Quite an interesting chapter overall !
My question below, about this vague group of words from the book
Copyright, our buds at the CFAI, Book 2 reading 9, 7th verse;
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Are they saying that the investors’ need for downside protection is a behavorial quirk, and one can profit from that selling OTM puts (that’s how i read it), or is there a different message?
Haha, it was interesting the first time for me but not now. Negative skewed from what i remember is making a bunch of small returns and then having few big losses. This excessive risk by doing OTM’s leads to some protection…
Other than that, I dont really get it. You might be right but seems confusing. What page is this?
last page of reading 9. chapter 7.4
The paragraph that is above the one you quoted talks about how investors, influenced by emotions, overestimate the value of growth companies. They end up in a mistake.
Shefrin, on the other hand, with his theory, talks about how investors claim a risk premium (presumably sentiment premium) for investments with a high downside risk in an adverse economic environment. This makes that some securities in the market are undervalued so they should provide a return above true risk (alpha?).
So, a traditional efficient portfolio should realize about those mispricing and take advantage.
Also, another way to profit from investors fears is selling puts (offer downside protection). My question here is if options are adequately priced. I mean, if options capture true risk or also “sentiment risk”. I think is the former.