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. In a years time you probably won’t care about this exam too. It’s a paper degree with a catch 22 situation – you must have it because others have it; so what if you have it, others have it too. Nothing more, nothing less. But I can understand the debate point. Unfortunately, people, including me, think we are now finance experts but we have not even covered the tip of the iceberg as far as “true” hardcore finance is concerned.
Paulsons Wrote: ------------------------------------------------------- > 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. I don’t disagree that there are investors that seek out chronic inefficiencies. I’m only saying they are unlikely to have high turnover portfolios. By definition, it will take months for them to unwind their positions leading to infrequent trading.
I put acute based on finding even a chronic trend takes time and is not always evident. Its a belief which is longer term in nature, whereas acute as small as it is, if there’s even a dollar to be made, it will be acted upon.
I put chronic and feel 95% sure that acute is the correct answer.
I don’t know- this is kind of fun now that the test is over and it’s completely out of my hands. anyway, I think the issue is a semantic one- if someone is consistently finding similar acute inefficiencies and expoiting them, then those must be “chronically acute”, or nobody would know to take advantge of them. My understanding of acute inefficiencies is that they are “naturally” arbed away with or without hedge funds, and chronic inefficiencies are ones that other hedge funds seek to consistently exploit. But that’s just me. It’s actually quite an honor to even be debating this point with some of the regulars… it’s comforting to see that these questions are hard for everyone, even the brainiacs on AF.
eastcoaster9 Wrote: ------------------------------------------------------- > I don’t disagree that there are investors that > seek out chronic inefficiencies. I’m only saying > they are unlikely to have high turnover > portfolios. By definition, it will take months > for them to unwind their positions leading to > infrequent trading. the book says hedge funds are an example of chronic ineff traders. the book also says that hedge funds cause problems for some investors’ IPS because their frequent trading brings about a lot of cap gains taxes. just admit it man
All I can do really is post from the text. So I can’t argue this. eastcoaster9 Wrote: ------------------------------------------------------- > 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… Nonsensical? The text is clear. Most investors/bulk of assets seek to generate alpha off chronic ineff. I find it difficult to dispute that. I feel UBS is undervalued, I buy it. I don’t go after $0.02 today going long UBS on the NYSE while simultaneously shorting it on the Swiss exchange. Of the $5 trillion in equity mutual funds, how many funds are employing a strategy to arb trade acute ineff? Next, that I purchased UBS based on a perceived chronic inefficiency does not require that I hold it for 5 years. Next, nothing implies that there is a different acute opportunity every day. Or that the mispricing requires a huge volume to be pushed back to parity. It is just noted that they have an extremely brief life. So if you take that they are brief to imply that you can just sit at your etrade account arbing away all day, that is quite a leap. Do they result in trades? Of course they do. Anyway, if you believe the market is efficient you rarely trade, if you believe it has acute ineff, you trade when you find one and you have enough time and expertise and resources to exploit it given the transaction costs, if you believe the market has chronic inefficiencies you can trade every day on almost anything out there. Hey this looks cheap because blank, this div yield is too high, hey expected inflation is too low, people aren’t factoring in this new info due to some heuristic bias, contrarian, and on and on. You can be pretty damn active if you buy the chronic.
i love it slouis. you’re giving me hope. i had this whole argument in my head, against myself, during the exam. i changed it at the last second from acute to chronic. so sad we’ll never know what the cfai answer was. it must have been in schweser where i read that although there are more acute inefficiencies, funds spend more time and effort trying to identify and exploit chronic inefficiencies. i did read this somewhere, right?
Paulsons Wrote: ------------------------------------------------------- > eastcoaster9 Wrote: > -------------------------------------------------- > ----- > > > I don’t disagree that there are investors that > > seek out chronic inefficiencies. I’m only > saying > > they are unlikely to have high turnover > > portfolios. By definition, it will take months > > for them to unwind their positions leading to > > infrequent trading. > > the book says hedge funds are an example of > chronic ineff traders. the book also says that > hedge funds cause problems for some investors’ IPS > because their frequent trading brings about a lot > of cap gains taxes. > > just admit it man Bottom line, investors pursuing acute inefficiences will have higher turnover than those pursuing chronic inefficiencies, IMO. With that, I’m bowing out of this one.
I have to apologize in general, really. I mean I am not really this fired up about this but it comes across that way. cfasf1 - I think you hit on something there. In reading through this tonight I did not see anywhere where it said that there are more acute inefficiencies. Just that they are more easily discernable and that they are brief in nature. I did read, as noted, that more investors and assets are deployed to attempt to generate excess returns by taking advantage of chronic inefficiencies.
alright. i had to do it. i opened the schweser book. can’t believe i opened schweser again 2 days after the test. so. according to schweser, not cfai… “…chronic mkt inefficiencies are less easily identified and are longer term in nature… Despite being less discernible, a majority of investors (including hedge funds) concentrate on finding chronic inefficiencies…” (p.41) i know, i know. that doesn’t really solve anything, but it’s worth a consideration… i’m feeling better about my choice…
eastcoaster9 Wrote: ------------------------------------------------------- > Bottom line, investors pursuing acute > inefficiences will have higher turnover than those > pursuing chronic inefficiencies, IMO. With that, > I’m bowing out of this one. Again, if you believe the market is efficient you rarely trade. Done there. If you believe it has acute ineff, you trade when you find one quickly enough to exploit it. Find an acute inefficiency tomorrow and trade it. If you believe the market has chronic inefficiencies you can trade actively on a wide variety of strategies. As mentioned above: Hey this looks cheap because blank, this div yield is too high, expected inflation is too low, people aren’t factoring in this new info due to some heuristic bias… Tomorrow you could come up with 100 reasons to trade based on some chronic inefficiency. You could have a heck of a lot more turnover tomorrow pursuing chronic than if you were pursuing acute.
