FIN310 unit 4 active vs. passive investing

In an efficient market and for an investor who believes in a passive approach to investing, what is the primary duty of a portfolio manager? accounting for results diversification identifying undervalued stocks no need for a portfolio manager

Diversification

Even if the markets are efficient, professional portfolio management is still important because it provides investors with: I. Low-cost diversification II. A portfolio with a specified risk level III. Better risk-adjusted returns than an index

I. and II.

weak-form EMH

Stock prices already reflect all information contained in history of trading

prospect theory

a gain of 1.000 increases utility (joy) less than the pain of a loss of 1,000 even if they come with equal expected value- disposition effect - therefore, investors will reject more risker investments vs safer investments even if the proposition has a positive expected value

Models of financial markets that emphasize psychological factors affecting investor behavior are called _______. data mining fundamental analysis charting behavioral finance

behavioral finance

If investors are too slow to update their beliefs about a stock's future performance when new evidence arises, they are exhibiting _______. representativeness bias framing error conservatism memory bias

conservatism

framing

decisions are affected based on how they are framed

cande patterns body

denotes a higher price at close(green or darker) or lower (red or higher)

A person with a long position in a commodity futures contract wants the price of the commodity to ______. decrease substantially increase substantially remain unchanged increase or decrease substantially

increase substantially

candle chart

indicates gain/loss per period, opening price, closing price and trading ranges

candle pattern wick

indicates highs and lows of trading activity during the day- investors get clues to trading activity and sentiment

One type of passive portfolio management is ________. - investing in a well-diversified portfolio without attempting to search out mispriced securities - investing in a well-diversified portfolio while only seeking out passively mispriced securities - investing an equal dollar amount in index stocks - investing in an equal amount of shares in each of the index stocks

investing in a well-diversified portfolio without attempting to search out mispriced securities

passive management

investors believe that markets are efficient and will invest in a market-representative index and earn that market's return without selecting individual (stock) investments

active management

investors try to "beat the market" indices by analyzing and selecting investments (stocks) that they feel are underpriced, undervalued or will otherwise outperform the market

A futures contract __________. is a contract to be signed in the future by the buyer and the seller of a commodity is an agreement to buy or sell a specified amount of an asset at a predetermined price on the expiration date of the contract is an agreement to buy or sell a specified amount of an asset at whatever the spot price happens to be on the expiration date of the contract gives the buyer the right, but not the obligation, to buy an asset some time in the future

is an agreement to buy or sell a specified amount of an asset at a predetermined price on the expiration date of the contract

Approximately __________ of futures contracts result in actual delivery. 0% less than 1% to 3% less than 5% to 15% less than 60% to 80%

less than 1% to 3%

The advantage that standardization of futures contracts brings is that _____ is improved because ____________________. liquidity; all traders must trade a small set of identical contracts credit risk; all traders understand the risk of the contracts pricing; convergence is more likely to take place with fewer contracts trading cost; trading volume is reduced

liquidity; all traders must trade a small set of identical contracts

Interest rate swaps involve the exchange of ________________. actual fixed-rate bonds for actual floating-rate bonds actual floating-rate bonds for actual fixed-rate bonds net interest payments and an actual principal swap net interest payments based on notional principal, but no exchange of principal

net interest payments based on notional principal, but no exchange of principal

Investors gravitate toward the latest hot stock even though it has never paid a dividend. Even though net income is projected to fall over the current and next several years, the price of the stock continues to rise. What behavioral concept may explain this price pattern? Overconfidence Loss aversion Mental accounting Calendar bias

overconfidence

behavioral biases

overconfidence - overestimate own beliefs conservatism bias - too slow in updating beliefs with new contradictory evidence regret avoidance - people will feel worse making a mistake on a trade that is deemed unconventional relative to one that is more accepted confirmation bias - drawn to investments that validate own existing beliefs and opinions representativeness bias - extrapolate patterns too quickly from a very small sample

dot com bubble (1995-1999)

period when investors overvalued firms with web-based businesses. many firms were not viable and were in the start-up phase. firms traded at unbelievable high multiples and many of the firms were not profitable.

Conventional finance theory assumes investors are _______, and behavioral finance assumes investors are _______. rational; irrational irrational; rational greedy; philanthropic philanthropic; greedy

rational; irrational

passive mangers trust that ______ will not yield better results since there is no informational change

stock picking

semi strong-form EMH

stock prices already reflect all public information

strong-form EMH

stock prices already reflect all relevant information, including inside information

EMH

suggests that all investors are on the same playing field and that any future abnormal returns will be due to unknown factors, rather than skills or an information advantage

Efficient markets hypothesis

theory that suggests current asset prices reflect all currently available information and speculators are unable to profit from having superior information relative to others in the market

active managers will attempt to ____ and outperform

time the market

bearish pattern

trades were above closing price

bullish pattern

trades were below closing price, traders bought at lows of the day