CFA CFA level 3 CFA level 3 CFA level 3 CFA level 3 CFA volume 2 finquiz item set answers, study session 3, reading 7
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Reading 7
Behavioral Finance and Investment Processes
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CFA Level III Item-set - Solution
Study Session 3
June 2018
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Reading 7
Behavioral Finance and Investment Processes
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FinQuiz Level III 2018 – Item-sets Solution
Reading 7: Behavioral Finance and Investment Processes
1. Question ID: 17036
Correct Answer: B
Client B is an Independent Individualist since he enjoys investing and is subject to conservatism and
availability biases. Independent Individualists are most likely to be contrarian.
2. Question ID: 17037
Correct Answer: C
Client C is an Active Accumulator as is evident from his preference for high risk investments, quick
decision making and lack of self-control. The best approach to dealing with such clients is to take
control of the situation. Advisors should prove to them that they have the ability to make objective,
wise and long-term decisions.
3. Question ID: 17038
Correct Answer: C
Client A is a friendly follower. He wants to be in the latest, most popular investments without regard
to current market conditions and is subject to framing and availability biases. He is most likely
overestimating his risk tolerance. For Friendly Followers, regret aversion is an emotional bias with a
significant impact.
4. Question ID: 17039
Correct Answer: C
Client D places a great deal of emphasis on financial security and has gained most of his wealth
passively (through inheritance). He also has a low risk tolerance. Hence, the client is most likely a
passive preserver. Passive preservers would not respond well to educational discussions on portfolio
diversification and other quantitative aspects of investment decision making. Since most of their
biases are emotional, they respond better to ‘big picture’ advice.
5. Question ID: 17040
Correct Answer: B
Client E is most likely an Independent Individualist since he follows a growth investment style and
has medium risk tolerance. In addition, he is subject primarily to cognitive errors. Independent
Individualists are most vulnerable to overconfidence and self-attribution biases.
6. Question ID: 17041
Correct Answer: A
Price’s approach is incorrect. Grande’s IPS was developed seven years ago, and since then, Grande’s
circumstances have most likely changed. For e.g. he is older now and may not have the same risk and
return objectives as he had seven years ago. Hence, Grande’s BIT classification from his previous IPS
may not be an appropriate guide to use for dealing with him now.
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