QUESTION 3 HAS ONE PART FOR A TOTAL OF 12 MINUTES.
John Nultione was recently hired as a portfolio manager with Equity Advisors (EA). As part of
his responsibilities, Nultione prepares market forecasts for the firm’s chief investment officer,
Walt Hyatt. The U.S. equity market declined by 20 percent last year. After constructing a model
of factors affecting the market, Nultione becomes convinced that U.S. market returns will be
13.47 percent for the first half of this year followed by an 11.21 percent return for the second
half of this year.
Nultione remembers similar conditions several years ago when his forecast was too pessimistic
and he missed a significant buying opportunity. He does not want to miss another market low.
Nultione proposes a large increase in EA’s portfolio allocation to U.S. equities, which will move
his position from underweight to overweight. By contrast, Hyatt believes the recent downward
trend in the market will continue, and any gains from restructuring EA’s portfolio allocation
would not be worth the risk of relative underperformance.
After preparing his forecast, Nultione reads reports by several respected analysts, including
Harinder Singh. Nultione disagrees with Singh’s forecast of a continued decline in the market.
Hyatt, however, attended a conference where Singh presented his market forecast. Hyatt found
Singh’s analysis convincing and agreed with his forecast. Nultione points out that since the
conference, several key variables in Singh’s analysis have changed. Despite this evidence, Hyatt
remains convinced that Singh’s forecast is correct.
Hyatt believes that Nultione’s proposed portfolio allocation could result in a significant
underperformance of EA’s portfolio compared to its peers. Hyatt believes such
underperformance could harm his own position at the firm. As a result, Hyatt asks Nultione to
review the work of the top 20 equity analysts and reassess his forecast. Nultione presents his
review of the 20 analysts to Hyatt, focusing on the views of three analysts who agree with
Nultione’s optimistic market view.
For each Nultione and Hyatt:
i. Identify two psychological traps they have fallen into.
ii. Justify your position by stating evidence from the information provided.
Note: Four different psychological traps must be identified.
Answer Question 3 in the Template provided on page 23.
QUESTION 10 HAS THREE PARTS (A, B, C) FOR A TOTAL OF 19 MINUTES.
Greta Steiner, an analyst at Shopond Research, has been asked to develop an estimate of the
aggregate operating profit margin for the companies in the S&P 500 Index. She is using the S&P
500 as a representation of the overall U.S. economy. Steiner first reviews the U.S. economic
data presented in Exhibit 1. She notes that U.S. firms cannot raise prices to fully compensate for
inflation because of the current elasticity of demand.