kim226

Investor behavior and psychology allow classification according to risk preferences. The particular technique associated with this classification exercise is termed personality:

A) assessing.

B) typing.

C) testing.

---

The particular technique is termed personality typing. Personality typing is an attempt to help both the investor and manager get a better understanding of an investor’s risk tolerance characteristics. Although no classification can accurately describe all investors, personality typing does give an indication to risk tolerance.

kim226

Behavioral finance models of asset pricing take into account economic considerations and add:

A) individual selections.

B) security specific characteristics.

C) personal preferences.

---

In a world that accounts for behavioral factors, personal preferences are added to asset pricing models. Not only do basic economic relationships impact security prices but so do personal preferences. Investors’ likes and dislikes enter the pricing function.

kim226

Which of the following statements about appropriate investment planning is CORRECT?

A) Individual investment planning could include the consultation of counsel.

B) An appropriate investment objective for a typical 23-year-old investor is a low-risk strategy, such as capital preservation.

C) It is not a good idea to get too specific when constructing an investment policy statement.

---

Consultation with tax counsel could be recommended for complicated tax situations and an estate counsel for estate issues. A 23-year-old investor should be more concerned about capital appreciation, not preservation. Investment policy statements are more useful the more specific they are.

kim226

Investor psychology indicates investors will form portfolios via which method?

A) Pyramiding.

B) Triangulating.

C) Integrating.

---

Pyramiding is the concept applied to investor portfolio formation in which portfolios are created by matching layers of assets to specific goals. Each layer of assets is not particularly evaluated within an overall portfolio context.

kim226

Most of the short questionnaires used by investment professionals to determine client risk tolerance levels consist of:

A) comments about investment scenarios.

B) comments about non-investment scenarios.

C) questions that focus on how the individual would deal with the professional if he/she lost their money.

---

The questions tend to focus on self-evaluative statements and comments on different non-investment scenarios.

kim226

Which of the following statements about personality typing for individual investors is CORRECT?

A) An ad hoc approach to personality typing is to administer a short questionnaire.

B) It is difficult to render precise categorizations of broad groups of investors.

C) Subjective assessments of investors are easy to standardize.

---

As opposed to precise categories, broad classifications are easy to derive. The more subjective the assessment, the more difficult to standardize. An ad hoc approach would be a less formal approach based on the investment professional’s interview with investors.

kim226

Which of the following statements about risk and decision-making styles would least likely appear in a personality typing questionnaire?

A) I do not like contact sports, like football.

B) I typically lose sleep when the market is down.

C) My favorite subject in school was mathematics.

---

Most investor questionnaires focus on self-evaluative statements and comments on different non-investment scenarios.

kim226

The results of a personality typing questionnaire can be used to classify investors according to risk tolerance and how decisions are made. The classification that represents the most risk averse investor would be a(an):

A) cautious investor.

B) methodical investor.

C) spontaneous investor.

---

Cautious investors are those investors most averse to portfolio losses. These investors are the most risk averse investor classification and prefer assets with low probability of loss.

kim226

The results of a personality typing questionnaire can be used to classify investors according to risk tolerance and how decisions are made. The classification that represents investors most independent in their decision making is:

A) methodical investors.

B) individualist investors.

C) spontaneous investors.

---

Individualist investors represent the most independent investor classification. These investors are confident in their decisions and are not deterred from making risky investment decisions.

kim226

The results of a personality typing questionnaire can be used to classify investors according to risk tolerance and how decisions are made. The classification that represents investors suffering the highest trading costs is:

A) spontaneous investors.

B) methodical investors.

C) individualist investors.

---

Spontaneous investors are those investors desiring to have the latest, hottest investment idea in their portfolio. Frequent portfolio adjustments and high turnover are characteristics of investment decisions made by spontaneous investors. High trading costs usually negate returns generated by the hot ideas.