1. Investors frequently repurchase a stock they previously owned and sold. Explain which stocks they are more likely to repurchase.

2. Carefully explain how mental accounting can affect the formation of portfolios.

3. Explain the misattribution bias and the effect it can have on investment behavior.

4. Carefully explain the disposition effect and the human behavior that prompts it. Explain how such and effect can lead to under-reaction to news and a post-announcement drift in stock prices.

5. You are the investment manager of a fixed income portfolio consisting of the following bonds (Values and duration): (Note duration is the weighted average maturity of a bond or bond portfolio.)

Bond A           $100,000,000              7

Bond B            $80,000,000              12

Bond C            $60,000,000              4

What is the duration of the portfolio?

6. Your view is that interest rates are going to decline. If the above bonds are the only viable bonds available in the market, and you can sell one bond and buy an equivalent amount of the other, which would you sell and which would you buy?

7. What is the composition and duration of the new portfolio?

8. Carefully explain how an increase in interest rate volatility would affect the value of a puttable bond.

You are saving for your child’s college in 8 years and have a fixed income portfolio with a duration of 12. What risk do you face? How could you eliminate the risk?

Suppose you have bought an interest only tranche from a mortgage backed CDO (collateralized debt obligation). Carefully explain two risks you face.