Q3. Many defined contribution plan participants tend to hold a large amount of assets in company stock relative to other asset classes. Which of the following characteristics of a DC plan participant’s portfolio best reflects the reason behind this tendency?

A)   Status quo bias

.B)  Purely selfish investment motives.

C)     Endorsement effect.

Q4. Leonard Busch is a employee of Matrix Technologies, and a participant in the Matrix Technologies defined contribution plan. The assets in the plan are the only investments he owns. Busch’s investment allocation is shown below.

Allocation         Investment Option

20%                  Yukon Large Cap Growth Fund

40%                  Matrix Technologies Company Stock

15%                  Yukon Intermediate Bond Fund

10%                  Yukon Money Market Fund

15%                  Yukon International Stock Fund

Which of the following factors is most likely to drive Busch’s investment allocation?

A)   Status quo bias.

B)   1/n diversification heuristics.

C)   Familiarity.

答案和详解如下：

Q3. Many defined contribution plan participants tend to hold a large amount of assets in company stock relative to other asset classes. Which of the following characteristics of a DC plan participant’s portfolio best reflects the reason behind this tendency?

A)   Status quo bias

.B)  Purely selfish investment motives.

C)     Endorsement effect.

Correct answer is C)

DC participants tend to hold excess stock of the company they work for due to familiarity and a perceived endorsement by management. The endorsement effect refers to the misconception that by offering an investment as an alternative, the sponsor is implicitly endorsing it as a good investment. Note that the status quo bias refers to a lack of action on the part of the participant. Also note that putting too much in company stock would be an example of an investor being “boundedly selfish” in that there does not seem to be a determination if the investment would be in the investor’s best interests.

Q4. Leonard Busch is a employee of Matrix Technologies, and a participant in the Matrix Technologies defined contribution plan. The assets in the plan are the only investments he owns. Busch’s investment allocation is shown below.

Allocation         Investment Option

20%                  Yukon Large Cap Growth Fund

40%                  Matrix Technologies Company Stock

15%                  Yukon Intermediate Bond Fund

10%                  Yukon Money Market Fund

15%                  Yukon International Stock Fund

Which of the following factors is most likely to drive Busch’s investment allocation?

A)   Status quo bias.

B)   1/n diversification heuristics.

C)   Familiarity.

Correct answer is C)

Looking at Busch’s allocation, he obviously has a disproportionate amount of Matrix Technologies company stock. DC participants tend to hold excess stock of the company they work for due to familiarity and a perceived endorsement by management. Familiarity refers to investors selecting stocks with which they are comfortable with or have a proximity to. If company stock is offered as an investment option in a defined contribution plan, participants may feel a sense of control or allegiance to the firm and hold more company stock than is sensible, which is an effect of familiarity. Note that Busch’s assets are not equally divided among investment options, which means the 1/n diversification heuristic would not seem to apply. Status quo bias is clearly not the best answer given the weight in company stock.

好

Thank you!