Ch 9: Behavioral Finance and Technical Analysis
EXPLAIN HOW Several equity carve-outs also have violated the Law of One Price.
To illustrate, consider the case of 3Com, which in 1999 decided to spin off its Palm division. It first sold 5% of its stake in Palm in an IPO, announcing that it would distribute the remaining 95% of its Palm shares to 3Com shareholders six months later in a spinoff. Each 3Com shareholder would receive 1.5 shares of Palm in the spinoff. Once Palm shares began trading, but prior to the spinoff, the share price of 3Com should have been at least 1.5 times that of Palm. After all, each share of 3Com entitled its owner to 1.5 shares of Palm plus an ownership stake in a profitable company. Instead, Palm shares at the IPO actually sold for more than the 3Com shares. The stub value of 3Com (i.e., the value of each 3Com share net of the value of the claim to Palm represented by that share) could be computed as the price of 3Com minus 1.5 times the price of Palm. This calculation, however, implies that 3Com's stub value was negative, this despite the fact that it was a profitable company with cash assets alone of about $10 per share.
When bond traders are optimistic about the economy, however, they might require smaller default premiums on lower-rated debt, what does this mean for the yield spread?
When bond traders are optimistic about the economy, however, they might require smaller default premiums on lower-rated debt. Hence, the yield spread will narrow, and the confidence index will approach 1. Therefore, higher values of the confidence index are bullish signals.
conventional theories vs behavioral finance
Whereas conventional theories presume that investors are rational, behavioral finance starts with the assumption that they are not.
what happens Because put options do well in falling markets while call options do well in rising markets?
a rising ratio is taken as a sign of broad investor pessimism and a coming market decline.
Mental accounting
a specific form of framing in which people segregate certain decisions
cumulative breadth for each day is obtained by what?
adding that day's net advances (or declines) to the previous day's total. The direction of the cumulated series is then used to discern broad market trends. Analysts might use a moving average of cumulative breadth to gauge broad trends.
Fama (1998) reviews the anomalies literature and argues what?
anomalies are inconsistent in terms of their support for one type of irrationality versus another. Some papers document long-term corrections (consistent with overreaction), while others document long-term continuations of abnormal returns (consistent with underreaction). Moreover, the statistical significance of many of these results is hard to assess. Even small errors in choosing a benchmark against which to compare returns can cumulate to large apparent abnormalities in long-term returns.
closed-end fund discounts may also be examples of what?
apparent anomalies that have alternative, rational explanations.
what do Shefrin and Statman (1984) argue?
argue that behavioral motives are consistent with some investors' irrational preference for stocks with high cash dividends they feel free to spend dividend income, but would not "dip into capital" by selling a few shares of another stock with the same total rate of return) and with a tendency to ride losing stock positions for too long (because "behavioral investors" are reluctant to realize losses). In fact, there is considerable evidence that investors are more prone to sell stocks with gains than those with losses, precisely contrary to a tax-minimization strategy (Sherin and Statman, 1985; Odean, 1998). This reluctance to realize losses is known as the disposition effect.
Technical analysis attempts to do what?
attempts to exploit recurring and predictable patterns in stock prices to generate superior investment performance. Technicians do not deny the value of fundamental information but believe that prices only gradually close in on intrinsic value. As fundamentals shift, astute traders can exploit the adjustment to a new equilibrium.
This is "nearly" a violation of the Law of One Price. why?
because one would expect the value of the fund to equal the value of the shares it holds. We say nearly, because in practice, there are a few wedges between the value of the closed-end fund and its underlying assets. One is expenses. The fund incurs expenses that ultimately are paid for by investors, and these will reduce share price. On the other hand, if managers can invest fund assets to generate positive risk-adjusted returns, share price might exceed net asset value.
prospect theory
behavioral theory that investor utility depends on gains or losses from investors' starting position, rather than on their levels of wealth
Ross (2002) points out that closed-end fund discounts can be what?
can be reconciled with rational investors even if expenses or fund abnormal returns are modest. He shows that if a fund has a dividend yield of 6, an alpha (risk-adjusted abnormal return) of a, and expense ratio of e, then using the constant-growth dividend discount model (see Chapter 13), the premium of the fund over its net asset value will be (look at pg 266).
