Question 4 Relates to Chen’s decision to invest in stock GFTC. Schweser Answer states Representativeness. Why is answer not familiarity? Anyone else get confused on this one? thanks,
can you post the actual question - thanks.
I did! I even emailed Schweser about it and about one other question from the same item set (about Chen’s not selling losing money stock). I will post Schweser’s reply once I get home (no access to that email account from work).
I just found the question you’re refering too… The answer is representitiveness becuase Chen using a stereotype to make the investment decision (good management = good company to buy) rather than the fact he is familar with the firm (i read about this firm or its in my town) to purchase. It’s a fine line, a very fine line i think in this case and i wouldn’t expect to see a question on the exam that treads into such a grey area.
“It’s a fine line, a very fine line i think in this case and i wouldn’t expect to see a question on the exam that treads into such a grey area.” Really…? Despite my attempts to block out previous exams, the myriad of ambiguous questions still haunts me at night…
strikershank is correct. Here’s my question to Schweser and their reply: Question: “familiarity is when people invest in securities they are familiar with” (quote from Answer to Q4). In the information provided about Chen’s, there is a following phrase: “The Chens have had GFTC in their portfolio for several years because it’s a company that they know from their business dealings and they consider it a good company”. Should not this phrase be interpreted as “company they are familiar with”? This seems like a clear example of familiarity, whereas the correct answer to the question (according to Schweser) is Representativeness Answer (from Schweser): For Q 4, it is only asking about Chen’s consideration of GFTC as a good company. This would most likely be representativeness. If the question asked about their consideration of GFTC based on their business dealings then I would argue that familiarity would be the best choice.
Schweser’s reply is wrong. The implication from the sentence is that the Chens consider it a good company BECAUSE of their business dealings. (If there were a comma between dealings and “and” the linkage would be less clear.) I originally thought the answer should be familiarity, but representativeness could still be the correct answer. Book 1, page 160: “Representativeness is a heuristic process by which investors base expectations upon past experience, applying stereotypes.” Familiarity seems to be more of a gut feeling, based less upon analysis. Book 1, page 183: “Familiarity is also bred by proximity. A local firm is often seen as a sound investment, even if investors know nothing of the firm’s future prospects.” It’s a close call. I’m going to second your email Schweser.
kleine Wrote: ------------------------------------------------------- > Question 4 Relates to Chen’s decision to invest in > stock GFTC. > > > Schweser Answer states Representativeness. > > Why is answer not familiarity? > > Anyone else get confused on this one? > > thanks, I also got confused by that question. How about the next one, question 5. Why isn’t that answer A. regret?
See page 162-3 in Schweser. To avoid feeling regret investors tend to stay in comfortable investments, such as stocks and bonds. Next, rather than sell profitably investments, investors may use their cash flows, such as interest and dividends. Loss aversion is the better answer.
gideon Wrote: ------------------------------------------------------- > See page 162-3 in Schweser. To avoid feeling > regret investors tend to stay in comfortable > investments, such as stocks and bonds. Next, > rather than sell profitably investments, investors > may use their cash flows, such as interest and > dividends. Loss aversion is the better answer. Look at question 3 on page 166. It is a similar question and the answer is regret.
I’m really glad people are posting about this quiz in the back of Book 1 because I found it discouragingly tricky & ambiguous. I’m glad to see that I’m not alone in that opinion. Hopefully the real test won’t be that bad but maybe that’s a false hope.