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Chapter 2: Q7B (page 284)

Question: After Polly Shrum sells a stock, she avoids following it in the media. She is afraid that it may subsequently increase in price. What behavioral characteristic does Shrum have as the basis for her decision making?

a. Fear of regret

b. Representativeness

c. Mental accounting

Short Answer

Expert verified

Answer

a. Fear of regret

Step by step solution

01

Definition

The tendency of not taking any decision for the fear of regretting in case it turned out to be a wrong decision is called as “fear of regret”.

02

 Step 2: Explanation on behavior characteristics

Since Polly Shrum is fearful of her decision proving wrong, she is avoiding following it up in the media. This a typical character trait of “fear of regret” as explained above.

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Most popular questions from this chapter

In contrast to the capital asset pricing model, arbitrage pricing theory:

a. Requires that markets be in equilibrium.

b. Uses risk premiums based on micro variables.

c. Specifies the number and identifies specific factors that determine expected returns.

d. Does not require the restrictive assumptions concerning the market portfolio

If the simple CAPM is valid, which of the situations in Problems 13 – 19 below are possible? Explain. Consider each situation independently.

Karen Kay, a portfolio manager at Collins Asset Management, is using the capital asset pricing model for making recommendations to her clients. Her research department has developed the information shown in the following exhibit.

a. Calculate expected return and alpha for each stock.

b. Identify and justify which stock would be more appropriate for an investor who wants to:

i. Add this stock to a well-diversified equity portfolio.

ii. Hold this stock as a single-stock portfolio.

To estimate the Sharpe ratio of a portfolio from a history of asset returns, we use the difference between the simple (arithmetic) average rate of return and the T-bill rate. Why not use the geometric average?

You are a portfolio manager meeting a client. During the conversation that follows your formal review of her account, your client asks the following question:

My grandson, who is studying investments, tells me that one of the best ways to make money in the stock market is to buy the stocks of small-capitalization firms late in December and to sell the stocks one month later. What is he talking about?

a. Identify the apparent market anomalies that would justify the proposed strategy.

b. Explain why you believe such a strategy might or might not work in the future.
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