Lecture8 - Portfolio Management Theory (Behavioral) AEM...

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1 AEM 4230 Copyright © by Vicki Bogan Portfolio Management Theory (Behavioral) Risk and Return – Traditional Approach / Explanation ± CAPM ± Fama-French Three-Factor Model
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2 Behavioral Approach ± Anomalies ² May be risk premiums ² Limits to Arbitrage ² Behavioral Explanations Limits to Arbitrage vs. Market Efficiency ± EMH ² ² ± Limits to Arbitrage ² ² ²
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3 Behavioral Explanations ± Information Processing Errors ± Behavioral Biases Information Processing ± Overconfidence ± Conservatism ± Extrapolation Bias ± Sample Neglect and Representativeness Forecasting Errors
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4 Overconfidence ± Overconfidence/Excessive Optimism ² ² Conservatism ± Investors are too slow (too conservative) in updating their beliefs in response to new evidence
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5 Extrapolation Bias ± Hot-hand fallacy ² Representativeness ± Base Rates (Historical Information) Under- Emphasized Relative to Evidence ²
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6 Representativeness ± Sample Size Neglect in Learning Distribution ² (6 Tosses vs. 1000 Tosses) ± “Law of Small Numbers” Representativeness ± Gambler’s Fallacy ²
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This note was uploaded on 09/03/2009 for the course AEM 4230 taught by Professor Bogan,v. during the Fall '08 term at Cornell University (Engineering School).

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Lecture8 - Portfolio Management Theory (Behavioral) AEM...

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