CFA CFA level 3 CFA level 3 CFA level 3 CFA level 3 CFA volume 2 finquiz item set answers, study session 3, reading 7

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Reading 7 Behavioral Finance and Investment Processes FinQuiz.com

FinQuiz.com

CFA Level III Item-set - Solution

Study Session 3 June 2018

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Reading 7 Behavioral Finance and Investment Processes FinQuiz.com

FinQuiz Level III 2018 – Item-sets Solution

Reading 7: Behavioral Finance and Investment Processes

Correct Answer: B

Client B is an Independent Individualist since he enjoys investing and is subject to conservatism and availability biases Independent Individualists are most likely to be contrarian

Correct Answer: C

Client C is an Active Accumulator as is evident from his preference for high risk investments, quick decision making and lack of self-control The best approach to dealing with such clients is to take control of the situation Advisors should prove to them that they have the ability to make objective, wise and long-term decisions

Client A is a friendly follower He wants to be in the latest, most popular investments without regard

to current market conditions and is subject to framing and availability biases He is most likely

overestimating his risk tolerance For Friendly Followers, regret aversion is an emotional bias with a significant impact

Client D places a great deal of emphasis on financial security and has gained most of his wealth passively (through inheritance) He also has a low risk tolerance Hence, the client is most likely a passive preserver Passive preservers would not respond well to educational discussions on portfolio diversification and other quantitative aspects of investment decision making Since most of their biases are emotional, they respond better to ‘big picture’ advice

Correct Answer: B

Client E is most likely an Independent Individualist since he follows a growth investment style and has medium risk tolerance In addition, he is subject primarily to cognitive errors Independent

Individualists are most vulnerable to overconfidence and self-attribution biases

Correct Answer: A

Price’s approach is incorrect Grande’s IPS was developed seven years ago, and since then, Grande’s circumstances have most likely changed For e.g he is older now and may not have the same risk and return objectives as he had seven years ago Hence, Grande’s BIT classification from his previous IPS may not be an appropriate guide to use for dealing with him now

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