12/7/2020 Test: CFA III - SS3 - The Behavioral Finance Perspective | Quizlet
NAME
5 Written questions
1. behavioral finance tries to explain observed investor decision making, which is clearly not fully explained by traditional finance
0
INCORRECT
No answer given
THE ANSWER
descriptive
2. implies that no manager should be able to generate alpha consistently
INCORRECT
No answer given
THE ANSWER
no free lunch
3. - anxious and impetuous
- might have opinions but recognizes limitations
- seeks and takes advice about investing
INCORRECT
No answer given
THE ANSWER
BB&K the celebrity traits
4. selling winners too soon and holding onto losers too long
INCORRECT
No answer given
THE ANSWER
disposition effect
5. concerned with describing the decision-making processes of individuals
INCORRECT
No answer given
THE ANSWER
micro behavioral finance
5 Matching questions
1. the price is right A. individuals estimate future probabilities by how easily they recall a past
event, four causes:
INCORRECT
1. retrievability - how easily a memory is recalled
No answer given
2. categorization - prior experiences and classifications
THE ANSWER
3. narrow range of experience - limited experience means narrow focus
D. - suggests that asset prices reflect all available information and adjust
4. resonance - individuals tend to estimate others' likes and dislikes using
instantaneously to fully and accurately incorporate the value of new
their own
information
- information here is defined as all current information as well as the
B. - prediction overconfidence: leads to underestimating risk and setting
unbiased interpretation of expected information
confidence intervals too narrow
- certainty overconfidence: relates to over-stated probabilities of
success
C. - because they put goals and related assets into mental accounts,
investors' portfolios tend to resemble layered pyramids of assets
- investors ignore the correlations of assets
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12/7/2020 Test: CFA III - SS3 - The Behavioral Finance Perspective | Quizlet
2. overconfidence bias D. - suggests that asset prices reflect all available information and adjust
instantaneously to fully and accurately incorporate the value of new
INCORRECT
information
No answer given
- information here is defined as all current information as well as the
THE ANSWER
unbiased interpretation of expected information
B. - prediction overconfidence: leads to underestimating risk and setting
confidence intervals too narrow
E. identifies four behavioral investor types. Go through a four step process
- certainty overconfidence: relates to over-stated probabilities of success
to determine the investors BIT:
1. interview to determine if active or passive
3. mental accounting bias
2. plot on a risk tolerance scale
INCORRECT
3. test for behavioral biases
No answer given 4. classify the investor into one of the BITs
THE ANSWER
C. - because they put goals and related assets into mental accounts,
investors' portfolios tend to resemble layered pyramids of assets
- investors ignore the correlations of assets
4. Pompian behavioral model
INCORRECT
No answer given
THE ANSWER
E. identifies four behavioral investor types. Go through a four step process
to determine the investors BIT:
1. interview to determine if active or passive
2. plot on a risk tolerance scale
3. test for behavioral biases
4. classify the investor into one of the BITs
5. availability bias
INCORRECT
No answer given
THE ANSWER
A. individuals estimate future probabilities by how easily they recall a past
event, four causes:
1. retrievability - how easily a memory is recalled
2. categorization - prior experiences and classifications
3. narrow range of experience - limited experience means narrow focus
4. resonance - individuals tend to estimate others' likes and dislikes using
their own
5 Multiple choice questions
1. rules of thumb
A. the price is right
B. heuristics
C. prescriptive
D. self-calibration
2. - current income
- currently owned assets
- present value of future income
A. behavioral life-cycle wealth classifications
B. behavioral life-cycle model
C. behavioral asset pricing
D. bounded rationality
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12/7/2020 Test: CFA III - SS3 - The Behavioral Finance Perspective | Quizlet
3. investors focus on one factor or outcome while consciously eliminating or subconsciously ignoring others
A. isolation effect
B. evaluation phase
C. self-calibration
D. AMH conclusions
4. investors place values on alternatives in terms of expected utility
A. endowment bias
B. evaluation phase
C. disposition effect
D. self-calibration
5. individuals are subject to:
1. framing - the way information is presented, aka loss aversion
2. self-control bias - refers to an individual's tendency to place a much greater value on current consumption than on future goals
3. mental accounting - assign different portions of wealth to meet the different goals, ignores the fact that wealth is fungible
A. availability bias
B. behavioral life-cycle model
C. BB&K the individualist traits
D. Pompian behavioral model
5 True/False questions
1. adds a sentiment premium to the discount rate:
- risk free rate + risk premium + sentiment premium → macro behavioral finance
INCORRECT
True
THE ANSWER
False
It should be → behavioral asset pricing
2. - high tolerance active with emotion
- likes to get deeply involved with investing
- strong-willed, confident, and likes to control investing
- most difficult to advise → Pompian BIT: active accumulator
INCORRECT
False
THE ANSWER
True
3. - anxious and careful
- concerned with the future and protecting assets
- may seek the advice of someone they perceive as more knowledgeable than themselves → BB&K the guardian traits
INCORRECT
False
THE ANSWER
True
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12/7/2020 Test: CFA III - SS3 - The Behavioral Finance Perspective | Quizlet
4. - passive investor with low to moderate risk tolerance
- suffers mainly from cognitive errors
- wants to be in the most popular investments
- use quantitative methods to educate → Pompian BIT: active accumulator
INCORRECT
True
THE ANSWER
False
It should be → Pompian BIT: friendly follower
5. - unconsciously place more emphasis on old information
- NOT the result of an emotional predisposition → prospect theory
INCORRECT
True
THE ANSWER
False
It should be → conservatism bias
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