I just had to look this up when I got home. CFAI Vol 2 pg. 90 sec. 7. CONCLUSION "One can elect the passive approach–fly the beta flag and allow one’s portfolio to float on the “index currents.” Or one can choose to be an active alpha-seeking investor and try to chip away at the many chronic inefficiencies and behavioral biases that we know exist, even though we can’t clearly discern how they are priced and whether they will profitably regress toward equilibrium within a reasonable time. With chronic inefficiencies, by their very definition, discernibility will always be somewhat clouded. (Otherwise, they would become acute–and would be long gone.) So with these opportunities, one is always acting on imperfect knowledge and playing the odds. But without actively scanning the horizon and being poised to move on reasonably discernable opportunities, investors will surely have no chance of reaping the incremental return inherent in the grand continuous march toward efficiency. " chronic => active alpha seeking investor
“So you’re saying there’s a chance!”
what was all that one in a million talk
I call data mining!! this isn’t a clear confirmation IMHO. Ppl are saying that its not acute bc acute inefficiencies are quickly arb’d away… in my book thats the definition higher turnover, no? I mean just think of it this way- who trades more? Hedge fund A that arb’s TSX vs NASDAQ mispricing all day or B that trades Kazakhstan mkt bc of capital flow restrictions? Am I being delusional?
confirming evidence trap! Acute was the answer or my name isn’t AFJ…and it is too
the fact is that chronic inefficiencies are longer-term exploitations
anyone who knows stat arb funds, understands why acute is the correct answer.
So it’s either Acute or Chronic depending on how you interpreted the question? or rather, what you thought CFAI thinks you should be thinking is the way to interpret this question. i put Acute, changed to Chronic, waffled a bit, and i think finally ended at chronic but by that point the smudges were pretty bad and i can’t remember. in reality, aren’t BOTH chronic and acute inefficiencies being exploited by arbitrage, it’s just a different group of investors for differnet reasons?
i picked chronic (this was one of about 10 iffy questions). I agree acute is correct.
I love this time of year. Long-term, Short-Term, Hedge Funds, No Hedge Funds, Stat Arb, I’m cool with all that. Test details aside, I could be made to believe that either is accurate. Unfortunately, whether it seems likely, applicable, practical, reasonable or not, it is their game by their rules and what they say goes. So let me paraphrase the conclusion posted above… the closing passage taken directly from the only reading in the CFAI texts dedicated to acute and chronic inefficiencies. 1.) you can invest passively by indexing, or 2.) you can take an active approach and attempt to generate alpha if you choose option 2.) you are trading chronic inefficiencies, you are “playing the odds,” and you are betting that they will “profitably regress toward equilibrium within a reasonable time” If these chronic inefficiencies were easily discernible … “they would become acute–and would be long gone.” Name one trade you made this year that was based on an acute inefficiency. Now name five you made based on a chronic.
My firms blackbox made hundreds if not thousands. Why do you think the acute ones are “long gone”?? Because they are traded away… Instantly.
No. I think they are gone because the book said they are. Past that I don’t really care until after Aug 18. I don’t mean to be a smart ass. So sorry. In the end, I agree with your straightforward point. market efficiency arbs an acute ineff away with what? Uh, trades. But in the book it seems pretty straightforward. You are either passive or active and active takes advantage of chronic. Sorry. I’ll move on now. Seeing it in print really is enough. One last passage from page 84 to hammer down this fantasy world: “With acute inefficiencies, the surrounding uncertainties can be hedged or minimized. Their resolution occurs quickly, well within the relevant time frame of arbitraging participants. Chronic inefficiencies tend to be less discernable, more ambiguous, more resistant to rapid resolution from available market forces, and generally longer term in nature. This distinction relates to Jack Treynor’s (1976) wonderfully suggestive concept of “fast ideas versus slow ideas.” Obviously, one would prefer to hurl fast ideas at acute inefficiencies, but by their very nature, fast ideas have a short half life. And that half life may be condensing with the explosive growth in hedge funds. But even in this era of the hedge fund, only a small minority of market participants spend their days in a high-performance hunt for acute inefficiencies. The vast majority of investors, and certainly the bulk of assets, swim with the broad currents, while looking for less-fleeting incremental opportunities.” vast majority of investors, bulk of assets, less fleeting… chronic.
