Question 3 in reading 7 (CFAI) asks which bias is most relevant bias in portfolio construction…? Investor has at least two of the listed biases in the answers (home and overconfidence). The answer is home bias.
Why is home biases more relevant than overconfidence in portfolio construction? (The possible explanation is because it was listed in the questionnaire but is this the only reason).
I think the home bias is more important for actually constructing a portfolio because adding international stock is something you can change. Her having overconfidence might not apply because she isn’t creating the portfolio, you are. If that makes sense? This whole section seems pretty open to interpretation.
Makes no sense. Overconfidence is, IMO harder to handle and with overconfident person is difficult to cooperate. At the other hand, person who has just home bias but she beliefs to her financial adviser makes this bias easier to mitigate. I know for this question.
IMO, the most important biases are those that deviate the portfolio from becoming mathematically optimum. Overconfidence is more related to bet and optimism which not necessarily implies an under-optimized portfolio (this could be related to active management). Home bias, in the other hand, can prevent to have optimum asset weightings in the portfolio mix (neglects diversification too).
It may be. Mean-Variance Portfolio and all biases are observed in relation to such portfolio.
It is clear answering these questions during the test is going to be interesting.