Question

In the “Vanguard Investor Questionnaire” we studied in the class, a higher overall score of 65 will have an asset allocation recommendation of 80% in stocks and 20% in bonds, and a low score of 25 will have a recommendation of 20% in stocks and 80% in bonds. Answer the two questions. (5 points each) (i) What does the score measure?

(ii) We explained that the type of recommendation in the questionnaire is inconsistent with standard finance theory. Why?

Answer 1

A. This score is representing the risk aversion and risk loving nature of investor because when there is a higher score, it is meaning that the investor is more risk loving as he is having a higher proportion of stocks in his portfolio and lower proportion of Bond and vice-versa.

B. This type of questionnaire is inconsistent with a standard finance theory because presence of stocks and bonds can not only be determining the performance of an individual because it is also dependent upon other factors so it is just not about allocation of the portfolio into bonds and stocks but it is also related to distribution of these portfolios in respect to the risk and returned expected so it is not in accordance with the standard Finance theory.