When overconfident investors revise their forecasts based on new information, they tend to
overestimate the impact. As an overconfident investor, one will be disappointed by the subsequent
movements in Bison stock because of her initial overoptimism after the earnings announcement.
Investors who use anchoring tend to underestimate the impact of new information because they are
anchored in their old beliefs. One will be pleased by the subsequent movements in stock because he
will have initially underestimated the impact of the positive earnings announcement.
Bank Security Portfolio Return Objs. – I Remember Living In CR – Interest Rate risk, Liquidity,
Income, Credit Risk
CME Form Process – Forming Expectations Needed Historically Provided Capital Managers
Many Incentives & Gratifying Invitations Into Overlooking Market Expectations
Made Rashly - Find Expectations Needed, Historical Performance, Choose
Methods/Models/Info, Get Info, Interpret Output, Make Expectations, Monitor &
Refine
Psych Traps – Overconfident Chief Executives Start Quietly Piling Risk – Overconfidence,
Confirming Expectations, Status Quo, Prudence, Recallibility
BRIC
-Size of BRIC economies could be >1/2 that of the G6 by 2025, and could surpass the G6 by 2040
-India's growth is strongest at 5% for next 30-50 years
-Global spending for BRICs - 4x as large as G6 by 2050
-Real exchange rates for BRIC countries could strengthen by 300% by 2050
-Slowest to open economy: India
-Weaker tech progree: Brazil & India
-Most rapidly aging: China & Russia
-China's economy could overtake Germany in next 4 years, Japan by 2015, and US by 2039
-India's economy could be larger than all but US & China in 30 years
-BRIC per capita income will remain below G6 (except Russia)
Factors that lead to growth
-Technological progress
-Growth in capital stock
-Employment Growth
Conditions for Sustained Economic Growth
-Macroeconomic stability
-institutional efficiencies
-open trade
-worker education
Why Emerging Markets in a Portfolio?
Increased growth in markets = increased demand for capital = stonger currency values = increased
market caps which further justifies inclusion in a well diversified portfolio
When evaluating a specific country, are the following good or bad signs?
1. GDP=5% good if >4%, under may mean growing slower than population
2. Defecit/GDP =10% bad >4% indicates substantial credit risk
3. Foreign Debt/GDP = 75% bad >50%
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