CH 9 Flashcards
Define “conservatism bias”.
Investors are too slow (too conservative) in updating their beliefs in response to recent evidence.
Detrimental “representativeness bias”.
People are too prone to believe that a small sample is representative of a broad population and infer patterns too quickly.
Define “framing”.
Decisions are affected by how choices are posed, for example, as gains relative to a low baseline level or losses relative to a higher baseline.
Define the “disposition effect”.
The reluctance of investors to sell shares in investments that have fallen in price.
Holding onto losers
Define “mental accounting”.
A specific form of framing in which people segregate certain decisions.
Define “regret avoidance”.
People blame themselves more for unconventional choices that turn out badly so they avoid regret by making conventional decisions.
Define “prospect theory”.
Behavioral theory that investor utility depends on gains or losses from investors’ starting position, rather than on their levels of wealth.
Define “breadth”.
The extent to which movements in broad market indexes are reflected widely in movements of individual stock prices.
Define “relative strength”.
Recent performance of a given stock or industry compared to that of a broader market index.
Define the “trin statistic”.
The ratio of average volume in declining issued to average volume in advancing issues.
Provide the formula for trin.
Trin = (Volume declining/ Number declining) / (Volume advancing/ Number advancing)
What does a ‘trin > 1’ signify?
Ratio is considered bearish, because falling stocks would then have higher average volume than the advancing stocks, indicating net selling pressure.
Define the “confidence index”.
Ratio of the yield of top-rated corporate bonds to the yield on intermediate-grade bonds.
Provide the formula for the “confidence index”?
Confidence index = average yield on 10 top-rated corporate bonds / average yield on 10 intermediate-grade corporate bonds.
What does a large ‘confidence interval’ ratio indicate?
A high ratio indicated that the yields between high rated and intermediate corporate bonds is narrow, this means that investors are optimistic about the market, therefore require smaller default risk premiums on lower rated corporate bonds.
