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

Murphy started his career as a portfolio manager around eight years ago, and has, over the years, increased the application of behavioral finance to portfolio construction and investment

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FinQuiz.com

CFA Level III Item-set - Question

Study Session 3 June 2018

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FinQuiz Item-set ID: 17035

Questions 1(17036) through 6(17041)

Sean Murphy Case Scenario

Sean Murphy is the chief portfolio manager at Funds Management Association (FUMA), a U.S based money management firm Murphy started his career as a portfolio manager around eight years ago, and has, over the years, increased the application of behavioral finance to portfolio construction and investment policy development During an annual review of some of his private wealth clients, Murphy discovered the following details:

Client A: This client is a 40-year-old marketing specialist He often wants to be in the latest,

most popular investments without regard to current market conditions or the suitability of the investment to his long-term goals His IPS states that he has a low to medium risk tolerance A behavioral analysis questionnaire has identified the presence of framing and availability biases

Client B: This client is a 35-year-old HR manager at a multinational firm An analysis of

her behavioral traits has shown the tendency of maintaining an opinion made at a time of making an investment, even when market conditions change The client often resists following a financial plan and really enjoys investing

She is, however, subject to availability bias

Client C: The client’s portfolio has high turnover, which often results in inferior investment

performance He frequently invests in higher risk investments that his friends suggest, and is quick in making investment decisions A behavioral analysis indicates the lack of self-control in the client as is evident from his excessive spending needs

Client D: This client places a great deal of emphasis on financial security and preservation

of wealth Most of his accumulated wealth was gained through inheritance, and the client has been very careful not to take excessive risks with his funds

Client E: The client has a growth investment style and medium risk tolerance Most of the

biases identified in this client are cognitive in nature

After completing the review process, Murphy went out for lunch with one of his colleagues, Colin Price During their conversation over lunch, Price mentioned the portfolio of Rich Grande,

a client that had recently hired FUMA as his investment advisor Grande had followed a proper investment plan developed by his previous portfolio manager for about ten years However, for the past seven years, Grande had no portfolio manager and hence, no organized investment plan When Grande joined the firm, Price checked his previous IPS for important details When Price found out that the IPS described Grande as an active accumulator, he decided to deal with him by

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taking control of the investment situation and setting the terms of their advisory engagement himself

FinQuiz Question ID: 17036

1 Which one of Murphy’s clients is most likely to be contrarian?

A Client A

B Client B

C Client C

2 When dealing with Client C, Murphy should most likely:

A let the client dictate the terms of the advisory engagement

B provide data-backed support for all of his recommendations

C prove to the client that he has an ability to make objective, long-term decisions

3 Which of the following emotional biases should Murphy be most concerned with when

dealing with Client A?

A Endowment

B Self-attribution

C Regret-aversion

4 Which of the following is least likely to be true for Client D?

A The client may exhibit anchoring and adjustment and mental accounting biases

B The client would place a great deal of emphasis on short-term performance

C The best approach to dealing with the client would be to have regular educational

discussions with him on portfolio diversification

5 With respect to Client E, which of the following emotional biases would be most prevalent?

A Self-control

B Overconfidence

C Regret-aversion

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6 Price’s approach to dealing with Grande is most likely:

A incorrect

B partly correct, because active accumulators are best handled by taking control of the situation but not by dictating the terms of the engagement

C correct, because active accumulators are best handled by taking control of the situation and by dictating the terms of the engagement

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