slouiscar Wrote: ------------------------------------------------------- > eastcoaster9 Wrote: > -------------------------------------------------- > ----- > > > Bottom line, investors pursuing acute > > inefficiences will have higher turnover than > those > > pursuing chronic inefficiencies, IMO. With > that, > > I’m bowing out of this one. > > > Again, if you believe the market is efficient you > rarely trade. Done there. > > If you believe it has acute ineff, you trade when > you find one quickly enough to exploit it. Find > an acute inefficiency tomorrow and trade it. > > If you believe the market has chronic > inefficiencies you can trade actively on a wide > variety of strategies. As mentioned above: Hey > this looks cheap because blank, this div yield is > too high, expected inflation is too low, people > aren’t factoring in this new info due to some > heuristic bias… Tomorrow you could come up with > 100 reasons to trade based on some chronic > inefficiency. > > You could have a heck of a lot more turnover > tomorrow pursuing chronic than if you were > pursuing acute. Chronic inefficiences are hard to exploit which will lead to lower market turnover.
After instantly choosing acute, I though long and hard on very similar lines as slouiscar and changed my answer to Chronic. I did consider that Chronic would be picked by somebody who did not really remember the LOS dealing with this and CFAI may be tricking us, but I wonder if they are so narrow-minded. I totally agree about Hedge funds. They do all the trading that is mentioned in several places in Level III because of chronic condition. Acute condition is really arbitraged away by the computer-based trades. Anyway, I put chronic with a lot of though although acute came to my mind without any thought.
this really could go either way… let’s ask the source. mcleod, what did you put? lol.
eastcoaster: Try this kinda-analogy: Turnover is related to an ability and a willingness to trade. You have a willingness but the ability is severely impacted by access, information, timing and costs. I have a willingness and an ability to trade daily. Read the quote from text again. It doesn’t say hard to exploit. Just harder to discern. I can trade more, that is turnover. It is not hard at all to decide to buy Apple tomorrow thinking people are over reacting because Jobs didn’t make an appearance at their annual conference. In a few days once that inefficiency plays out (or not) I can sell. That is trying to exploit a behavioral reaction, a chronic not acute. “…try to chip away at the many chronic inefficiencies and behavioral biases that we know exist,”
Amazing debate, I have put Chronic for all those reasons but all my friends keep telling me it’s acute… We will indeed never know! what a frustration…
lets put it this way who trades more investors or speculators(traders). Is an investor who has identified a LONG TERM chronic inefficiency gonna be popping in and out of his trade on a daily basis? no, he will put on a trade and hold till his LONG TERM inefficiency pays off. Now look at speculator. He notices that the exchange rate is off by .1% according to PPP. Thousands of these guys(or computers) notice the same thing. They all put on a trade, each one trying to scalp a profit. They leverage their position up millions of times and trade. Within minutes the opp is eliminated, everyone exits their position. Which one creates more turnover? I say acute. If you think anything else, I say you are overthinking it. BTW Slouis, your Steve Jobs example is hardly what I would call a LONG TERM inefficiency. A few days is not what I would call long term.
LongOnCFA, That is the prevailing rationale, and it is quite likely accurate. I feel the text disputes that in two areas. First, as you cap lock it repeatedly, your focus is on time frame, long-term vs. short-term. The text is clear, chronic: “generally longer term in nature.” That phrase is intended to provide a comparison to acute whose “resolution occurs quickly, well within the relevant time frame for arbitraging participants.” That is like comparing Texas Holdem to a single hand of blackjack. Blackjack is short-term it takes a minute, appropriate for someone trying to make a quick buck. The Holdem game is generally longer term in nature. It could take a half hour, 4 hours, 4 days, whatever, but it will take generally longer than blackjack. That you describe it as relatively longer does not make it long-term on an age-of-the-earth scale. Second, speculating vs. trading. This is not discussed in the text in the description of acute vs. chronic. This is what comes to ones mind when you think arbitrage, you want to instantly think high volume speculation. I would say that arbitrage is not speculating as the uncertainties are perfectly hedged away. When I read the text I see a small minority of market participants seeking discernable opportunities to attempt exploit with arbitrage and then I see active management to generate alpha. And lastly, I feel the Steve Jobs example hits exactly on the misinterpretation. One could make a case that the stock falling 4-5 points early yesterday was a behavioral reaction to the unknown or ambiguity. You could argue that selling a billion iphones is a good thing whether the founder is at his desk or on a beach. Behavioral sources are a chronic inefficiency. As you note this is clearly not long term. That fact has exactly nothing to do with it. A trader could choose to take advantage of the inefficiency to generate alpha. It is longer term in nature than an arb opportunity and it arises because people fear some unknown or because of herding behavior.
can the initiator of this thread contact the CFAI to explain the debate? Maybe the question was poorly written and they may cancel that question (see another thread on this type of procedure). We have apparently until the 12th to mention anything related to the exam… So what’s the conclusion? Acute or Chronic?