Analyze_This

I agree with you. I remember a q along those lines, I got it right but found it frustrating to answer. Probably a time when you just have to give the answer they want.

Here's how I approached it: I think that in either case, his understanding of risk is off, and thus he is more likely to concentrate in specific risks. Put another way, if a combo of stocks (R=15%) and (bonds R=5%) is used to get a 10% return, a mental accountant would put all his assets in an asset with a lower beta at 10%, which would have a much higher risk in a mkt correction than a bond/stock p'folio.