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?

    <p>Concentration of risk</p> Signup and view all the answers

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

    <p>Preference for safe assets</p> Signup and view all the answers

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

    <p>Personal factors such as drive and lifestyle</p> Signup and view all the answers

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

    <p>Increased investment in equities</p> Signup and view all the answers

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

    <p>They are more likely to pay attention to their investments and be disciplined.</p> Signup and view all the answers

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

    <p>To assess the risk tolerance of an investor</p> Signup and view all the answers

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

    <p>It prevents investors from evaluating various risks related to investment avenues.</p> Signup and view all the answers

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

    <p>Because they prevent investors from making informed decisions.</p> Signup and view all the answers

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

    <p>To help investors detach emotions from their investments.</p> Signup and view all the answers

    What is the purpose of risk profiling in investment decisions?

    <p>To ascertain the risk appetite of the investor.</p> Signup and view all the answers

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

    <p>The need to take risks, the ability to take risks, and the willingness to take risks.</p> Signup and view all the answers

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

    <p>The need to take risks.</p> Signup and view all the answers

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

    <p>To strike a balance between the need, ability, and willingness to take risks.</p> Signup and view all the answers

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

    <p>To identify the purpose of investment</p> Signup and view all the answers

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

    <p>They all have financial goals that require investment</p> 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?

    <p>Financial objectives</p> Signup and view all the answers

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

    <p>Living a comfortable life after retirement</p> Signup and view all the answers

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

    <p>To live a comfortable life after retirement</p> Signup and view all the answers

    Why is understanding 'why' important in investments?

    <p>To create a financial plan that aligns with one's goals</p> Signup and view all the answers

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

    <p>To buy a house</p> Signup and view all the answers

    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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    Description

    Explore the impact of ethical principles on investment behaviors, including discipline and long-term wealth building. Learn how ethics can help individuals stay focused and avoid shortcuts.

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