CFA text 2012， Vol。1。 P90， it says： “The case that will require the most adjustment per asset class is emotional bias at high wealth level”， for my understanding， this should be adapt， thus require 10-15% difference with optimal allocation per asset class， why adapting need so many adjust， it should be adjusted or modulated less。 any idea？
P106，I think observation 3 ： concentration is caused by loss aversion， market neutral will not cause concentration（see answer explanation）， so why obersvation 3 is not chosen？
P154， Q3， it should choose overconfidence， as indicated in the text， why over-confidence is not correct？
you are right. when you are dealing with emotional bias, you will adapt to the client. Because you are not exerting enough control to your client’s emotions, you would allow wider corridor for the existing allocation to stray.
when you are dealing with cognitive biases, they can easily be fixed and your client is easier to persuade. therefore you set a narrower corridor with the asset mix.
Page 106
I am not sure
Page 154 Q3.
The question asks you what bias is “RELEVANT” when constructing the portfolio for Johnson. AKA, what bias should you place as priority to construct the portfolio for Johnson.
Because johnson specifically states that he wants only domestic investments, you must keep this bias in mind.
As for overconfidence bias, it only matters from a investor’s point of view.
you are right. when you are dealing with emotional bias, you will adapt to the client. Because you are not exerting enough control to your client’s emotions, you would allow wider corridor for the existing allocation to stray.
when you are dealing with cognitive biases, they can easily be fixed and your client is easier to persuade. therefore you set a narrower corridor with the asset mix.
Text says, Cognitive errors can be moderated & emotional biases can be only be adapted.
There are two extreme cases & guideline asset allocation changes:
Client exhibiting a) emotional biases b) high wealth level & low standard of living risk - Adapt
his behaviorally modified portfolio will be a stronger asset allocation change. As in, between 10-15 (+ - ) from the proposed asset allocation resulting from traditional MVO. It has the stronger allocation change coz of his high wealth which allows him flexibility.
Client exhibiting a) coginitive errors b) Low wealth level & high standard of living risk - Moderate
allocation change is only 0-3% max per asset class.
Apart from it there are two Moderate & Adapt possibilities…Really no grip on the matter
