Andirah Wang is a new client of Willowtree Investment Advisors (Willowtree). As part of her initial meeting with her advisor, Anita Reinholt, CFA, Wang completed a questionnaire designed to profile her personality type. The results indicated that she is a person who has a conservative investing nature, but is confident in her own ability to research investment options in a careful, systematic manner. Reinholt believes in modern portfolio theory (MPT), but after years of experience knows that an individuals investment preferences and decisions are not always congruent with MPT. She has become increasingly interested in the tenets of behavioral finance theory in hopes that it will help her understand each clients motivations and biases. When meeting with prospects or clients, she is careful to document comments and observations relative to the portfolio management process. Reinholt recorded the following statements made by Wang during the initial consultation: - "I use the "basket" theory of investing - I don't want to put all my assets in one place so I'll give you a try with about 20% of my investment portfolio - that way I can see how you do relative to my other advisors."
- I have been following Pharmitrol, a local company listed on NASDAQ. Several of my neighbors have production jobs there and are really optimistic about the firms prospects. Of course theyre not in management, but I think they should be able to sense whats going on. I have a significant position now at $3.50 per share and expect to triple my investment soon.
Reinholt is considering the appropriate risk and return objectives for Wangs account. Wang said that she would like a moderately aggressive portfolio. Upon reviewing her balance sheet, however, Reinholt notes that Wang already has a significant allocation to a few high-risk securities. In addition she has some other illiquid and personal use assets, such as her residence, a time share condominium, and an interest in a local miniature golf course. Relative to her stated spending and retirement goals, her total net worth appears to be barely adequate. The analysis of Wangs personality questionnaire indicates that she most likely is a: | | B) | individualistic investor. |
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Answer and Explanation
Wangs systematic research, confidence in her own ability and conservative nature place her in the general category of methodical investors. Note that cautious investors are the most risk averse, individualistic investors tend to be more aggressive, and that spontaneous investors tend to chase the latest hot investment.
Statement 1 by Wang is reflective of which of the following basic principles of the behavioral finance investment framework?
Answer and Explanation
Asset segregation is the tendency to evaluate a manager or investment in isolation instead of measuring the impact on the overall portfolio.
The statement by Wang about Pharmitrol is most reflective of which of the following behavioral tendencies?
Answer and Explanation
Wang is overconfident about the information she has about Pharmitrols prospects. Reference dependency is related to the fear of regret and the concept of reference point. Investors often evaluate alternatives not in terms of final outcome, but in terms of gains and losses relative to an artificial reference point. Loss aversion is the tendency to prefer large uncertain losses to small, certain losses; it leads to holding on too long after stocks have fallen in price. Loss aversion also refers to the tendency of investors to treat the risk of losing potential gains differently from potential losses, even if both have the same monetary value and the same risk characteristics. Anchoring refers to the inability to fully incorporate (adjust) the impact of new information on projections.
Which of the following is NOT one of the behavioral finance traits that leads to market inefficiency? Investors: | A) | are overconfident in their ability to interpret information and predict performance. |
| B) | all have the same information and interpret it the same way. |
| | C) | think a well run company will be a good investment. |
| | D) | have an inability to incorporate new information into a new forecasted stock price. |
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Answer and Explanation
Market efficiency assumes all investors have the same information, interpret it the same way, and make the same forecasts. Some behavioral finance traits can lead to market inefficiencies such as representativeness, anchoring-and-adjustment, loss aversion, frame dependence, and overconfidence. Representativeness can take many forms and can be characterized as any time an investor bases expectations for the future on some past characteristic. Anchoring-and-adjustment refers to the inability to fully incorporate the impact of new information on previous projections. Loss aversion can lead to investors holding on to a losing stock too long or to increased risk seeking behavior to recover from a loss. Frame dependence refers to investors' tendency to frame their tolerance on the current direction of the market or in the context of the information received rather than on its own merits. Overconfidence is when people place too much confidence in their ability to predict resulting in unjustified bets.
Market efficiency assumes all investors have the same information, interpret it the same way, and make the same forecasts. Some behavioral finance traits can lead to market inefficiencies such as representativeness, anchoring-and-adjustment, loss aversion, frame dependence, and overconfidence. Representativeness can take many forms and can be characterized as any time an investor bases expectations for the future on some past characteristic. Anchoring-and-adjustment refers to the inability to fully incorporate the impact of new information on previous projections. Loss aversion can lead to investors holding on to a losing stock too long or to increased risk seeking behavior to recover from a loss. Frame dependence refers to investors' tendency to frame their tolerance on the current direction of the market or in the context of the information received rather than on its own merits. Overconfidence is when people place too much confidence in their ability to predict resulting in unjustified bets.
For understanding an individuals preferences, goals and desires, situational profiling: | A) | places individuals into categories according to sources of wealth and level of risk aversion. |
| | B) | is not useful if a psychological profile has already been completed. |
| | C) | is superior to psychological profiling. |
| D) | places individuals into categories according to stage of life and economic circumstances. |
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Answer and Explanation
Situational profiling can enhance an advisors understanding of an investors preferences, goals, and desires by categorizing individuals according to sources and measures of wealth as well as stage of life.
Which of the following statements is most accurate? Wangs | A) | willingness to take risk is more important than her ability to take risk. |
| | B) | willingness and ability to take risk are incongruent therefore Rineholt should defer to Wangs desire for a moderately aggressive portfolio. |
| | C) | ability to take risk is more important than her willingness to take risk. |
| D) | ability to take risk is determined by her time horizon and portfolio size. |
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Answer and Explanation
Willingness to take on risk is the investor's own personal view of their level of risk aversion. Ability to take on risk is determined by several factors such as length of lifespan and portfolio size relative to goals. It is usually best to defer to a person's willingness to take on risk if a conflict arises and their willingness is greater than their ability, unless doing so would jeopardize the portfolios ability to meet the investors goals. Under these circumstances, it appears that Wangs stated risk tolerance is not only incongruent with her economic status, but is also in conflict with her personality profile. Rinehart should meet with Wang for education purposes and to explore the inconsistencies.
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发表于 2008-9-16 18:10
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