A problem related to the tendency to perceive patterns where they don't exist is what?
data mining. After the fact, you can always find patterns and trading rules that would have generated enormous profits. If you test enough rules, some will have worked in the past. Unfortunately, picking a theory that would have worked after the fact carries no guarantee of future success.
Relative strength statistics are designed to what?
designed to uncover these cross-sector potential opportunities.
Kondratieff wave
economy follows a long pattern of growth and decline over approximately 48 and 60 years. however, because cycles that last about 50 years provide only two independent observations per century, which is hardly enough data to test the predictive power of the theory.
Hoffman and Sherin (2014) find what?
find that investors who use technical analysis appear to exhibit similar behavioral traits as those linked to overconfidence and excessive optimism. Behavioral biases may also be consistent with technical analysts' use of volume data.
A growing number of economists have come to interpret the anomalies literature as consistent with several "irrationalities" that seem to characterize individuals making complicated decisions. These irrationalities fall into two broad categories. What are they?
first, that investors do not always process information correctly and therefore infer incorrect probability distributions about future rates of return; and second, that even given a probability distribution of returns, they often make inconsistent or systematically suboptimal decisions.
house money effect
house money effect refers to gamblers' greater willingness to accept new bets if they currently are ahead. They think of (i.e., frame) the bet as being made with their "winnings account," that is, with the casino's and not with their own money, and thus are more willing to accept risk.
conservatism bias def -what does it give rise to?
investors are too slow (too conservative) in updating their beliefs in response to recent evidence. This means that they might initially underreact to news about a firm, so that prices will fully reflect new information only gradually. Such a bias would give rise to momentum in stock market returns.
what is the second leg of the behavioral critique?
is that in practice the actions of such arbitrageurs are limited and therefore insufficient to force prices to match intrinsic value.
fundamental risk incurred in exploiting apparent profit opportunities presumably will do what?
limit the activity of traders
Much of technical analysis seeks to uncover trends in what? this is in effect a search for what?
market prices; momentum
Behavioral Finance
models of financial markets that emphasize potential implications of psychological factors affecting investor behavior
representativeness bias
people are too prone to believe that a small sample is representative of a broad population and infer patterns too quickly
regret avoidance
people blame themselves more for unconventional choices that turn out badly so they avoid regret by making conventional decisions
POINT AND FIGURE CHARTS
pg 271
a warning figures
pgs 274 and 275
Put/Call Ratio
ratio of put options to call options outstanding on a stock
confidence index
ratio of the yield of top-rated corporate bonds to the yield on intermediate-grade bonds. The ratio will always be below 1 because higher-rated bonds will offer lower promised yields to maturity.
Grinblatt and Han (2005) do what?
show that the disposition effect can lead to momentum in stock prices even if fundamental values follow a random walk. The fact that the demand of "disposition investors" for a company's shares depends on the price history of those shares means that prices close in on fundamental values only over time, consistent with the central motivation of technical analysis.
closed-end funds often sell for what?
substantial discounts or premiums from net asset value.
Lee, Shleifer, and Thaler (1991) argue what?
that the patterns of discounts and premiums on closed-end funds are driven by changes in investor sentiment. They note that discounts on various funds move together and are correlated with the return on small stocks, suggesting that all are affected by common variation in sentiment. One might consider buying funds selling at a discount from net asset value and selling those trading at a premium, but discounts and premiums can widen, subjecting this strategy too to fundamental risk.
trin statistic
the ratio of average volume in declining issues to average volume in advancing issues
Disposition Effect
the reluctance of investors to sell shares in investments that have fallen in price.
The most common measure of breadth is what?
the spread between the number of stocks that advance and decline in price. If advances outnumber declines by a wide margin, then the market is viewed as being stronger because the rally is widespread. These numbers are reported daily in The Wall Street Journal (see Figure 9.7). on pg 272
Short interest
the total number of shares currently sold short in the market
Investors' limited analytic processing capacity may also cause them to what?
them to overreact to salient or attention-grabbing news and underreact to less salient information.
what happens when traders become overconfident?
they may trade more, inducing an association between trading volume and market returns (Gervais and Odean, 2001).
