Chap012INVESTMENTSBODIE KAANE MARCUSNINTH EDITION.docx

Chap012INVESTMENTSBODIE KAANE MARCUSNINTH EDITION.docx

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Chap012INVESTMENTSBODIEKAANEMARCUSNINTHEDITION

CHAPTER12:

BEHAVIORALFINANCE

ANDTECHNICALANALYSIS

PROBLEMSETS

1.Technicalanalysiscangenerallybeviewedasasearchfortrendsorpatternsinmarketprices.Technicalanalyststendtoviewthesetrendsasmomentum,orgradualadjustmentsto‘correct’prices,or,alternatively,reversalsoftrends.Anumberofthebehavioralbiasesdiscussedinthechaptermightcontributetosuchtrendsandpatterns.Forexample,aconservatismbiasmightcontributetoatrendinpricesasinvestorsgraduallytakenewinformationintoaccount,resultingingradualadjustmentofpricestowardstheirfundamentalvalues.Anotherexamplederivesfromtheconceptofrepresentativeness,whichleadsinvestorstoinappropriatelyconclude,onthebasisofasmallsampleofdata,thatapatternhasbeenestablishedthatwillcontinuewellintothefuture.Wheninvestorssubsequentlybecomeawareofthefactthatpriceshaveoverreacted,correctionsreversetheinitialerroneoustrend.

2.Evenifmanyinvestorsexhibitbehavioralbiases,securitypricesmightstillbesetefficientlyiftheactionsofarbitrageursmovepricestotheirintrinsicvalues.Arbitrageurswhoobservemispricinginthesecuritiesmarketswouldbuyunderpricedsecurities（orpossiblysellshortoverpricedsecurities）inordertoprofitfromtheanticipatedsubsequentchangesaspricesmovetotheirintrinsicvalues.Consequently,securitiespriceswouldstillexhibitthecharacteristicsofanefficientmarket.

3.Oneofthemajorfactorslimitingtheabilityofrationalinvestorstotakeadvantageofany‘pricingerrors’thatresultfromtheactionsofbehavioralinvestorsisthefactthatamispricingcangetworseovertime.AnexampleofthisfundamentalriskistheapparentongoingoverpricingoftheNASDAQindexinthelate1990s.Arelatedfactoristheinherentcostsandlimitsrelatedtoshortselling,whichrestricttheextenttowhicharbitragecanforceoverpricedsecurities（orindexes）tomovetowardstheirfairvalues.Rationalinvestorsmustalsobeawareoftheriskthatanapparentmispricingis,infact,aconsequenceofmodelrisk;thatis,theperceivedmispricingmaynotberealbecausetheinvestorhasusedafaultymodeltovaluethesecurity.

4.Therearetworeasonswhybehavioralbiasesmightnotaffectequilibriumassetprices:

first,behavioralbiasesmightcontributetothesuccessoftechnicaltradingrulesaspricesgraduallyadjusttowardstheirintrinsicvalues,andsecond,theactionsofarbitrageursmightmovesecuritypricestowardstheirintrinsicvalues.Itmightbeimportantforinvestorstobeawareofthesebiasesbecauseeitherofthesescenariosmightcreatethepotentialforexcessprofitsevenifbehavioralbiasesdonotaffectequilibriumprices.

Inaddition,aninvestorshouldbeawareofhispersonalbehavioralbiases,evenifthosebiasesdonotaffectequilibriumprices,tohelpavoidsomeoftheseinformationprocessingerrors（e.g.overconfidenceorrepresentativeness）.

5.Efficientmarketadvocatesbelievethatpubliclyavailableinformation（and,foradvocatesofstrong-formefficiency,eveninsiderinformation）is,atanypointintime,reflectedinsecuritiesprices,andthatpriceadjustmentstonewinformationoccurveryquickly.Consequently,pricesareatfairlevelssothatactivemanagementisveryunlikelytoimproveperformanceabovethatofabroadlydiversifiedindexportfolio.Incontrast,advocatesofbehavioralfinanceidentifyanumberofinvestorerrorsininformationprocessinganddecisionmakingthatcouldresultinmispricingofsecurities.However,thebehavioralfinanceliteraturegenerallydoesnotprovideguidanceastohowtheseinvestorerrorscanbeexploitedtogenerateexcessprofits.Therefore,intheabsenceofanyprofitablealternatives,evenifsecuritiesmarketsarenotefficient,theoptimalstrategymightstillbeapassiveindexingstrategy.

6.a.Davisuseslossaversionasthebasisforherdecisionmaking.Sheholdsontostocksthataredownfromthepurchasepriceinthehopesthattheywillrecover.Sheisreluctanttoacceptaloss.

7.a.Shrumrefusestofollowastockaftershesellsitbecauseshedoesnotwanttoexperiencetheregretofseeingitrise.Thebehavioralcharacteristicusedforthebasisforherdecisionmakingisthefearofregret.

8.a.Investorsattempttoavoidregretbyholdingontolosershopingthestockswillrebound.Ifthestockreboundstoitsoriginalpurchaseprice,thestockcanbesoldwithnoregret.Investorsalsomaytrytoavoidregretbydistancingthemselvesfromtheirdecisionsbyhiringafull-servicebroker.

