Fluent Essays

Read the case study (see attachment). Then answer the following questions: 1) Briefly describe the money management business of JPM. 2) Identify 3 behavioral biases that JPM hopes to exploit, and how they can be exploited to obtain superior returns? 3) The fund created by JPM to exploit these biases is described on their website. https://am.jpmorgan.com/us/en/asset-management/gim/adv/products/d/jpmorgan-intrepid-value-fund-a-4812a0284 The ticker symbol for the fund is JIVAX. The fund was launched in 2005. What has been the return to the fund from Jan 31, 2005 to the current date? (Provide the starting price, ending price and return over the time period.) What has been the return to the S&P 500 over the same time period? (Provide the starting price, ending price and return over the time period. S&P is an appropriate comparison as it is comprised of mid and large sized firms.) 4) What could be the reasons for the difference is performance for JIVAX and S&P 500? What suggestions would you make for improving the performance of JIVAX?J.P. Morgan Behavioral Funds Case Study J.P. Morgan has mutual funds that seek to exploit behavioral biases. In this case study you will first read more about this fund and another one, and then answer questions that appear at the end. “JP Morgan’s behavioral finance process began in 1992 in London. Even in 2006, two thirds of the $76 billion AUM in behavioral finance products was in non-U.S. stocks. Jonathan Golub took the lead CPM role for U.S. retail products, including the behavioral finance funds. At investment conferences and in conference calls, Golub offered his views on broad capital market trends and gave detailed information on the investment process at JP Morgan. Investment Philosophy: Traditional finance theory held that investors were rational, or if they were not, that sophisticated investors would trade aggressively and force stocks to be accurately priced. Eugene Fama made this argument persuasively in the 1960s and, by the late 1970s, it had become academic orthodoxy.8 The early 1980s marked a turning point. Anomalies in stock prices and a new behavioral finance theory emerged, built on the psychology of Daniel Kahneman and Amos Tversy, whose collaborative work earned the 2002 Nobel Prize. Early contributions by Robert Shiller and Richard Thaler cast doubt on Fama’s efficient markets hypothesis. 1. Early contributions to behavioral finance included: Robert Shiller, who argued that stock prices were too volatile given realizations of fundamentals; and Werner DeBondt and Richard Thaler showed that individual stocks tended to mean revert. 2. Bradford De Long, Andrei Shleifer, Lawrence Summers, and Robert Waldmann developed early models of the limits to arbitrage, which helped to explain why sophisticated investors had a limited appetite for correcting mispricing. Unlike in traditional finance models, real arbitrage involved costs and risks that rational investors were sometimes unwilling to bear. 3. Prominent contributions to academic research on efficient market anomalies included: Rolf Banz showed that small stocks tend to outperform large stocks; Sanjoy Basu found that stocks with low valuation ratios, like the ratio of price to earnings, also tended to outperform; Victor Bernard and Jacob Thomas extended early work by Ray Ball showing that the prices of stocks with earnings surprises were likely to continue to drift upward; and Narasimhan Jegadeesh and Sheridan Titman showed the profitability of momentum strategies. The meaning of these empirical findings was still hotly debated. Some argued that these characteristics were proxies for firm risk and others maintained that they reflected mispricing, and hence underlying behavioral biases. Golub commented: These anomalies are glaring. Analysis shows that this outperformance cannot be explained by risk, so something else must be at work. We believe that that something is the collective impact of human psychological biases on mark