Adaptive Market Hypothesis

CFA Level III Portfolio Management
#1

What are Lo’s 5 axioms of Adaptive Market Hypothesis?

#2

had to go back and refer …

  1. Relationship between risk and reward varies over time (risk premiums change because risk preferences change over time).
  2. Active Management can add value by exploiting arbitrage opportunities
  3. Any investment strategy will have times when it does well, and others when it does not perform as well, (will not consistently do well).
  4. ability to adapt and innovate is critical for survival
  5. Survival is the objective. (Darwinism - the survivors are the ones who learn and adapt to changes).
#3

what SS is this from?

#4

SS3 - RR7

#5

How about naming all 4 behavioral finance models?

#6

i would say individuals are self interested in addition to cpk’s list…SO dont get caught out self interest is common for both AMH and EMH

#7

Behavorial Approach to Asset Pricing: adjust for sentiment premium. It’s the traditional CAPM plus the emotional factors. Behavorial Portfolio Theory(BPT): portfolios in layers. Adaptive Market Hypothesis(AMH): be adaptive and innovative to survive.

I miss one.

#8

would one of these qualifiy?

[1]Consumption/Savings decisions?

[2]Behavioural investor Types?

Also, mini quiz: Who can list the biases associated with bubbles/crashes?

#9

[1] would qualify, [2] no.

One bias off the top of my head would be convoy/herding behavior which is a part of a regret aversion bias. correct?

#10

Confirmation bias,self attribution bias,hindsight bias combined with overconfidence bias and reduced search set -> bubbles.

As bubbles unwind,the anchoring/adjustment bias takes hold,investors are slow to adjust their anchor despite new info->crash.

During the crash,the disposition effect takes hold causing :[1]investors hold losses for longer than rational and [2] postpone regret.

#11

correct