (which may
well be a good company) with the company’s stock (which may or
may not be an appropriate holding for his portfolio and/or a good
investment) and its future performance. This can result in
employees’ overweighting their company stock, thereby holding an
underdiversified portfolio.
4. a. The behavioral finance principle of biased
expectations/overconfidence is most consistent with the inve stor’s
first statement. Petrie stock provides a level of confidence and
comfort for the investor because of the circumstances in which she
acquired the stock and her recent history with the returns and
income from the stock. However, the investor exhibits
overconfidence in the stock given the needs of her portfolio (she
is retired) and the brevity of the recent performance history.
b. The behavioral finance principle of mental accounting is most
consistent with the investor’s second statement. The investor
has segregated the monies distributed from her portfolio into two “accounts”: the returns her portfolio receives on the Petrie stock and the returns on the rest of her portfolio. She is maintaining a separate set of mental accounts with regard to the total funds distributed. The investor’s specific uses should be viewed in the overall context of her spending needs and she should consider the risk and return profile of the entire portfolio.
5. i. Overconfidence (Biased Expectations and Illusion of Control):
Pierce is basing her investment strategy for supporting her
parents on her confidence in the economic forecasts. This is a
cognitive error reflecting overconfidence in the form of both
biased expectations and an illusion of control. Pierce is likely
more confident in the validity of those forecasts than is
justified by the accuracy of prior forecasts. Analysts’ consensus
forecasts have proven routinely and widely inaccurate. Pierce also
appears to be overly confident that the recent performance of the
Pogo Island economy is a good indicator of future performance.
Behavioral investors often conclude that a short track record is
ample evidence to suggest future performance.
Standard finance investors understand that individuals typically
have greater confidence in the validity of their conclusions than
is justified by their success rate. The calibration paradigm,
which compares confidence to predictive ability, suggests that
there is significantly lower probability of success than the
confidence levels reported by individuals. In addition, standard
finance investors know that recent performance provides little
information about future performance and are not deceived by this
“law of small numbers.”
ii. Loss Aversion (Risk Seeking): Pierce is exhibiting risk aversion in deciding to sell the Core Bond Fund despite its gains and
favorable prospects. She prefers a certain gain over a possibly
larger gain coupled with a smaller chance of a loss. Pierce is
exhibiting loss aversion (risk seeking) by holding the High Yield
Bond Fund despite its uncertain prospects. She prefers the modest
possibility of recovery coupled with the chance of a larger loss
over a certain loss. People tend to exhibit risk seeking, rather
than risk aversion, behavior when the probability of loss is large.
There is considerable evidence indicating that risk aversion holds
for gains and risk seeking behavior holds for losses, and that
attitudes toward risk vary depending on particular goals and
circumstances.
Standard finance investors are consistently risk averse and
systematically prefer a certain outcome over a gamble with the same
expected value. Such investors also take a symmetrical view of
gains and losses of the same magnitude, and their sensitivity
(aversion) to changes in value is not a function of a specified value reference point.
iii. Reference Dependence: Pierce’s inclination to sell her Small Company Fund once it returns to her original cost is an
example of reference dependence. This is predicated on the
current value as related to original cost, her reference point.
Her decision ignores any analysis of expected terminal value
or the impact of this sale on her total portfolio. This
reference point of original cost has become a critical but
inappropriate factor in Pierce’s dec ision.
In standard finance, alternatives are evaluated in terms of
terminal wealth values or final outcomes, not in terms of gains and losses relative to a reference point such as original cost.
Standard finance investors also consider the risk and return
profile of the entire portfolio rather than anticipated gains or losses on any particular investment or asset class.