9.a.–iv

b.–iii

c.–v

d.–i

e.–ii

10.Underlyingrisksstillexistevenduringamispricingevent.Themarketmispricingcouldgetworsebeforeitgetsbetter.Otheradverseeffectscouldoccurbeforethepricecorrectsitself（e.g.lossofclientswithnounderstandingorappetiteformispricingopportunities）.

11.Dataminingistheprocessbywhichpatternsarepulledfromdata.Technicalanalystsmustbecarefulnottoengageindataminingasgreatisthehumancapacitytodiscernpatternswherenopatternsexist.Technicalanalystsmustavoidminingdatatosupportatheory,ratherthanusingdatatotestatheory.

12.Evenifpricesfollowarandomwalk,theexistenceofirrationalinvestorscombinedwiththelimitstoarbitragebyarbitrageursmayallowpersistentmispricingstobepresent.Thisimpliesthatcapitalwillnotbeallocatedefficiently—capitaldoesnotimmediatelyflowfromrelativelyunproductivefirmstorelativelyproductivefirms.

13.Trin=

Thistrinratio,whichisbelow1.0,wouldbetakenasabullishsignal.

14.Breadth:

Advances

Declines

NetAdvances

1,604

1,434

170

Breadthispositive—bullishsignal（noonewouldactuallyuseaone-daymeasure）.

15.Thisexerciseislefttothestudent;answerswillvary.

16.Theconfidenceindexincreasesfrom（5%/6%）=0.833to（6%/7%）=0.857.

Thisindicatesslightlyhigherconfidencewhichwouldbeinterpretedbytechniciansasabullishsignal.Buttherealreasonfortheincreaseintheindexistheexpectationofhigherinflation,nothigherconfidenceabouttheeconomy.

17.Atthebeginningoftheperiod,thepriceofComputers,Inc.dividedbytheindustryindexwas0.39;bytheendoftheperiod,theratiohadincreasedto0.50.Astheratioincreasedovertheperiod,itappearsthatComputers,Inc.outperformedotherfirmsinitsindustry.Theoveralltrend,therefore,indicatesrelativestrength,althoughsomefluctuationexistedduringtheperiod,withtheratiofallingtoalowpointof0.33onday19.

18.Fivedaymovingaverages:

Days1–5:

（19.63+20+20.5+22+21.13）/5=20.65

Days2–6=21.13

Days3–7=21.50

Days4–8=21.90

Days5–9=22.13

Days6–10=22.68

Days7–11=23.18

Days8–12=23.45Sellsignal（day12price

Days9–13=23.38

Days10–14=23.15

Days11–15=22.50

Days12–16=21.65

Days13–17=20.95

Days14–18=20.28

Days15–19=19.38

Days16–20=19.05

Days17–21=18.93Buysignal（day21price>movingaverage）

Days18–22=19.28

Days19–23=19.93

Days20–24=21.05

Days21–25=22.05

Days22–26=23.18

Days23–27=24.13

Days24–28=25.13

Days25–29=26.00

Days26–30=26.80

Days27–31=27.45

Days28–32=27.80

Days29–33=27.90Sellsignal（day33price

Days30–34=28.20

Days31–35=28.45

Days32–36=28.65

Days33–37=29.05

Days34–38=29.25

Days35–39=29.00

Days36–40=28.75

19.Thispatternshowsalackofbreadth.Eventhoughtheindexisup,morestocksdeclinedthanadvanced,whichindicatesa“lackofbroad-basedsupport”fortheriseintheindex.

20.

Day

Advances

Declines

NetAdvances

CumulativeBreadth

1

906

704

202

202

2

653

986

-333

-131

3

721

789

-68

-199

4

503

968

-465

-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

Thesignalisbearishascumulativebreadthisnegative;however,thenegativenumberisdeclininginmagnitude,indicativeofimprovement.Perhapstheworstofthebearmarkethaspassed.

21.Trin=

Thisisaslightlybullishindicator,withaveragevolumeinadvancingissuesabitgreaterthanaveragevolumeindecliningissues.

22.ConfidenceIndex=

Thisyear:

ConfidenceIndex=（8%/10.5%）=0.762

Lastyear:

ConfidenceIndex=（8.5%/10%）=0.850

Thus,theconfidenceindexisdecreasing.

23.Note:

Inordertocreatethe26-weekmovingaveragefortheS&P500,weconvertedtheweeklyreturnstoweeklyindexvalues,withabaseof100fortheweekpriortothefirstweekofthedataset.ThefollowinggraphshowstheS&P500valuesandthe26-weekmovingaverage,beginningwiththe26thweekofthedataset.

a.Thegraphsummarizesthedataforthe26-weekmovingaverage.ThegraphalsoshowsthevaluesoftheS&P500index.

b.TheS&P500crossesthroughitsmovingaveragefrombelowfourteentimes,asindicatedinthetablebelow.Theindexincreasesseventimesinweeksfollowingacross-throughanddecreasesseventimes.

Dateof

cross-through

DirectionofS&P500insubsequentweek

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.TheS&P500crossesthroughitsmovingaveragefromabovefourteentimes,asindicatedinthetablebelow.Theindex