Behavioral Finance - Reading 10: Portfolios, Pyramids, Emot individual, behavioral, describes, following, finance

mayanfang1

Q1. According to behavioral finance, which of the following best describes the components of individual investors’ portfolios?

A)   Their portfolios will be over concentrated in their employer’s stock and domestic securities.

B)   Their portfolios will be over concentrated in their employer’s stock and risky securities.

C)   Their portfolios will be over concentrated in risky securities.

Q2. According to behavioral finance, which of the following best represents how investors will diversify a portfolio for their defined contribution pension?

A)   Using modern portfolio theory.

B)   According to their employer’s advice.

C)   Using 1/n diversification.

Q3. According to behavioral finance, which of the following best describes how investors will invest their retirement portfolio?

A)   The investor will put an equal dollar amount in each mutual fund on the menu of their employer’s defined contribution plan.

B)   The investor will put most of their money in the less risky assets on the menu of their employer’s defined contribution plan.

C)   The investor will put most of their money in the less risky assets on the menu of their employer’s defined contribution plan unless the employer forces them to put the majority of the funds in the company’s stock.

Q4. Jack McCauley has been working as a successful electrical engineer for ten years. He is now considering a career move in which he would move to management because he thinks he would be successful at that as well. According to behavioral finance, which of the following would most likely characterize McCauley’s evaluation of his skills as an investor?

A)   Overconfidence.

B)   Aversion to ambiguity.

C)   Representativeness.

Q5. Which of the following best represents the behavioral finance discussion of overconfidence in individual investors?

A)   Investors will often fail to recognize their own incompetence but can correct their poor decision making with the help of others.

B)   Investors will often fail to recognize their own incompetence and they will also fail to correct their poor decision making process.

C)   Investors will often fail to recognize their own incompetence but can correct their poor decision making through adaptive processing.

Q6. According to behavioral finance, overconfident individual investors:

A)   cannot detect their own underperformance and generalize when thinking about their abilities.

B)   cannot detect their own underperformance and think in specific terms about their abilities.

C)   gradually learn about their underperformance and adapt a cognitive approach.

mayanfang1

 

答案和详解如下：

 

Q1. Correct answer is A)

According to behavioral finance, individuals invest in securities they are familiar with. They are over concentrated in their employer’s stock and in domestic securities. Their portfolios will exhibit a home bias, with few international assets.

Q2. Correct answer is C)         

Investors will diversify a portfolio for their defined contribution pension using 1/n diversification. If their employer offers ten mutual funds, employees will tend to put one-tenth of their contribution in each mutual fund.

Q3. Correct answer is A)

According to behavioral finance, investors will diversify the portfolio for their defined contribution pension using 1/n diversification. In 1/n diversification, an employee puts an equal amount in each fund on the employer’s defined contribution pension plan menu. For example, if there are eight mutual funds available, the employee will put one-eighth of their contribution in each fund. Note that in the U.S., an employer cannot force an employee to put more than 10% of their retirement funds in company stock.

Q4.Correct answer is A)

McCauley assumes that because he is successful as an engineer, he would be successful in management. He is overconfident in his abilities and assumes that his success in one area will carry over into other activities he attempts.

Q5. Correct answer is B)         

According to behavioral finance, overconfident individual investors will fail to correct their poor decision making process. Their inability to make correct decisions also means that they lack the ability to recognize their own incompetence.

Q6. Correct answer is A)

According to behavioral finance, overconfident individual investors cannot detect their own underperformance and generalize when thinking about their abilities. They believe that because they have been successful in one area of their life then they should be successful in investing as well.

 

 

 

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