行为金融学anawer.docx

行为金融学anawer.docx

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行为金融学anawer

CHAPTER1:

DiscussionQuestionsandProblems

1.Differentiatethefollowingterms/concepts:

a.Prospectandprobabilitydistribution

Aprospectisalotteryorseriesofwealthoutcomes,eachofwhichisassociatedwithaprobability,whereasaprobabilitydistributiondefinesthelikelihoodofpossibleoutcomes.

b.Riskanduncertainty

Riskismeasurableusingprobability,butuncertaintyisnot.Uncertaintyiswhenprobabilitiescan’tbeassignedorthepossibleoutcomesareunclear.

c.Utilityfunctionandexpectedutility

Autilityfunction,denotedasu（）,assignsnumberstopossibleoutcomessothatpreferredchoicesreceivehighernumbers.Utilitycanbethoughtofasthesatisfactionreceivedfromaparticularoutcome.

d.Riskaversion,riskseeking,andriskneutrality

Riskaversiondescribessomeonewhopreferstheexpectedvalueofalotterytothelotteryitself.Riskseekingdescribessomeonewhoprefersalotterytotheexpectedvalueofalottery.Andriskneutralitydescribessomeonewhoseutilityoftheexpectedvalueofalotteryisequaltotheexpectedutilityofthelottery.

2.Wheneatingout,Roryprefersspaghettioverahamburger.Lastnightshehadachoiceofspaghettiandmacaroniandcheeseanddecidedonthespaghettiagain.Thenightbefore,Roryhadachoicebetweenspaghetti,pizza,andahamburgerandthistimeshehadpizza.Then,todayshechosemacaroniandcheeseoverahamburger.DoesherselectiontodayindicatethatRory’schoicesareconsistentwitheconomicrationality?

Whyorwhynot?

Rory’spreferencesareconsistentwithrationality.Theyarecompleteandtransitive.Weseethatherpreferenceorderingis:

Pizza

spaghetti

macaroniandcheese

hamburger

3.Considerapersonwiththefollowingutilityfunctionoverwealth:

u（w）=ew,whereeistheexponentialfunction（approximatelyequalto2.7183）andw=wealthinhundredsofthousandsofdollars.Supposethatthispersonhasa40%chanceofwealthof$50,000anda60%chanceofwealthof$1,000,000assummarizedbyP（0.40,$50,000,$1,000,000）.

a.Whatistheexpectedvalueofwealth?

E（w）=.4*.5+.6*10=6.2

U（P）=.4e0.50+.6e10=13,216.54

b.Constructagraphofthisutilityfunction.

Thefunctionisconvex.

c.Isthispersonriskaverse,riskneutral,orariskseeker?

Riskseekerbecausegraphisconvex.

d.Whatisthisperson’scertaintyequivalentfortheprospect?

ew=13,216.54givesw=9.4892244or$948,922.44

4.Anindividualhasthefollowingutilityfunction:

u（w）=w.5wherew=wealth.

a.Usingexpectedutility,orderthefollowingprospectsintermsofpreference,fromthemosttotheleastpreferred:

P1（.8,1,000,600）

P2（.7,1,200,600）

P3（.5,2,000,300）

Ranking:

P2,P3,P1withexpectedutilities31.5972,31.0209,and30.1972forprospects2,3,and1,respectively

b.WhatisthecertaintyequivalentforprospectP2?

998.3830

c.Withoutdoinganycalculations,wouldthecertaintyequivalentforprospectP1belargerorsmaller?

Why?

ThecertaintyequivalentforP1wouldbesmallerbecauseP2isrankedhigherthanP1.

5.Considertwoprospects:

Problem1:

Choosebetween

ProspectA:

$2,500withprobability.33,

$2,400withprobability.66,

Zerowithprobability.01.

AndProspectB:

$2,400withcertainty.

Problem2:

Choosebetween

ProspectC:

$2,500withprobability.33,

Zerowithprobability.67.

AndProspectD:

$2,400withprobability.34,

Zerowithprobability.66.

IthasbeenshownbyDanielKahnemanandAmosTversky（1979,“Prospecttheory:

Ananalysisofdecisionunderrisk,”Econometrica47

（2）,263-291）thatmorepeoplechooseBwhenpresentedwithproblem1andwhenpresentedwithproblem2,mostpeoplechooseC.Thesechoicesviolateexpectedutilitytheory.Why?

ThisisanexampleoftheAllaisparadox.Thefirstchoicesuggeststhat

u（2,400）>.33u（2,500）+.66u（2,400）or.34u（2,400）>.33u（2,500）

whilethesecondchoicesuggestsjusttheoppositeinequality.

Chapter2:

DiscussionQuestionsandProblems

1.Differentiatethefollowingterms/concepts:

a.Systematicandnonsystematicrisk

Nondiversifiableorsystematicriskisriskthatiscommontoallriskyassetsinthesystemandcannotbediversified.Diversifiableorunsystematicriskisspecifictotheassetinquestionandcanbediversified.

b.Betaandstandarddeviation

BetaistheCAPM’smeasureofrisk.Ittakesintoaccountanasset’ssensitivitytothemarketandonlymeasuressystematic,nondiversifiablerisk.Thestandarddeviationisameasureofdispersionthatincludesbothdiversifiableandnondiversifiablerisks.

c.Directandindirectagencycosts

Agencycostsarisewhenmanagers’incentivesarenotconsistentwithmaximizingthevalueofthefirm.Directcostsincludeexpendituresthatbenefitthemanagerbutnotthefirm,suchaspurchasingaluxuryjetfortravel.Otherdirectcostsresultfromtheneedtomonitormanagers,includingthecostofhiringoutsideauditors.Indirectcostsaremoredifficulttomeasureandresultfromlostopportunities.

d.Weak,semi-strong,andstrongformmarketefficiency

Withweakformmarketefficiencypricesreflectalltheinformationcontainedinhistoricalreturns.Withsemi-strongformmarketefficiencypricesreflectallpubliclyavailableinformation.Withstrongformmarketefficiencypricesreflectinformationthatisnotpubliclyavailable,suchasinsiders’information.