Recent events are typically more salient to investors, and this salience can lead to what? -ex?
this salience can lead to overreaction rather than underreaction biases. For example, when investors react to positive recent earnings news, they may overweight its significance and project performance too far into the
If investors respond too strongly to signals about the fundamental value of a stock, then those signals will cause what?
those signals will cause stock prices to overshoot their intrinsic values. Stocks with high prices relative to proxies for intrinsic value will be more prone to be overvalued and therefore poor investments. Similarly. low-priced stocks would be more apt to be undervalued. These errors could lead to value anomalies such as the lower average returns of stocks with high ratios of market-to-book value compared to low market-to-book stocks.
Technical analysis thus uses volume data as well as price history to do what?
to direct trading strategy.
what do Many believe that the behavioral approach is too what?
too unstructured, in effect allowing virtually any anomaly to be explained by some combination of irrationalities chosen from a laundry list of behavioral biases. While it is easy to "reverse engineer" a behavioral explanation for any particular anomaly, these critics would like to see a consistent or unified behavioral theory that can explain a range of anomalies.
Overconfidence about the precision of one's value-relevant information would be consistent with what?
value-versus-growth (e.g., book-to-market) anomalies.
An interesting example of overconfidence in financial markets is provided by Barber and Odean (2001), what do they find and say?
who compare trading activity and average returns in brokerage accounts of men and women. They find that men (in particular, single men) trade far more actively than women, consistent with the generally greater overconfidence among men documented in the psychology literature. They also find that trading activity is highly predictive of poor investment performance. The top 20% of accounts ranked by portfolio turnover had average returns seven percentage points lower than the 20% of the accounts with the lowest turnover rates. As they conclude, "Trading [and by implication, overconfidence] is hazardous to your wealth."
If prices are distorted, then capital markets will do what?
will give misleading signals (and incentives) as to where the economy may best allocate resources. In this crucial dimension, the behavioral critique of the efficient market hypothesis is certainly important irrespective of any implication for investment strategies.
In evaluating trading rules, you should always ask whether the rule would have seemed reasonable before you looked at the data. If not, what happens?
you might be buying into the one arbitrary rule among many that happened to have worked in that particular sample. The crucial question is whether there is reason to believe that what worked in the past should continue to work in the future.
summary
-Behavioral finance focuses on systematic irrationalities that characterize investor decision making. These "behavioral shortcomings" may be consistent with several efficient market anomalies. -Among the information processing errors uncovered in the psychology literature are heuristic decisions, overconfidence, conservatism, and representativeness. Behavioral tendencies include framing, mental accounting, regret avoidance, and loss aversion. -Limits to arbitrage activity impede the ability of rational investors to exploit pricing errors induced by behavioral investors. For example, fundamental risk means that even if a security is mispriced, it still can be risky to attempt to exploit the mispricing. This limits the actions of arbitrageurs who take positions in mispriced securities. Other limits to arbitrage are implementation costs, model risk, and costs to short-selling. Occasional failures of the Law of One Price suggest that limits to arbitrage are sometimes severe. -The various limits to arbitrage mean that even if prices do not equal intrinsic value, it still may be difficult to exploit the mispricing. As a result, the failure of traders to beat the market may not be proof that markets are actually efficient, with prices equal to intrinsic value. -Technical analysis is the search for recurring and predictable patterns in stock prices.It is based on the premise that prices only gradually close in on intrinsic value. As fundamentals shift, astute traders can exploit the adjustment to a new equilibrium. -Technical analysts look for trends in stock prices. Moving averages, relative strength, and breadth are used in various trend-based strategies. Technical analysts also use volume data and sentiment indicators. These strategies are broadly consistent with several behavioral models of investor activity. -Some sentime
A less common, bullish perspective is what?
A less common, bullish perspective is that, because all short sales must be covered (i.e., short-sellers eventually must purchase shares to return the ones they have borrowed), short interest represents latent future demand for the stocks. As short sales are covered, the demand created by the share purchase will push prices up.
Elliott wave theory
A technical analysis theory that claims that the market follows regular, repeated waves or cycles. Once the longer-term waves are identified, investors presumably can buy when the long-term direction of the market is positive. While there is considerable noise in the actual evolution of stock prices, by properly interpreting the wave cycles, one can, according to the theory. predict broad movements.
what might also be an explanation for the home country bias?
Affect might also be an explanation for the home country bias, the empirical tendency for investors to overweight shares in their home markets compared to an efficient diversification strategy. Psychologists have documented that people prefer familiar settings about which they feel like they have more information. Given this, they might well give up some diversification to focus on home markets where they subjectively perceive less
(the jagged red curve). After a period in which prices have been falling, the moving average will be above what? in contrast?
