SS6 - Capital Market

Question 0

Status Quo trap

Answer 0

Tendency to perpetuate recent observations - to predict no change from past

Doing nothing becomes easy and preferred strategy

Question 1

Anchoring trap

Answer 1

Tendency to give disproportionate weight to the first info it receives in one topic

Ie 1st presenter might “anchor” subsequent discussion in a way to give it an edge

Question 2

Confirming evidence trap

Answer 2

Tendency to seek info that supports point of view

Avoid it by:
Examine all data with vigor
Enlist independent person to argue against you
Be honest about your motives

Question 3

Overconfidence trap

Answer 3

Overestimate accuracy of your forecasts

Avoid by:
Widening range of possible ties around primary target forecast

Question 4

Prudence trap

Answer 4

Tendency to temper forecasts that don’t appear extreme or to act overly cautious in forecasts - happens over decisions that can be costly to decision maker’s career

Avoid by:
Widening possibilities around target forecasts.

Question 5

Recallability trap

Answer 5

Overly influenced by events that recently happened

Question 6

Gordon growth

Answer 6

Earnings = div yield + growth rate
= D(0) *(1+g) /P(0) +g
=D(1)/P(0) + g

g =capital gains yield

Question 7

What is g in terms of GDP?

Answer 7

G is the nominal GDP
= real GDP growth rate + expected long-run inflation rate

Or

Earnings growth rate = GDP growth rate + excess corporate growth

Question 8

Grinold-kroner model

Answer 8

E(Re) = d/p -

Question 9

Five phases of business cycle

Answer 9

Initial recovery
Early upswing
Late upswing
Slowdown
Recession