Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

FIN 4250 > Topic 6 - Behavioural Portfolios > Flashcards

Topic 6 - Behavioural Portfolios Flashcards

1
Q

What do behavioral portfolios consider?

A

They consider broader life goals, wants for utilitarian, expressive, and emotional benefits

they arae about life, beyond money. they are about the expressive and emotional benefits beyond utilitarian benefits

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

How is risk viewed in the context of behavioral portfolios?

A

Falling short of one’s wants

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

What are the two benefits of behavior portfolios?

A

They recognize the emotional and expressive advantages of investments

they can reflect personal values

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

What is the objective of the behavioral portfolio?

A

accommodate a wider range of investor wants

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

What is the objective of the mean-variance portfolio theory?

A

Optimize portfolios based on risk (return variance) and return

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

Where are efficient portfolios for mean-variance portfolio theory (MVPT)?

A

They are on the mean-variance frontier line

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

What does keeping portfolios close to peers do for you? It reduces what?

A

It reduces your expressive costs of being labeled a loser or singled out if things go wrong
it reduces the emotional cost of regret, a majority go up and down together, therefore you are with almost everyone all the time

The costs of being deemed a loser and regret, may exceed the expressive benefits that deviating from peers portfolio results in being an alone winner

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

What is used to describe portfolios in behavioural portfolio theory?

A

Describes portfolios on behavioral wants frontiers.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

Are behavioral wants frontiers free of ignorance and cognitive & emotional errors?

A

They are free from ignorance and cognitive and emotional errors.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

What do people value if they prescribe to the mean-variance portfolio theory?

A

They only have wants that do not extend past the utilitarian benefits of high expected return with low risk

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

Is the mean variance-optimized portfolios sensitive to minor parameter estimate changes?

A

Yes, they are very sensitive

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

What does it mean when a portfolio is unpalatable?

A

It means it fails to satisfy wants that are beyond maximizing expected return at the existing standard deviation of returns of the funds portfolio

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

What do investors use to control deviations from benchmark returns?

A

tracking error optimization

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

What is tracking error optimization?

A

the difference between the benchmark portfolios and the mean-variance portfolio

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

Do you want the tracking error optimization to be big or small?

A

You want to minimize the tracking error optimization (the difference between the benchmark portfolios and the mean-variance portfolios)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

Can you ever be above the mean-variance frontier?

A

No, you can never be above this.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

Where do portfolios on the mean tracking error frontier lie?

A

They lie below the mean-variance frontier

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

What is better about portfolios on the mean tracking error frontier than portfolios on the mean-variance frontier?

A

Portfolios on the mean tracking error frontier might align better with the behavioral wants frontier, which accommodates expressive and emotional goals

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

What do constraints provide in portfolios?
(example: no less than 30% in US stocks)

A

Constraints place portfolios closer to behavioral wants frontier

It also aligns portfolios with investors’ expressive and emotional goals

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
20
Q

When do portfolios fall on the behavioral wants frontier?

A

When they fulfill investors’ wants for utilitarian, expressive, and emotional benefits, without stumbling into cognitive and emotional errors

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
21
Q

Investors who trade stocks more frequently outperform the stock market return. (true or false)

A

false

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
22
Q

What happens when investors trade stocks more frequently?

A

They almost always fall behind the stock market returns.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
23
Q

What does it indicate if frequent stock traders fall short of the stock market returns?

A

It shows that the most frequent traders are misled into trading by ignorance or cognitive errors

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
24
Q

Where would we describe the portfolio of those who trade infrequently?

A

They are on the mean-variance efficient frontier

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
25
Q

What are noise traders?

A

Traders who make decisions to buy or sell based on factors that they believe to be helpful, but in reality it will give them no better returns than random choices

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
26
Q

Where can noise traders’ portfolios be found?

A

On behavioral wants frontier, behavioral errors frontier, or a combination of both

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
27
Q

What is home bias?

A

The tendency for investors to concentrate their portfolios in home country investments

I am from Canada, I will mainly focus on Canadian investments

28
Q

Why do people choose portfolios that fall under the home bias?

A

Because of familiarity

29
Q

What benefits does home bias offer?

A

Familiarity provides high expressive and emotional benefits

30
Q

Where does home bias place portfolios in relation to the mean-variance frontier?

A

Below the mean-variance frontier.

31
Q

How do you get rid of the home bias?

A

By diversifying investments

32
Q

What does traveling to foreign countries do? (in regard to home bias)

A

When you travel to foreign countries, it increases your familiarity for investors and reduces the home bias.

If you travel more, you are more likely to invest in other places outside of your home country, therefor avoiding home bias

33
Q

Behavioral portfolios are NOT goal-based portfolios. (true or false)?

A

False,
behavioral portfolios ARE goal-based

34
Q

What is the layered pyramid in portfolio building?

A

Investors consider portfolios as a layered pyramid where each layer is dedicated to satisfying a want (that is often specified as a goal)

Common stocks (top of the pyramid)
Preferred stocks
Safe bonds and guaranteed mortgages
cash reserve
Insurance (bottom of the pyramid)

The pyramid layers do change over time. (from 1929 to now it is different)

35
Q

Wants are more specific than goals? (true or false)

A

False
goals are more specific than wants. many investors have ‘wants’ (example: to be rich) with no specific goals

36
Q

Do the layers on the portfolios as layered pyramids change over time?

