Behavioral Finance CFAI webesite question 21

CFA Level III Portfolio Management
#1

Hi all

so the question is as follows:

Owen and Yang meet with Callie Steven, an upper level executive with AutoPay, a small but fast-growing privately held company. She has been employed with AutoPay for more than 15 years, and as a result her holdings in AutoPay are estimated to be more than 30% of her total portfolio. She believes that over the next several years AutoPay will put together an initial public offering, resulting in a huge windfall. She states that she has a significant portion of her portfolio in short-term bonds and money market funds to offset the risk of her AutoPay shares. Owen points out to Steven that her current portfolio is subject to mental accounting, is not constructed in layers, and does not take into consideration covariance between assets.

Q. Is Owen’s comment regarding Steven’s current portfolio correct?

  1. Yes.
  2. No, he is incorrect with regard to portfolio construction.
  3. No, he incorrect with regard to covariance between assets

for me this portfolio is lacking diversity but is not built in layers (whereby each layer covers one level of the clients needs (core, luxury…).

on the other hand, the Client is taking into consideration the covariance as she is speaking about the reduction of risk.

so my answer was 3 while the CFAI answer was 2

can anybody help please?

thanks

#2

He’s saying she’s exhibiting mental a/c bias and then saying its not constructed in layers. Answer B.

#3

so the first element about the mental bias is a fact…

cause the way the question is turned, i thought that even that one is one of his conclusions that we can agree or disagree on…

many thanks