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.

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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.

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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.

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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.

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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.

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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.

kim226

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) Spontaneous.

B) Methodical.

C) Cautious.

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Daly’s 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.

kim226

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) Spontaneous and methodical.

C) Methodical and individualist.

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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.

kim226

Which of the following statements concerning an investor’s policy statement is least accurate? The investment policy statement:

A) should represent the long-term objectives of the investor.

B) provides guidance to the investment advisor regarding issues of appropriateness of decisions.

C) determines the client's ability and willingness to take risk.

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The investment policy statement does not determine the client’s ability and willingness to take risk. These are a function of the client’s situation and personality type. The IPS should, however, discuss the client’s willingness and ability to take risk.

kim226

Clients can benefit from an investment policy statement which:

A) provides for legal recourse due to portfolio underperformance.

B) dictates how to spend extra liquidity.

C) provides long-term investment discipline deterring short-term knee-jerk portfolio adjustments.

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The purpose of an investment policy statement is to provide long-term discipline in investment decision making. The investment policy statement protects against short-term portfolio adjustments resulting from investor panic or overconfidence.

kim226

An investment policy statement does NOT provide which of the following?

A) Guaranteed investment returns.

B) Long-term investment decision making guidelines.

C) Weighting ranges for asset allocation.

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An investment policy statement does not provide guaranteed investment results.