2.Astockhasabetaof1.2andthestandarddeviationofitsreturnsis25%.Themarketriskpremiumis5%andtherisk-freerateis4%.

a.Whatistheexpectedreturnforthestock?

E（R）=.04+1.2（.05）=.10

b.Whataretheexpectedreturnandstandarddeviationforaportfoliothatisequallyinvestedinthestockandtherisk-freeasset?

E（Rp）=.5（.10）+.5（.04）=.07,σp=（.5）（.25）=.125

c.Afinancialanalystforecastsareturnof12%forthestock.Wouldyoubuyit?

Whyorwhynot?

Ifyoubelievethesourceisverycredible,buyitasitisexpectedtogenerateapositiveabnormal（orexcess）return.

3.Whatisthejointhypothesisproblem?

Whyisitimportant?

Ifwhentestingonehypothesisanothermustbeassumedtohold,ajoint-hypothesisproblemarises.Forus,thisisofparticularinterestwhenwearetestingmarketefficiencybecauseoftheneedtoutilizeaparticularrisk-adjustmentmodeltoproducerequiredreturns,thatis,torisk-adjust.Thiswouldnotbeaproblemifweknewwithcertaintywhatthecorrectriskadjustmentmodelis,butunfortunatelywedonot.IfatestrejectstheEMH,isitbecausetheEMHdoesnothold,orbecausewedidnotproperlymeasureabnormalreturns?

Wesimplydonotknowforcertaintheanswertothisquestion.

4.WarrenBuffetthasbeenaverysuccessfulinvestor.In2008LuisaKrollreportedthatBuffetttoppedForbesMagazine’slistoftheworld’srichestpeoplewithafortuneestimatedtobeworth$62billion（March5,2008,"Theworld'sbillionaires,"Forbes）.DoesthisinvalidatetheEMH?

WarrenBuffett’sexperiencedoesnotnecessarilyinvalidatetheEMH.Thereisthepossibilitythatheisjustlucky:

giventhattherearenumerousmoneymanagers,someareboundtoperformwelljustbyluck.StillmanywouldquestionthisherebecauseBuffett’strackrecordhasbeenconsistentlystrong.

5.Youareconsideringwhethertoinvestintwostocks,StockAandStockB.StockAhasabetaof1.15andthestandarddeviationofitsreturnshasbeenestimatedtobe0.28.ForStockB,thebetais0.84andstandarddeviationis0.48.

a.Whichstockisriskier?

StockAisriskier,thoughstockBhasgreatertotalrisk.

b.Iftherisk-freerateis4%andthemarketriskpremiumis8%,whatistheexpectedreturnforaportfoliothatiscomposedof60%Aand40%B?

Rp=.6（.132）+.4（.1072）=.12208

c.IfthecorrelationbetweenthereturnsofAandBis0.50,whatisthestandarddeviationfortheportfoliothatincludes60%Aand40%B?

σp2=（.6）2（.28）2+（.4）2（.48）2+2*.5（.6）（.4）（.28）（.48）=9.7%,σp=31.2%

Chapter3:

DiscussionQuestionsandProblems

1.Differentiatethefollowingterms/concepts:

a.Lotteryandinsurance

Alotteryisaprospectwithalowprobabilityofahighpayoff.Manypeoplebuylotterytickets,evenwithnegativeexpectedvalues.Thesesamepeoplebuyinsurancetoprotectthemselvesfromrisk.Normally,insuranceisahedgeagainstalow-probabilitylargeloss.Thesechoicesareinconsistentwithtraditionalexpectedutilityframeworkbutcanbeexplainedbyprospecttheory.

b.Segregationandintegration

Integrationoccurswhenpositionsarelumpedtogether,whilesegregationoccurswhensituationsareviewedoneatatime.

c.Riskaversionandlossaversion

Apersonwhoisriskaversepreferstheexpectedvalueofaprospecttotheprospectitself,whereasforapersonwhoislossaverse,lossesloomlargerthangains.

d.Weightingfunctionandeventprobability

Eventprobabilityissimplythesubjectiveviewonhowlikelyaneventis.Theweightingfunctionisassociatedwiththeprobabilityofanoutcome,butisnotstrictlythesameastheprobabilityasinexpectedutilitytheory.

2.Accordingtoprospecttheory,whichispreferred?

a.ProspectAorB?

Decision（i）.Choosebetween:

A（0.80,$50,$0）andB（0.40,$100,$0）

ProspectAispreferredduetoriskaversionforgains.Whilebothhavethesameexpectedchangeinwealth,Ahaslessrisk.

b.ProspectCorD?

Decision（ii）.Choosebetween:

C（0.00002,$500,000,$0）andD（0.00001,$1,000,000,$0）

ProspectD,withmorerisk,ispreferredduetotheriskseekingthatoccurswhenthereareverylowprobabilitiesofpositivepayoffs.

c.Arethesechoicesconsistentwithexpectedutilitytheory?

Whyorwhynot?

ViolationofEUtheorybecausepreferencesareinconsistent.ThesamesortofAllaisparadoxproof