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Question of the Week: Level 3 - Portfolio Management

Inadequate portfolio diversification and holding a concentrated position in an employer’s stock is the result of:

Question of the Week: Level 3 - Portfolio Management 8 votes

A. both confirmation bias and representative bias.
12% 1 vote
B. both confirmation bias and the illusion of control.
37% 3 votes
C. both representative bias and the illusion of control.
50% 4 votes

Comments

  • MarkMeldrumMarkMeldrum OntarioPosts: 28 Associate
    The correct answer is Option B:

    The illusion of control can lead investors to inadequately diversify portfolios.  Researchers have found that some investors prefer to invest in companies that they may feel they have some control over, like the companies they work for, leading them to hold concentrated positions.

    Confirmation bias may also lead to under-diversify portfolio and/or holding a disproportionate amount of their investment assets in their employing company’s stock because they believe in their company and are convinced of its favorable prospects.

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