1. Carefully explain how mental accounting can affect the formation of portfolios.
2. Explain the misattribution bias and the effect it can have on investment behavior.
3. Carefully explain the disposition effect and the human behavior that prompts it. Explain how such and effect can lead to under-reaction to news and a post-announcement drift in stock prices.
4. Carefully explain how an increase in interest rate volatility would affect the value of a puttable bond.
5. You are saving for your child’s college in 8 years and have a fixed income portfolio with a duration of 12. What risk do you face? How could you eliminate the risk?
6. Suppose you have bought an interest only tranche from a mortgage backed CDO (collateralized debt obligation). Carefully explain two risks you face.