Question

Which of the following choices are accurate descriptions of the differences between Modern Portfolio Theory (MPT) and Behavioral Finance (BF)? Check all that apply.

a. Investors are risk-averse in MPT, and they are also risk-averse in BF.

b. With MPT new information is priced accordingly, and with BF new information is not immediately priced into the security.

c. With MPT investors seek to maximize utility while with BF investors seek to minimize regret.

d. With MPT investors act in their own self-interests, while with BF investors act in the best interest of the market investors as a whole

e. With MPT securities are valued rationally and with BF securities are valued heuristically.

f. With MPT investors possess perfect information and with BF investors possess imperfect information.

Answer 1

Answer:

The MPT or Modern Portfolio Theory expresses that the investors are objective. Because they own flawless data, keep their best interests in mind, look to expand utility, price information in like manner, and are considered as risk averse. Whereas Behavioural Finance accepts that investors will act heuristically rather than reasonably, keep their best interests in mind with inclination and mistakes, look to limit lament, not cost in new data promptly, and are loss-averse rather than risk-averse.

Hence, the correct statements are Statement B, Statement C, Statement E and Statement F.

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