Reading 1.1

Cross Sectional Consistency

consistency across asset classes (regarding risk and return characteristics)

Intertemporal consistency

consistency over various investment horizons (regarding portfolio decisions)

7 step process to fomulate capital market expectations (very generalized)

1. time horizon

2. hisotircal perfroemnce of past performance

3. what valuation model used

4. collect best data

limitations to using economic data

1. time lag

2. data revisions (i.e. CPI)

3. indexes rebased

what does appraisal bias creat

smaller SD and makes returns seem less corelated

what can regime changes in historical data rate

nonstationary data (boo!)

asset returns have historically exhibited..

fat tails

skewness

e.g. of misrepresentations of correlations

rainfall influences corn prices and corn prices influences rainfall

rainfall is exogenous (outside the model)

anchoring bias

• type and example

cognitive

info recieved first is overweighted

status quo bias

emotional

predictions are highly influenced by recent past

(if inflation at 4% that becomes the forecast)

confirmation bias

• type and eg

cognigitve

only infomation supporting the existing belif is considered

overconfidence bias

-type and e.g.

past mistakes ignored

Prudence Bias

• type and eg

cognitive

forecast overly conservative

availability bias

type and eg

cognitive

what easiest to remember is overweighted