Week 8 Tut Qs....... PDF

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Tut q's for Week 8 Equities and Investment Analysis....

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Topic 7 Week 8 Tutorial – Behavioral Finance Q1. Describe the differences and similarities between the Prospect Theory and the conventional Expected Utility Theory. Q2. Imagine a situation where an individual needs to choose between a sure outcome and a gamble (e.g., tossing a coin, rolling a dice, etc.). Create a situation in which an individual would make different decisions under the Prospect Theory and under the Expected Utility Theory. Q3. Jill Davis tells her broker that she does not want to sell her stocks that are now below the price she originally paid for them. She believes that if she just holds on to them a little longer, they will recover, at which time she will sell them. What behavioral characteristic does Jill demonstrate? a. Loss aversion b. Regret avoidance c. Risk aversion d. Conservatism Q4. After John Dow sells his stock, he avoids following it in the media. He is afraid that it may subsequently increase in price. What behavioral characteristic does he exhibit? a. Loss aversion b. Regret avoidance c. Risk aversion d. Conservatism Q5. Match each example to one of the following behavioral characteristics: Example

Characteristic

a. Investors are slow to update their beliefs when given new evidence b. Investors are reluctant to bear losses caused by their unconventional decisions

i. Disposition effect

c. Investors are reluctant to sell stocks with “paper” losses

iii. Representativeness bias

d. Investors disregard sample size when forming views about the future from the past

iv. Regret avoidance

ii. Conservatism bias

Q6. Let’s remember one of the cases we discussed at the beginning of the course, namely, the one with GameStop (GME). Read an extract from the Forbes article that discusses the details of what has happened to GME: how the stock price surged, whether this price surge was driven by fundamentals, and how short sellers, who are generally considered to be rational, well-informed investors, were squeezed out of the market. Discuss decision-making biases that might have contributed to the GME price surge. Assuming that the GME stock was overpriced, what could have prevented short sellers from correcting the price to its fair value?...