CFA CFA Level 3 Question of the Week: Level 3 – Portfolio Management

Question of the Week: Level 3 – Portfolio Management

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

      • A. both confirmation bias and representative bias.
      • B. both confirmation bias and the illusion of control.
      • C. both representative bias and the illusion of control.
    • MarkMeldrum
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      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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