Skip to content

During asset bubbles investors often exhibit symptoms of which bias?

Overconfidence Bias

Symptoms include:

  • overtrading
  • under-estimating risk
  • failure to diversify
  • rejection of contradictory information

With overconfidence investors are more active, trading volume increases thus lowering expected profits.

Advertisements

When advising emotionally biased investors, advisors should focus on:

explaining how the investment program being created affects such issues as:

  • financial security
  • retirement
  • future generations

rather than focus on quantitative details.

If inflation is expected to be above average then real estate should:

Outperform

In general real estate is considered a hedge against inflation and should increase in value, thus increase allocation to real estate when inflation is above long run average.

____ has become more relevant in generating alpha for fixed income portfolios since the financial crisis.

Liquidity Management

Hedging tail risks through portfolio diversification is…

not difficult to implement and only has modest incremental cost.

Hedging with derivatives, such as credit default swaps is effective but costly.

The much higher credit loss rate experienced with high-yield bonds results in an emphasis on ____ and ____ when evaluating a position.

The much higher credit loss rate experience with high-yield bonds results in an emphasis on credit risk and market value when evaluating a position.

Investment-grade bonds have lower ____ and ____ risks than high-yield bonds and are more sensitive to ____ and ____ which causes ____.

Investment-grade bonds have lower credit and default risks than high-yield bonds and are more sensitive to interest rate changes and credit migration which causes credit spread volatility.

A currency overlay program will add value to a portfolio only if the currency alpha has a ____ correlation with other assets in the portfolio.

A currency overlay program will add value to a portfolio only if the currency alpha has a low correlation with other assets in the portfolio.

High frequency data is more sensitive to ____ across variables. As a result high frequency data tends to produce ____ correlation estimates.

High frequency data is more sensitive to asynchronism across variables. As a result high frequency data tends to produce lower correlation estimates.

Thus daily stock movements will be noisier than monthly stock movements which be more correlated with each other.

A risk with loss characteristics of high frequency of occurrence and low severity of loss is best managed through:

Risk Reduction