KRochelli Wrote: ------------------------------------------------------- > anyone who knows stat arb funds, understands why > acute is the correct answer. right, but as a financial advisor, your clients aren’t going to be arbing out any technical mispricings in the markets. the text mentions that hedge funds are a large exploiter of chronic ineffs and that acute are too short term in nature and arbed out by things like stat arb funds. who’s your client base? an individual investor acting like a hedge fund and exploiting things like inefficient emerging markets or a stat arb fund? i’m def in the chronic ineff camp
So you chronic camp guys… Are you trying to say you would engage in frequent trading/high turnover, chasing after inefficiencies that may not correct themselves for months or years? Seems nonsensical to me…
I chose “chronic” but now unfortunately I think the correct answer according to CFAI is “acute”. “Acute” does not mean frequent. The question asked for reason for frequent trading. What if an investor believed “inefficiences are acute and infrequent”. That would not contradict anything in the question, however this trader would also trade “infrequently”. Just a badly worded question from CFAI, and that’s just an occupational hazard. NC
eastcoaster9- Isn’t that right? One would trade on chronic inefficiencies that persist becuase that’s where the opportunities are. Acute inefficiencies do not persist, they naturally get arb’ed away so how can one possibly exploit them?
What’s the point arguing, people. Even if you convinve yourself, as well as others, it does’nt mean you have the right answer. One, very, “key” thing people are failing to understand even after reaching Level III – what matters is what the CFAI thinks because most probably, most likely, as always, the institute’s answer and the accompanying explanation will leave you astounded. Relax. Kick back. Drink a few. And if you are in NYC, enjoy the hot women who are trying their best to save cloth.
sparklala731 Wrote: ------------------------------------------------------- > eastcoaster9- > Isn’t that right? One would trade on chronic > inefficiencies that persist becuase that’s where > the opportunities are. Acute inefficiencies do not > persist, they naturally get arb’ed away so how can > one possibly exploit them? Exactly, they are getting arb’ed away by the acute inefficiency/frequent traders!! That is the whole point of arbitrage, to locate the ephemeral inefficiencies, so you make your money quickly and can move on to the next perceived inefficiency, which may happen the next day, hence frequent trading. Otherwise with chronic, your funds are tied up for months waiting for the correction, leading to infrequent trading.
sid3699 Wrote: ------------------------------------------------------- > What’s the point arguing, people. Even if you > convinve yourself, as well as others, it does’nt > mean you have the right answer. > > One, very, “key” thing people are failing to > understand even after reaching Level III – what > matters is what the CFAI thinks because most > probably, most likely, as always, the institute’s > answer and the accompanying explanation will leave > you astounded. > > Relax. Kick back. Drink a few. And if you are in > NYC, enjoy the hot women who are trying their best > to save cloth. I enjoy a good debate. I’d like to think I put in all those hours to at least in part have the ability to maintain and defend a position on various topics in finance. In a couple days, I will have forgotten all about the exam.
eastcoaster9 Wrote: ------------------------------------------------------- > sid3699 Wrote: > -------------------------------------------------- > ----- > > What’s the point arguing, people. Even if you > > convinve yourself, as well as others, it > does’nt > > mean you have the right answer. > > > > One, very, “key” thing people are failing to > > understand even after reaching Level III – > what > > matters is what the CFAI thinks because most > > probably, most likely, as always, the > institute’s > > answer and the accompanying explanation will > leave > > you astounded. > > > > Relax. Kick back. Drink a few. And if you are > in > > NYC, enjoy the hot women who are trying their > best > > to save cloth. > > > I enjoy a good debate. I’d like to think I put > in all those hours to at least in part > have the ability to maintain and defend a position > on various topics in finance. > > In a couple days, I will have forgotten all about > the exam. Absolutely, great to debate with some like minded people. On that note - you said: “So you chronic camp guys… Are you trying to say you would engage in frequent trading/high turnover, chasing after inefficiencies that may not correct themselves for months or years? Seems nonsensical to me…” THIS IS THE ENTIRE HEDGE FUND INDUSTRY! this is what traders do. its in the book. it says that hedge funds are prime examples of those who trade against chronic ineff. i think your view of chronic is too extreme. chronic just means that its not instantly arbed out by some Big Blue computer brain somewhere as soon as put call parity doesn’t hold. what kind of individual investor can arb out the acute stuff? its too quick and its too saturated with institutional quant engines.