After a period in which prices have been falling, the moving average will be above the current price (because the moving average continues to "average in" the older and higher prices until they leave the sample period). In contrast, when prices have been rising. the moving average will be below the current price.
when would Behavioral biases would not matter for stock pricing?
Behavioral biases would not matter for stock pricing if rational arbitrageurs could fully exploit the mistakes of behavioral investors. Trades of profit-seeking investors would correct any misalignment of prices. However, behavioral advocates argue that, in practice, several factors limit the ability to profit from mispricing."
Behavioral finance devotes considerable attention to what?
Behavioral finance devotes considerable attention to market "sentiment," which may be interpreted as the general level of optimism among investors. Technical analysts have devised several measures of sentiment; we review a few of them.
EXPLAIN THE "TWIN" COMPANIES* EXAMPLE
COMPANIES* In 1907, Royal Dutch Petroleum and Shell Transport merged their operations into one firm. The two original companies, which continued to trade separately, agreed to split all profits from the joint company on a 60/40 basis. Shareholders of Royal Dutch receive 60% of the cash flow, and those of Shell receive 40%. One would therefore expect that Royal Dutch should sell for exactly 60/40 = 1.5 times the price of Shell. But this is not the case. Figure 9.2 shows that the relative value of the two firms has departed considerably from this "parity" ratio for extended periods of time.
Call Options vs. Put Options
Call options give investors the right to buy a stock at a fixed "exercise" price and therefore are a way of betting on stock price increases. Put options give the right to sell a stock at a fixed price and therefore are a way of betting on stock price decreases.&
framing ex -coin toss
Consider a coin toss with a payoff of $50 for tails. Now consider a gift of $50 that is bundled with a bet that imposes a loss of $50 if that coin toss comes up heads. In both cases, you end up with zero for heads and $50 for tails. But the former description frames the coin toss as posing a risky gain while the latter frames the coin toss in terms of risky losses. The difference in framing can lead to different attitudes toward the risky payoff.
ex of moving average on pg 270
Consider the price data in the following table. Each observation represents the closing level of the Dow Jones Industrial Average (DJIA) on the last trading day of the week. The five-week moving average for each week is the average of the DJIA over the previous five weeks. For example, the first entry, for week 5, is the average of the index value between weeks 1 and 5: 26,290, 26,380. 26,399, 26,379, and 26,450. The next entry is the average of the index values between weeks 2 and 6, and so on. Figure 9.4 plots the level of the index and the five-week moving average. Notice that while the index itself moves up and down rather abruptly, the moving average is a relatively smooth series, because the impact of each week's price movement is averaged with that of the previous weeks. Week 16 is a bearish point according to the moving-average rule. The price series crosses from above the moving average to below it, signifying the beginning of a downward trend in stock prices.
whats the difference between conventional models of portfolio choice and behavioral finance?
Conventional models of portfolio choice focus on asset risk and return. But behavioral finance focuses as well on affect, which is a feeling of "good" or "bad" that consumers may attach to a potential purchase or investors to a stock. For exam-ple, firms with reputations for socially responsible policies or attractive working conditions, or those producing popular products, may generate higher affect in public perception. If investors favor stocks with good affect, that might drive up prices and drive down average rates of return.
what do De Bondt and Thaler (1987) argue?
De Bondt and Thaler (1987) argue that such regret avoidance is consistent with both the size and book-to-market effect. Higher-book-to-market firms tend to have depressed stock prices. These firms are "out of favor" and more likely to be in a financially precarious position. Similarly, smaller, less well-known firms are also less conventional investments. Such firms require more "courage" on the part of the investor, which increases the required rate of return. Mental accounting can add to this effect. If investors focus on the gains or losses of individual stocks, rather than on broad portfolios, they can become more risk averse concerning stocks with recent poor performance, discount their cash flows at a higher rate, and thereby create a value-stock risk premium.
what do DeBondt and Thaler (1990) argue?
