Psychological/behavioral patterns can have a significant influence on an investor’s decision making process. Statement 1 is incorrect – the role of a portfolio manager is not to eliminate the effect of these psychological patterns on decision making, but to know and understand the investor’s situation, and use these psychological characteristics when discussing risk and return objectives with the client. The client may need education, but the psychological characteristics a client has should be a key consideration when setting risk and return objectives. Statement 2 is correct. Asset segregation refers to focusing on individual assets instead of evaluating the asset’s impact on the portfolio. Asset segregation tends to lead to the investor taking on more risk than is necessary in their portfolio – the investor may dismiss a particular asset because “it is too risky” however, in a portfolio context, the asset would actually reduce the risk of the portfolio as a whole. |
