24. In order to create the relative strength measure, we converted the weekly returns for the
Fidelity Banking Fund and for the S&P 500 to weekly index values, using a base of 100 for
a. The following graph summarizes the relative strength data for the fund.
Fidelity’s S elect Banking I ndex Values S &P 500 I ndex Values Relave S trength × 100
b. Over five-week intervals, relative strength increased by more than 5% 29 times, as
indicated in the table and graph below. The Fidelity Banking Fund underperformed
the S&P 500 index 18 times and outperformed the S&P 500 index 11 times in weeks
following an increase of more than 5%.
Date of
Increase
Performance of
Banking Fund in
Subsequent Week
Date of
Increase
Performance of
Banking Fund in
Subsequent Week
07/21/00 Outperformed 03/09/01 Outperformed
08/04/00 Outperformed 03/16/01 Underperformed
Relave Five Week Percentage Change
c. Over five-week intervals, relative strength decreases by more than 5% 15 times, as
indicated in the graph above and table below. The Fidelity Banking Fund
underperformed the S&P 500 index six times and outperformed the S&P 500 index
nine times in weeks following a decrease of more than 5%.
Date of
Decrease
Performance of
Banking Fund in
Subsequent Week
Date of
Decrease
Performance of
Banking Fund in
Subsequent Week
07/07/00 Underperformed 04/16/04 Underperformed
07/14/00 Outperformed 04/23/04 Outperformed
d. An increase in relative strength, as in part (b) above, is regarded as a bullish signal.
However, in our sample, the Fidelity Banking Fund is more likely to underperform the
25. It has been shown that discrepancies of price from net asset value in closed-end funds tend to
be higher in funds that are more difficult to arbitrage such as less-diversified funds.
CFA PROBLEMS
1. i. Mental accounting is best illustrated by Statement #3. Sampson’s requirement that his
income needs be met via interest income and stock dividends is an example of mental
accounting. Mental accounting holds that investors segregate funds into mental
ii. Overconfidence (illusion of control) is best illustrated by Statement #6. Sampson’s
desire to select investments that are inconsistent with his overall strategy indicates
overconfidence. Overconfident individuals often exhibit risk-seeking behavior.
iii. Reference dependence is best illustrated by Statement #5. Sampson’s desire to retain
poor-performing investments and to take quick profits on successful investments
suggests reference dependence. Reference dependence holds that investment
2. a. Frost’s statement is an example of reference dependence. His inclination to sell the
international investments once prices return to the original cost depends not only on
In standard finance, alternatives are evaluated in terms of terminal wealth values or final
b. Frost’s statement is an example of susceptibility to cognitive error, in at least two
ways. First, he is displaying the behavioral flaw of overconfidence. He likely is more
c. Frost’s statement is an example of mental accounting. Mental accounting holds that
investors segregate money into mental accounts (e.g., safe versus speculative),
maintain a set of separate mental accounts, and do not combine outcomes; a loss in
In standard finance, decisions consider the risk and return profile of the entire
portfolio rather than anticipated gains or losses on any particular account, investment,
or class of investments. Alternatives should be considered in terms of final outcomes
3. a. Illusion of knowledge: Maclin believes he is an expert on, and can make accurate
forecasts about, the real estate market solely because he has studied housing market
Overconfidence: Overconfidence causes us to misinterpret the accuracy of our
information and our skill in analyzing it. Maclin has assumed that the information he
b. Reference point: Maclin’s reference point for his bond position is the purchase price, as
evidenced by the fact that he will not sell a position for less than he paid for it. This
c. Familiarity: Maclin is evaluating his holding of company stock based on his familiarity
with the company rather than on sound investment and portfolio principles. Company
Representativeness: Maclin is confusing his company (which may well be a good
company) with the company’s stock (which may or may not be an appropriate holding for
4. a. The behavioral finance principle of biased expectations/overconfidence is most consistent
with the investor’s first statement. Petrie stock provides a level of confidence and comfort
b. The behavioral finance principle of mental accounting is most consistent with the
investor’s second statement. The investor has segregated the monies distributed from
5. i. Overconfidence (Biased Expectations and Illusion of Control): Pierce is basing her
investment strategy for supporting her parents on her confidence in the economic
forecasts. This is a cognitive error reflecting overconfidence in the form of both biased
Standard finance investors understand that individuals typically have greater confidence
in the validity of their conclusions than is justified by their success rate. The calibration
ii. Loss Aversion (Risk Seeking): Pierce is exhibiting risk aversion in deciding to sell the Core
Bond Fund despite its gains and favorable prospects. She prefers a certain gain over a
possibly larger gain coupled with a smaller chance of a loss. Pierce is exhibiting loss
aversion (risk seeking) by holding the High Yield Bond Fund despite its uncertain
Standard finance investors are consistently risk averse and systematically prefer a certain
iii. Reference Dependence: Pierce’s inclination to sell her Small Company Fund once it
returns to her original cost is an example of reference dependence. This is predicated
In standard finance, alternatives are evaluated in terms of terminal wealth values or final