CHAPTER 8: Discussion Questions and Problems
1. Differentiate the following terms/concepts:
a. Good company and good stock
b. Momentum-chaser and contrarian
c. International diversification and domestic diversification
d. Anchoring and herding
Anchoring means sticking with maintained or prior views. Herding is going with the
2. In a regression of perceived long-term investment value (LTIV) on size (S),
book to market (B/M), and management quality (MQ), the following
coefficients (all significant) were estimated:
LTIV = -.86 + 0.15log(S) + -.11log(B/M) +.85MQ
3. Home bias has a potential information-based explanation. Discuss.
One reason why investors may favor local markets – where local is interpreted as either
domestic or close-to-home but within the same country – is because they may possess, or
may feel that they possess, informational advantages. Gains from being geographically
4. In Canada there are two official languages, French and English. Some
Canadian corporations are headquartered in Quebec where French is the
official language. Most however are headquartered outside Quebec
where English is dominant. Would you expect Quebecers to invest more
in Quebec companies, and non-Quebecers to invest more in companies
based outside Quebec? Also, do you think the first language of the CEO
might matter in accounting for investor preferences? Explain.
5. Anchors are ubiquitous in financial markets. Give some examples.
Many examples could be given. One is the current level of stock prices. Many people