Respond to the required questions, double-spaced, APA format (source citations and reference insertions) essay (Each Question). In each Case Study, you must use at least three (3) references (in text), including the textbook (included below).
Respond to the required questions, double-spaced, APA format (source citations and reference insertions) essay (Each Question). In each Case Study, you must use at least three (3) references (in text), including the textbook (included below). Textbook reference: Berk, J. & DeMarzo, P. (2017). Corporate Finance: The Core (Fourth Edition). Boston, MA: Pearson. (This Assignment Box maybe linked to Turnitin.) 1- 150 Words: Discussion This discussion question for this module has two parts. Respond to both parts to receive full credit for this assignment. Part 1: There is evidence that small stocks and value stocks perform better over the long term than the market averages. What are some logical reasons for this phenomenon? Part 2: There is strong evidence that many investors suffer from familiarity bias and overconfidence bias. Can you explain why these biases might exist? Can you think of a situation in which you might make these mistakes (if you hadn’t learned about these biases in this module)? Include some news that is less than a year old that is applicable to this discussion. 2- 100 Words (Fabiola Theophile) – Reply and Comment on the following: According to William Bernstein, small stocks have returned 200 basis points in excess of the market return over time. Over a period of twenty plus years that is quite a healthy return. There are a few logical reasons for why this phenomenon exists. The knowledge that small and value stocks outperform the market is widely known the track record still exists however and is a worthwhile investment strategy. Despite the fact it is well known investors still prefer to invest in growth stocks. Growth stocks generally get more coverage in the news and are more attractive to invest in. Investors want to be a part of the new trends and not miss out on a potential windfall after a new company’s promises of profits come to fruition. For that reason, the demand remains low and further offers these small value stocks at a bargain price which will further enhance the payoff once the stock’s price comes back in line with the company’s earnings potential (Bessembinder, 2018). Familiarity bias is a common occurrence in both investing behaviors as well as many other facts of everyday life. Familiarity bias occurs when an investor only buys stock of their own country, chooses to invest a large amount of their portfolio in the company they work for, and finally when an investor chooses to buy stocks of companies, they regularly buy products from in their everyday life. This bias exists due to human nature. Humans are typically more comfortable with situations and items they are already familiar with. We don’t tend to like change and think if something is working ok why change it even if there is a new more efficient way (McAndrews, 2018). Overconfidence is another common occurrence in investor behavior. Again, the problem with this bias lies in human nature. As soon as the market drops human nature kicks in and through irrational thinking an investor will sell and not join the market again until it seems stable which causes them to miss the recovery for their prior losses. Its easy to remain calm when the market and our investments are doing well but as soon as the market turns down we forget all the recent good times and even past losses we made it through and decide to switch strategy at the wrong time (Howard, 2019). When it comes to investing, I am highly risk adverse. I routinely struggle with familiarity bias. I prefer to stick to what I know and companies that I am familiar with. I a more likely to invest in a company that I feel is stable and familiar with their brands and even a consumer. 3- 100 Words (Ciara Quinn) – Reply and Comment on the following: The financial world is daunting. Entering into the stock market is something we all know we should do, but most of us have no knowledge of where to even start. Fear and uncertainly stop individuals from tackling this investment, even when financial advisors are available; it is hard to trust people with your money in a situation you do not fully understand. These factors can lead to bias when it comes to investing. One of these biases is referred to as, overconfidence bias. It is exactly what it sounds like- getting too confident in one’s ability to pick winners (Berk & DeMarzo, 2017). After a couple of wins or after many years of school and experience, it is easy to fall into this bias. This is a situation no investor wants to get themselves into because overconfidence bias will lead to debt especially in young adults (Cwynar, Cwynar, Patena, & Sibanda, 2020). Familiarity bias is another mindset that some investors might fall into. This leads investors to stay with stocks they are familiar with and not venture out or take risk. This also plays into overconfident bias because investors believe that their familiar stocks will continue to make them money and that they are the best stocks out there (Berk & DeMarzo, 2017). It is natural for humans to believe that the best situations or the best investments, activities, jobs, etc. are the ones they are involved in. I can see myself falling into both familiarity and overconfident bias if I had entered the market without help. Our market was consistently growing and I would have easily fallen into believing that I had picked the best stocks. Furthermore, I can even see myself telling others that I had found some gems that would also make them money. For the second part of this discussion I want to address the long-term performance of small and value stocks. According to Motely Fool’s article on long term profit, value stocks outperform the growth of the market (Williams, 2016). First of all, small stocks are usually domestically driven so they are not as influenced by the global market as larger stocks (Imbert, 2019). Additionally, Imbert states that small stocks tend to stay more stable after the U.S. Central Bank lowers rates (2019).