Issues: Reading 5 practice question

CFA Level III Portfolio Management
#1

Hi, guys. I am reading the textbook about behavioral finance. In practice question of reading 5, I do not agree with the solutions of questions 6.

[question removed by moderator]

My understanding: I agree that the statement IS talking about mean-variance stuffs BUT it is a subjective claim from a client, NOT from a systematically statistical analysis. The client’s saying, “willing to take a small chance”, means personal experience or emotional judges like 8% loss is his bottom line. I think it should be related to layers and behavioral portfolio theory that allocates funds based on mental accounting.

Please give some advice.

(Institute 45)

Institute, CFA. 2018 CFA Program Level III Volume 2 Behavioral Finance, Individual Investors, and Institutional Investors. CFA Institute, 07/2017. VitalBook file.

#2

He does not talk about different portfolios - 1 single portfolio.

Where are the layers you are talking about … when you say / talk about your answer ?

#3

First of all, thank you for the response.

So you are saying that 1 single portfolio cannot have layers?

I don’t think so. Like the example 3 in section 4.3.3. of reading 5, one portfolio can contains 3 layers or more if you wish. I think the statement is somehow much closer to the example in the textbook.

Please share your more opinion. Thanks!

#4

I am not saying that …

Portfolio may have layers - but he is looking at the PORTFOLIO as a whole when he says 8% is his target Return objective. (Not a particular Layer’s)

"Expected return – 1.645 × Expected standard deviation ≥ –8%.”

FOR THE FULL PORTFOLIO not for a Layer within the Portfolio.

#5

I agree with cpk123. mental accounting breaks the portfolio into layers and manages the portfolio as individual layers versus a total portfolio / total return view point. As an example, living expenses could be one layer, college education another, gambling a third, vacations a forth, and so on. a mental accounting bias would view each layer independently and have different risk/return characteristics for each.

#6

Thank you cpk123.

Now I have found the correct angle to understand this statement.

Appreciate it so much!