IPT 1 Chapter 12

Question 1

What is the Behavioral Critique?

Answer 1

Investors are not fully rational and exhibit biases

Question 2

What are the Necessary Conditions for aggregate mispricing?

Answer 2

1. Biases must affect a large swath of professional investors
2. Biases must be systematic
3. No learning occurs
4. There are limits for arbitrage

Question 3

What are the different types of behavioral biases?

Answer 3

1. Memory biases
2. Self-perception biases and overconfidence
3. Status qua bias and conservatism
4. Sample size neglex bias
5. Framing
6. Mental accounting
7. Regret avoidance
8. Prospect Theory

Question 4

What are the central assertions of the criticisms of the EMH proponents?

Answer 4

1. Investors with limited cognitive abilites
2. Learning from mistakes does not occur since it is either too hard of not obvious or self-deception

Question 5

What are the limitations on the ability to do arbitrage?

Answer 5

1. Fundamental risk
2. Implementation costs
3. Model risk

Question 6

What is Technical analysis/Charting?

Answer 6

Attempts to exploit recurring and predictable patterns in stock prices to generate superior investment performance

Question 7

What are tools for identifying the underlying directions of prices?

Answer 7

1. Moving average
2. Relative strength
3. Breadth of the market

Question 8

What are branches of technical analysis?

Answer 8

1. Sentiment indicators
2. Flow-of-Fund indicators
3. Structural market indicators