What’s the diff? Anybody have some examples?
acute—temporary, easier to discern chronic—relatively long-term, difficult to discern, from structural or behavior sources.
I remember this by thinking “Awwww cute” small, easy to discern, like cheerleaders
it is almost impossible to exploit acute inneficiencies. Most hedgefunds are trying to exploit chronic which is harder to find and more uncertain outcomes
Think of it in medical terms … Acute = Bronchitis —> very obvious - not long-term ( hopefully ) I wd’nt say it is impossible to exploit …its just just any advantage that you have will be identified fairly quickly and will no longer be an advantage Chronic= Smoker’s Cough ----> not very obvious …long - term
All helpful, but Schweser has two examples in their questions, and I couldn’t tell the diff in a. and didn’t even know what they were asking in b. a. chasing value/neglected firms – is this LOOKING for acute or chronic inefficiencies? b. focusing on recent earnings growth and in top quartile – does this CREATE acute or chronic inefficiencies?
Acute can easily be corrected and are not based upon some fundamental structure or behavioral trait of investors. For instance a stock trading half a dollar off on two regional markets. Chronic are based upon structural limitations or ones based upon behavioral characteristics. And example of the latter subtype would be one based upon herding mentality, where the trader knows that the market has mispriced something but because of herding behavior there is no ability to correct it by shorting for a profit.
i would say a and b both are chronic. as James said, acute will lead to arbitrage and will be corrected very quickly