DeBondt and Thaler (1990) argue that this can result in a high initial P/E (due to the optimism built into the stock price) and poor subsequent performance when investors recognize their error. Thus, high P/E firms tend to be poor investments.
framing def
Decisions seem to be affected by how choices are framed. For example, an individual may reject a bet when it is posed in terms of the risk surrounding possible gains but may accept that same bet when described in terms of the risk surrounding potential losses. In other words, individuals may act risk averse in terms of gains but risk seeking in terms of losses. But in many cases, the choice of how to frame a risky venture—as involving gains or losses—can be arbitrary.
Other techniques also are used to uncover potential momentum in stock prices. Two of the more famous ones are what?
Elliott wave theory and Kondratieff waves. Both posit the existence of long-term trends in stock market prices that may be disturbed by shorter-term trends as well as daily fluctuations of little importance.
IMPLEMENTATION COSTS
Exploiting overpricing can be particularly difficult. Short-selling a security entails costs; short-sellers may have to return the borrowed security on little notice, rendering the horizon of the short sale uncertain; other investors such as many pension or mutual fund managers face strict limits on their discretion to short securities. This can limit the ability of arbitrage activity to force prices to fair value.
Finally, technicians believe that market fundamentals can be perturbed by what?
Finally, technicians believe that market fundamentals can be perturbed by irrational or behavioral factors, sometimes labeled "sentiment variables." More or less random price fluctuations will accompany any underlying price trend, creating opportunities to exploit corrections as these fluctuations dissipate.
mental accounting ex
For example, an investor may take a lot of risk with one investment account but establish a very conservative position with another account that is dedicated to her child's education. Rationally, it might be better to view both accounts as part of the investor's overall portfolio with the risk-return profiles of each integrated into a unified framework.
regret avoidance ex
For example, buying a blue-chip portfolio that turns down is not as painful as experiencing the same losses on an unknown start-up firm. Any losses on the blue-chip stocks can be more easily attributed to bad luck rather than bad decision making and cause less
disposition effect
For example, one of the best-documented behavioral tendencies is the disposition effect, which refers to the tendency of investors to hold on to losing investments. Until the stock is sold and the loss is realized, the investor perceives only a "paper loss" which is more easily ignored.
Overconfidence appears to be a widespread phenomenon, also showing up in many corporate finance context. Provide an example. -ceo
For example, overconfident CEOs are more likely to overpay for target firms when making corporate acquisitions (Malmendier and Tate, 2008). Just as overconfidence can degrade portfolio investments, it also can lead such firms to make poor investments in real assets.
relative strength Toyota Example
For example, the relative strength of Toyota versus the auto industry would be measured by movements in the ratio of the price of Toyota divided by the level of an auto industry index. A rising ratio implies Toyota has been outperforming the rest of the industry. If relative strength can be assumed to persist over time, then this would be a signal to buy Toyota.
what is an example of investor underreaction to the information contained in accruals?
If investors pay attention to "headline" earnings announcements, but comparatively neglect the less apparent extent to which accruals management has been used to manipulate reported earnings, then high current accruals (which artificially inflate reported earnings) will be a predictor of poor future returns
Fundamental Risk example -NASDAQ
In 2010, the NASDAQ index fluctuated at a level around 2,300. From that perspective, the value the index had reached in March 2000, around 5,000, seemed obviously crazy. Surely some investors living through the Internet "bubble" of the late 1990s must have identified the index as grossly overvalued, suggesting a good selling opportunity. But this hardly would have been a riskless arbitrage opportunity. Consider that NASDAQ may also have been "obviously" overvalued in January 2000 when it crossed above 4,000. An investor in January who believed that NASDAQ was overvalued at 4,000 and decided to sell it short would have suffered enormous losses as the index quickly increased by another 1,000 points before peaking in March. NASDAQ did finally crash, falling below 1,200 in late 2002. While the investor might have derived considerable satisfaction at eventually being proven right about the overpricing, by entering just a few months before the market "corrected," he might also have gone broke.
what did Chopra, Lakonishok, and Ritter, 1992 discover?
It is easy to see how such a pattern would be consistent with momentum and reversal anomalies. A short-lived run of good earnings reports or high stock returns would lead such investors to revise their assessments of likely future performance and thus generate buying pressure that exaggerates the price run-up. Eventually, the gap between price and intrinsic value becomes glaring and the market corrects its initial error. Interestingly, stocks with the best recent performance suffer reversals precisely in the few days surrounding management earnings forecasts or actual earnings announcements, suggesting that the correction occurs just as investors learn that their initial beliefs were too extreme
heuristics
Mental shortcuts or "rules of thumb" that often lead to a solution (but not always).
