Q1. Typical individual investors tend not to understand the effects of correlation on their portfolio. Which of the following characteristics of a DC plan participant’s portfolio best reflects the attempt to derive benefits from the effects of correlation even though the participant does not understand those effects?

A)   Endorsement effect.

B)   1/n diversification heuristics.

C)   Status quo bias.

Q2. Steve Perlewitz, a retirement plan specialist for Mercantile Asset Advisors (MAA), is discussing the behavioral characteristics of individual investors in defined contribution retirement plans in an effort to educate MAA’s sales team as they sell MAA’s services. In his presentation, Perlewitz makes the following comments:

Comment 1:    An investor whose decisions are impacted by mental accounting are likely to hold on to losing investments too long, and sell winning investments too soon.  

Comment 2:    Since mental accounting tends to guide investors toward more conservative asset classes, the portfolio of an investor impacted by mental accounting will tend to be more conservative than that of an investor who is not, assuming similar return objectives.                            

Comment 3:    The 1/n diversification methodology used by many DC plan participants is an example of naïve diversification.      

Comment 4:     If a defined contribution plan investor has an appropriate allocation in their retirement plan, the same allocation should also apply to their other investment accounts.

After listening to Perlewitz’s presentation, sales team leader Vicki Bruning would be CORRECT to agree with:

A)   Comments 1, 2, and 4 only.

B)   Comments 2 and 3 only.

C)   Comment 3 only.

答案和详解如下：

Q1. Typical individual investors tend not to understand the effects of correlation on their portfolio. Which of the following characteristics of a DC plan participant’s portfolio best reflects the attempt to derive benefits from the effects of correlation even though the participant does not understand those effects?

A)   Endorsement effect.

B)   1/n diversification heuristics.

C)   Status quo bias.

Correct answer is B)         

Feeling that they should spread out their risk, but not knowing how leads to the 1/n diversification heuristic. Often times, participants will only have a rough understanding of the effects of correlation and diversification and will simply divide their assets equally over the investment options in the plan in an attempt diversify their portfolio.

Q2. Steve Perlewitz, a retirement plan specialist for Mercantile Asset Advisors (MAA), is discussing the behavioral characteristics of individual investors in defined contribution retirement plans in an effort to educate MAA’s sales team as they sell MAA’s services. In his presentation, Perlewitz makes the following comments:

Comment 1:    An investor whose decisions are impacted by mental accounting are likely to hold on to losing investments too long, and sell winning investments too soon.  

Comment 2:    Since mental accounting tends to guide investors toward more conservative asset classes, the portfolio of an investor impacted by mental accounting will tend to be more conservative than that of an investor who is not, assuming similar return objectives.                            

Comment 3:    The 1/n diversification methodology used by many DC plan participants is an example of naïve diversification.      

Comment 4:     If a defined contribution plan investor has an appropriate allocation in their retirement plan, the same allocation should also apply to their other investment accounts.

After listening to Perlewitz’s presentation, sales team leader Vicki Bruning would be CORRECT to agree with:

A)   Comments 1, 2, and 4 only.

B)   Comments 2 and 3 only.

C)   Comment 3 only.

Correct answer is C)

Perlewitz is only correct with respect to Comment 3. With 1/n diversification, where a DC plan participant divides his investment dollars equally across available investment options, diversification is by chance only and is not part of a total portfolio perspective. Such a diversification methodology is reflective of naïve diversification. The other comments are incorrect. An investor whose decisions are impacted by mental accounting will look at investments as separate, focusing on the risk of investments in isolation. This means that the investor dismisses the effects of correlation, thus leading to more risky portfolios than an investor who does consider correlation. Note that the disposition effect refers to holding on to losing investments too long and selling winners too soon. Finally, diversification from an efficient perspective may allocate investments in tax-deferred accounts (like a retirement plan) differently than investments in taxable accounts, while still focusing on the investor’s allocation as a whole.

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