Reading 10: Portfolios, Pyramids, Emotions, and Biases －LO 2008, investment, potential, security

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If investors form their portfolios based on fear and hope, which of the following best represents the resulting structure of their portfolios? Their portfolios will be structured:

A) as pyramids.

B) as concentric circles.

C) according to modern portfolio theory.

D) using technical analysis.

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Answer and Explanation

If investors form their portfolios based on fear and hope, their portfolios will be structured as pyramids with the bottom layer invested in less risky assets to fund necessities. Once necessities are funded, higher levels of the pyramid are dedicated towards riskier investments.

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CFA Institute Area 3-5, 7, 12, 14-18: Portfolio Management
Session 3: Behavioral Finance
Reading 10: Portfolios, Pyramids, Emotions, and Biases
LOS a: Discuss the influence of hope and fear on investors' desire for security and investment potential.

miguelliu

 s

pundit

A