Momentum can be what?
Momentum can be absolute, in which case one searches for upward price trends, or relative, in which case the analyst looks to invest in one sector over another (or even take on a long-short position in the two sectors).
MODEL RISK
One always has to worry that an apparent profit opportunity is more apparent than real. Perhaps you are using a faulty model to value the security, and the price actually is right. Mispricing may make a position a good bet, but it is still a risky one, which limits the extent to which it will be pursued.
what do people tend to do in terms of overconfidence?
People tend to overestimate the precision of their beliefs or forecasts, and they tend to overestimate their abilities.
Pontiff (1996) demonstrates what?
Pontiff (1996) demonstrates that deviations of price from net asset value in closed-end funds tend to be higher in funds that are more difficult to arbitrage, for example, those with more idiosyncratic volatility.
figure on pg 263 about prospect theory
Prospect theory Panel A: A conventional utility function is defined in terms of wealth and is concave, resulting in risk aversion. Panel B: Under loss aversion, the utility function is defined in terms of changes from current wealth. It is also convex to the left of the origin, giving rise to risk-seeking behavior in terms of losses. Moreover, the convex curvature to the left of the origin in Panel B will induce investors to be risk seeking rather than risk averse when it comes to losses. Consistent with loss aversion, traders in the T-bond futures contract have been observed to assume significantly greater risk in afternoon sessions following morning sessions in which they have lost money (Coval and Shumway, 2005).
Relative strength
Relative strength measures the extent to which a security has outperformed or underperformed either the market as a whole or its particular industry. Relative strength is computed by calculating the ratio of the price of the security to a price index for the industry.
what do Shefrin and Statman (2000) argue?
Shefrin and Statman (2000) point out that a central distinction between conventional and behavioral finance theory is that the behavioral approach views investors as building their portfolios in "distinct mental account layers in a pyramid of assets." where each layer may be tied to particular goals and elicit different levels of risk aversion.
Fundamental Risk
Suppose that a share of Amazon is underpriced. Buying it may present a profit opportunity, but it is hardly risk-free because the presumed market underpricing can get worse. While price eventually should converge to intrinsic value, this may not happen until after the trader's investment horizon. For example, the investor may be a mutual fund manager who may lose clients (not to mention a job!) if short-term performance is poor or a trader who may run through her capital if the market turns against her, even temporarily.
what does the behavioral school argue?
The behavioral school argues that even if security prices are wrong, it still can be difficult to exploit them, and, therefore, that the failure to uncover obviously successful trading rules or traders cannot be taken as proof of market efficiency.
The common, bearish interpretation of short interest is based on what?
The common, bearish interpretation of short interest is based on the fact that short-sellers tend to be larger, more sophisticated investors. Accordingly, increased short interest reflects negative sentiment by the "smart money." which would be a warning sign concerning the stock's prospects.
breadth
The extent to which movements in broad market indexes are reflected widely in movements of individual stock prices.
Why not buy 3Com and sell Palm?
The limit to arbitrage in this case was the inability of investors to sell Palm short. Virtually all available shares in Palm were already borrowed and sold short, and the negative stub values persisted for more than two months.
what is The moving average of a stock price? -provide example
The moving average of a stock price is the average price over a given interval, where that interval is updated as time passes. For example, a 50-day moving average traces the average price over the previous 50 days. The average is recomputed each day by dropping the oldest observation and adding the newest.
Statman, Fisher, and Anginer (2008) look for evidence that affect influences security pricing. what did they find?
They find that stocks ranked high in Fortune's survey of most admired companies (i.e., with high affect) tended to have lower average risk-adjusted returns than the least admired firms, suggesting that their prices have been bid up relative to their underlying profitability and, therefore, that their expected future returns are lower.
Doesn't this mispricing give rise to an arbitrage opportunity? If Royal Dutch sells for more than 1.5 times Shell, why not buy relatively underpriced Shell and short-sell overpriced Royal?
This seems like a reasonable strategy, but if you had followed it in February 1993 when Royal sold for about 10% more than its parity value, Figure 9.2 shows that you would have lost a lot of money as the premium widened to about 17% before finally reversing after 1999. As in Example 9.2, this opportunity posed fundamental risk.
