Ethics in Investing

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Questions and Answers

What is the primary cause of a person's decisions being influenced by recent events, leading to a faulty assessment of risk?

Risk Profiling
Recency bias (correct)
Overconfidence bias
Behavioral tests

What type of bias occurs when an individual believes they are better than others at something, leading to a lack of proper assessment of risks?

Confirmation bias
Overconfidence bias (correct)
Recency bias
Loss aversion

What is the primary purpose of behavioral tests in investment decision making?

To determine the return on investment
To assess the risk tolerance of an investor
To create a diversified portfolio
To determine the personality of an investor (correct)

What is the potential risk of constructing a portfolio based on the interest of the investor rather than the investor's suitability?

Concentration of risk (D) Signup and view all the answers

What is the primary impact of a bear market on investor decision making?

Preference for safe assets (C) Signup and view all the answers

What is the primary reason for a person's saving and investment behavior being influenced by personal factors?

Personal factors such as drive and lifestyle (D) Signup and view all the answers

What is the result of a rise in prices of equities on investor decision making?

Increased investment in equities (B) Signup and view all the answers

What is the impact of ethical standards on an individual's investment behavior?

They are more likely to pay attention to their investments and be disciplined. (D) Signup and view all the answers

What is the primary purpose of risk profiling in investment decision making?

To assess the risk tolerance of an investor (C) Signup and view all the answers

What is the negative effect of behavioral biases on investment decisions?

It prevents investors from evaluating various risks related to investment avenues. (D) Signup and view all the answers

Why is it important to avoid behavioral biases in investment decisions?

Because they prevent investors from making informed decisions. (B) Signup and view all the answers

What is the role of a Registered Investment Advisor (RIA) or Mutual Fund Distributor (MFD) in investment decisions?

To help investors detach emotions from their investments. (B) Signup and view all the answers

What is the purpose of risk profiling in investment decisions?

To ascertain the risk appetite of the investor. (B) Signup and view all the answers

What are the three factors that need to be evaluated to ascertain the risk appetite of an investor?

The need to take risks, the ability to take risks, and the willingness to take risks. (B) Signup and view all the answers

What arises when an investor needs higher returns to reach their goals?

The need to take risks. (D) Signup and view all the answers

What is the role of a risk profiler in creating a risk profile of an investor?

To strike a balance between the need, ability, and willingness to take risks. (B) Signup and view all the answers

What is the importance of considering 'why' in investments?

To identify the purpose of investment (C) Signup and view all the answers

What is the common theme among the examples of Shalini, Rabindra, Surinder Singh, and Mrs. D'Souza?

They all have financial goals that require investment (B) Signup and view all the answers

What is the term used to describe the requirements of Shalini, Rabindra, Surinder Singh, and Mrs. D'Souza in the investment world?

Financial objectives (B) Signup and view all the answers

What is the primary concern for Rabindra in the given example?

Living a comfortable life after retirement (A) Signup and view all the answers

What is the motivation behind Mrs. D'Souza's investment decision?

To live a comfortable life after retirement (B) Signup and view all the answers

Why is understanding 'why' important in investments?

To create a financial plan that aligns with one's goals (A) Signup and view all the answers

What is the primary goal of Surinder Singh in the given example?

To buy a house (C) Signup and view all the answers

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Study Notes

Ethical Standards

Individuals with ethical principles tend to be more disciplined and attentive to their investments.
They follow norms, which helps in building long-term wealth.
Taking shortcuts can derail the investment process and set back existing efforts.

Risk Profiling

Risk profilers evaluate an investor's risk appetite to avoid selling mutual fund schemes with higher risk than they can handle.
Three factors are evaluated:
- The need to take risks (to reach investment goals).
- The ability to take risks (financial ability and investment horizon).
- The willingness to take risks (psychological capacity).

Biases

Biases can lead to making investment decisions based on recent events rather than analysis.
Examples of biases include:
- Recency bias (overestimating the importance of recent events).
- Overconfidence bias (overestimating one's abilities).

Investor Behavior

Behavior patterns are influenced by personal factors, such as being a spender, saver, or investor.
Behavioral tests can help determine an individual's personality type to guide investment decisions.
Investors' interests should align with their financial goals.

Financial Goals

Financial objectives are personal goals that require financial investments, such as:
- Shalini's education.
- Surinder Singh's buying a house.
- Mrs. D'Souza's retirement income.
- Rabindra's comfortable life in retirement.
Investing must start with a clear understanding of the purpose of investment (i.e., "why").
The "why" defines the financial goal, guiding investment decisions.

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