30 RELATE TO ROBERT MCGRIFF. ROBERT MCGRIFF AND MARSHALL...

Questions 25-30 relate to Robert McGriff.

Robert McGriff and Marshall Hemp are eating lunch at their favorite downtown spot. The

restaurant is within a few blocks of their law office and across the street from a large FDIC-

insured bank that they pass by almost every day. McGriff mentions that his wife recently inherited

$250,000 and they want to "park" it somewhere until they decide what to do with it. They want to

protect the cash and be able to access it quickly once they make their decision.

Pointing across the street, Hemp suggests to McGriff that they simply deposit the money in a

checking account in the bank. "A checking account there would fill all your short term needs for

the cash. The deposit would be totally insured, you'd make a bit of interest on it, and you could

simply write a check when you need it." When they finish eating, McGriff contacts his wife who

opens the checking account that afternoon.

About a year later, well after McGriff and his wife have closed the checking account and invested

the money in stocks and bonds, McGriff meets with his advisor, Jean Little. Little complains

about McGriff's tendency to want to sell stocks that have experienced a bit of a run up but hold

onto stocks that have experienced declines. McGriff's reply is that he wants to grab the profits on

those stocks before they disappear, but he has confidence that the others will recover. In addition

to these tendencies Little has noticed that the McGriffs, especially Robert, tend to be difficult to

deal with when new market or company information is released. Little has difficulty even getting

Robert to consider the implications of the information. "It's probably not worth going to all that

trouble to interpret the information, Jean!"

Another year has passed, and Robert McGriff has assumed almost total control of the McGriffs

portfolio. Little has almost given up on advising him, although she still meets with him regularly

and tries to explain fundamental portfolio theory to him. In spite of Little's efforts, McGriff makes

his own investment decisions, which in most cases turn out sub-optimal at best. In spite of the

results, McGriff seems to always be able to find evidence that his decisions are correct,

sometimes seeming to deliberately ignore evidence to the contrary. Partly due to his ever-

increasing confidence, he is now quick to interpret new information and adjust his portfolio in

response, even when the amount of information he has is limited. In addition he is usually

reluctant to change his decisions based on Little's suggestions, and has frequently even blamed

poor performance on Little.

In addition to the investment portfolio that he and his wife own, Robert McGriff participates in a

401(k) defined contribution plan administered by his employer. When he started his 401(k), the

plan offered 15 equity and 10 fixed income mutual funds as well as several money market funds.

For various reasons, McGriff almost immediately eliminated 5 of the equity funds, 3 of the bond

funds, and all of the money market funds. He then allocated almost evenly across the remaining

mutual funds, over-allocating only to the fund that contains his employer's stock. As he devotes

so much attention to his investment portfolio, McGriff effectively ignores his 401(k) portfolio.

...

By following Hemp's advice and depositing his wife's inheritance into the insured, interest-

bearing checking account, McGriff is most likely exhibiting which of the following?

A) Irrational behavior.

B) Rational behavioral.

C) Bounded rationality.

Question #26 of 60

McGriff's tendency to sell stocks that have appreciated in value but hold others that have fallen

is least likely to indicate:

A) loss aversion.

B) bounded rationality.

C) the disposition effect.

Question #27 of 60

Which of the following is least likely to explain McGriff's statement, "It's probably not worth going

to all that trouble to interpret the information, Jean!" McGriff:

A) is subject to confirmation bias.

B) feels the cognitive cost is too great.

C) fails to properly utilize a Bayesian framework to evaluate information.

Question #28 of 60

After Robert McGriff has assumed almost total control of the McGriff's portfolio, his management

techniques would most likely be classified as which of the following behavioral investor types?

A) Friendly follower.

B) Active accumulator.

C) Independent individualist.

Question #29 of 60

In consideration of McGriff's behavioral investor type, Little would probably be hesitant to:

A) present educational material to McGriff on a regular basis.

B) present McGriff's bad investments as evidence of a need to consult with Little.

C) use statistics and a periodic table of investments to help influence McGriff's decisions.

Question #30 of 60

There are several behavioral biases routinely exhibited by participants in defined contribution

plans. Which of the following statements is least likely to be true about McGriff's behavior with

respect to his 401(k) portfolio?

A) His employer's stock is held by one of the alternative funds offered in the plan and he

intentionally over-weighted that fund. This could indicate over-confidence and familiarity bias.

B) McGriff originally set up the portfolio and contribution allocations and has since ignored them.

He is subject to status quo bias because he has done nothing to evaluate the way funds are

deposited into the fund or the portfolio allocation.

C) 1/n diversification is when investors allocate evenly across all the alternative funds offered by a

defined contribution plan. McGriff is technically not subject to 1/n diversification bias because he

only allocated evenly across remaining funds after eliminating several of them.

Question #31 of 60