Chapter 7 EOC Q5

CFA Level III
#1

Statement 6

(from a client): “I follow a disciplined approach to investing. When a stock has appreciated by 15 percent, I sell it. Also, I sell a stock when its price has declined by 25 percent from my initial purchase price.”

The client of Statement 6 is most likely behaving consistently with:

  1. prospect theory.
  2. expected utility theory.
  3. behavioral portfolio theory.

C is correct. The client of Statement 6 is behaving consistently with behavioral portfolio theory. The client sells and holds a stock not because of the stock’s potential, but rather from a fear of the stock declining in value and gains dissipating and an aversion to realizing losses. Loss-aversion in prospect theory is discussed from a different perspective.

Can someone please explain the underlined sentence.

Thanks in advance

Haz

#2

Prospect theory is a theory mainly concerning loss aversion on the perspective of how things are framed.

BPT talks about loss aversion by describing peoples fear fir losing money causes them to take more risky plays a d “double down” on bets.

why not take a read at the prospect theory section?

#3

Thanks, will do.

Regards,

Haz