Cfa Level 3 2013 Summary

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Behavioral Heuristics – Check Anchor/OAR Availability– Conservatism, Anchoring, Overconfidence, Ambiguity aversion, Representativeness, Availability
Traditional Finance – TF-RAR - Risk averse, Asset integration, Rational expectations
Behavioral Finance – BF-LAB - Loss averse, Asset segregation, Biased expectations
Type of Investors – CMIS - Cautious, Methodical, Individualistic, Spontaneous
IPS Process – OCSAEEA, Old Cars Sell At Eastern European Auctions – Objectives, Constraints, Strategy, Allocation, Execution, Evaluation, Adjustments
IPS Constraints – URLIT - Unique, Regulatory/legal, Liquidity, tIme, Tax
TDA vs. TEA – Higher Enders Take TEA – Higher Ending Tax rate TEA better
Residence vs. Source – Pay Greater rate with
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This is a sign of heuristic-driven bias.

Behavioral finance assumes that:
1.investors are loss averse, which means they prefer uncertain losses to certain losses.
2.investors exhibit biased expectations, due to overconfidence in their ability to forecast the future.
3.investors construct portfolios via asset segregation, meaning that they tend to focus on an asset’s individual investment features versus its impact on the overall portfolio position

By admitting his mistake but reiterating other projections, one used the "single predictor" defense.

Feeling that they should spread out their risk, but not knowing how leads to the 1/n diversification heuristic. Often times, participants will only have a rough understanding of the effects of correlation and diversification and will simply divide their assets equally over the investment options in the plan in an attempt diversify their portfolio.

DC participants tend to hold excess stock of the company they work for due to familiarity and a perceived endorsement by management.

The endorsement effect refers to the misconception that by offering an investment as an alternative, the sponsor is implicitly endorsing it as a good investment.

Note that the status quo bias refers to a lack of action on the part of the participant. Also note that putting too much in company stock would be an example of an investor being “boundedly selfish” in that there does not seem to
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