A

Yes they do change over time

37
Q

Does everyone have the same layers on their portfolio (in portfolios as layers)

A

No, everyones layered pyramid is different

38
Q

What category would bonds typically fall under: protection from poverty or prospects for riches?
(portfolio as pyramid layers)

A

Bonds typically fall under the protection from poverty layer

39
Q

What category would stocks typically fall under: protection from poverty or prospects for riches?
(portfolio as pyramid layers)

A

Stocks typically fall under the prospects for riches layer

40
Q

What category would homeownership typically fall under: protection from poverty or prospects for riches?
(portfolio as pyramid layers)

A

A majority of Americans would perceive houses as safe investments and put them in the protection from poverty layer

41
Q

When would someone put homeownership under the prospects for riches layer (in the portfolio as a pyramid)

A

renters are more likely to perceive houses as risky investments, therefore they put homeownership under the prospects for riches layer)

42
Q

How is risk measured in behavioral portfolios?

A

it is measured by falling short of goals and wants

43
Q

What is want-based rebalancing in behavioral portfolios?

A

Risk is measured not by the variance of portfolio returns or by losses, but by falling short of reaching goals and satisfying wants.

Investor: primary goal is riches (80% of portfolio is stocks) and a secondary goal of protection from poverty (20% of portfolio)
If stock prices increase with bond prices staying the same, the new balance is 82% stock and 18% bonds.
if the investor still believes that their wants for protection from poverty can be satisfied with the current bond level, they may not want to rebalance at all.

44
Q

What is risk-based mean-variance rebalancing of a portfolio?

A

Investors choose a balance of investments that give them the returns they desire AND combined with the variance they can sleep with.
Portfolio: 60% stocks 40% bonds
If the stock prices increase in a couple of months with bonds staying the same, the portfolio is now 70% stocks and 30% bonds. You sell the stocks until the original 60/40 split is restored

45
Q

If a portfolio consists of 70% stocks and 30% bonds… a couple of months later it has now shifted to 80% stocks and 20% bonds (from price increases and decreases)

What would a want-based rebalancing do?

A

The investor would reevaluate their needs. Since the bonds are to protect them from poverty, they would need to reevaluate if that 20% still satisfies their protection from poverty.
If it does than no rebalancing is necessary.

46
Q

If a portfolio consists of 70% stocks and 30% bonds… a couple of months later it has now shifted to 80% stocks and 20% bonds (from price increases and decreases)

What would a risk-based mean-variance rebalancing be?

A

You would sell some stocks and buy more bonds so that you restore the original balance of 70/30

47
Q

What are some downsides to mean-variance rebalancing?

A

If you are constantly evaluating the balance (quarterly), you might be selling stocks or bonds at a bad time in the market all to rebalance
There are also extra transaction costs and taxes to consider since you are buying and selling more than “want” based rebalancing

48
Q

Does want-based rebalancing or risk-based mean-variance rebalancing have more transaction costs and tax implications?

A

Want-based has LESS transaction costs & tax implications since you don’t sell or buy to rebalance your portfolio unless a life-changing event happens, or you are not satisfied that the balance will meet your needs.

Risk-based mean-variance rebalancing has more transaction costs and can open you up to pay more taxes due to rebalancing quarterly, meaning buying and selling stocks & bonds on a more often basis.

49
Q

What factors does risk tolerance combine?

A

Risk traits
wants
perceptions
and circumstances

50
Q

If someone has more testosterone, how does that impact their risk tolerance?

A

If someone has high testosterone levels –> that leads to a high-risk tolerance

51
Q

If someone has high cortisol levels, how does that impact their risk tolerance?

A

High cortisol levels –> low-risk tolerance

52
Q

If someone owns a powerful sports car, what does that tell you about their risk-taking?

A

Owning a powerful sports car is linked to risk-taking behavior in investing

53
Q

If there are two hedge fund managers, one drives a sports car, the other doesn’t… who is more likely to make riskier investments without yielding higher returns?

A

The one who drives the sports car is more likely to make riskier investments without yielding higher returns

54
Q

What drives hedge fund managers into more frequent and active trading?

A

Sensation seeking

55
Q

What can sensation-seeking lead hedge fund managers to gravitate towards (in terms of stocks)?

A

Lottery like stocks

56
Q

What is prospect theory?

A

if two choices are put before an individual, both equal, with one presented in terms of potential gains, and the other in terms of potential losses, the potential gain will be chosen.

57
Q

What is shortfall aversion?

A

Aversion to falling short of “reference points” representing wants

Some people use their current situation as their reference point, so they have satisfied their wants.

58
Q

What plays a crucial role in choices determines the trade-off between protection from poverty and prospects for riches?

A

reference points

59
Q

What does prospect theory focus on?

A

How individuals assess gains vs losses

60
Q

What are the two key processes in prospect theory?

A

editing and evaluation

61
Q

What is the editing process in the prospect theory?

A

Ranking alternatives based on heuristic simplifying approach

62
Q

What is the evaluation process in the prospect theory?

A

Designates a reference point for assessing gains and losses

63
Q

Participants were given $1000 and had to decide between a guaranteed gain of $500 more, or a 50% chance to gain $1,000 and a 50% change to gain nothing.

Option A: $1,500
Option B: 50% of $2,000 50% of $1,000

What is the most popular option and how is it framed?

A

The popular option would be option A (a sure outcome rather than the gamble).

this was framed as a gain, positive framing.

64
Q

Participants received $2000 and had to decide between a definite loss of $500, or a 50% chance to lose $1,000 and a 50% chance to lose nothing.

Option A: $1,500
Option B: 50% of $2,000 50% of $1,000

What would you choose and how is it framed?

A

Option B (the gamble) was favored by 69% of people, as opposed to option A (a sure thing)

65
Q

What is the conclusion of Kahneman and Tversky’s experiment with framing a sure $1000 and a gain or loss (50/50) of $500 or $1000

A

the expected value for both negative and positive framing was the same.
When framed as a gain, people prefer the sure thing
When framed as a loss people prefer the gamble
people exhibit risk-seeking behaviour in domain losses

FIN 4250 (8 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions