Reading 15: Managing Individual ....tor Portfolios －LOS e investor

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CFA Institute Area 3-5, 7, 12, 14-18: Portfolio Management
Session 4: Private Wealth Management
Reading 15: Managing Individual Investor Portfolios
LOS e: Explain the use of a personality typing questionnaire for identifying an investor's personality type.

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Gary Daly is a retired schoolteacher who invests most of his money in U.S. Treasury bonds and notes. He has often stated that in times of crisis, he feels that it is better to be safe than sorry. In terms of behavioral finance, Daly is exhibiting which personality type?

A) Methodical.

B) Cautious.

C) Individualist.

D) Spontaneous.

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Answer and Explanation

Dalys personality type is a cautious investor who has a strong desire for financial security. Daly is both risk and loss averse and would prefer very safe investments. As such, investors prefer to rely on their feelings to make important investment decisions.

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Which of the following personality types applies to investors who make investment decisions based on facts as opposed to their feelings or intuitions?

A) Methodical and cautious.

B) Cautious and individualist.

C) Spontaneous and methodical.

D) Methodical and individualist.

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Answer and Explanation

Methodical investors research markets, industries, and firms for potential investments and are constantly on a mission to improve their analytical decision-making skills. Individualists also research their investment opportunities and exhibit independent thought when making investment decisions. Individualists are very confident, and this makes them capable of questioning inconsistencies in either recommendations or conclusions made by others. Individualist investor types tend to be less risk averse than methodical investors.

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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) methodical investor.

B) cautious investor.

C) spontaneous investor.

D) individualist investor.

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Answer and Explanation

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.

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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) methodical investors.

B) cautious investors.

C) individualist investors.

D) spontaneous investors.

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Answer and Explanation

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.

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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) individualist investors.

B) methodical investors.

C) spontaneous investors.

D) cautious investors.

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Answer and Explanation

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