{"id":27429,"date":"2023-06-08T06:31:01","date_gmt":"2023-06-08T06:31:01","guid":{"rendered":"https:\/\/analystprep.com\/study-notes\/?p=27429"},"modified":"2023-06-10T16:41:26","modified_gmt":"2023-06-10T16:41:26","slug":"application-of-behavioral-finance-to-portfolio-construction","status":"publish","type":"post","link":"https:\/\/analystprep.com\/study-notes\/cfa-level-iii\/application-of-behavioral-finance-to-portfolio-construction\/","title":{"rendered":"Application of Behavioral Finance to Portfolio Construction"},"content":{"rendered":"

Behavioral portfolios differ from traditional mean-variance portfolios. Rather than seek the optimal combination of assets that produces the highest risk-adjusted returns and utility to the investor, behavioral portfolios are generally structured in layers<\/em>. Even though these portfolios are not technically optimal, they can be useful in constructing portfolios that:<\/p>\n

    \n
  1. Clients easily understand.<\/li>\n
  2. Encourage the use of target date funds over lesser alternatives.<\/li>\n
  3. Discuss client objectives and their ranking.<\/li>\n<\/ol>\n

    Portfolio layers are based upon the bias of mental accounting, and they do not achieve economically optimal portfolios. The inspiration behind portfolio layers is the need to build a portfolio that is separated by aspirations. A pyramid is often used to represent the process. The following diagram compares a mean-variance portfolio (left) with a behavioral portfolio (right).<\/p>\n

    \"\"<\/p>\n

    \n

    Question<\/h2>\n

    Which of the following assets would most appropriately<\/em> be placed in the aspirational layer of a behavioral portfolio?<\/p>\n

      \n
    1. Venture capital seed fund.<\/li>\n
    2. Off-the-run treasury bills.<\/li>\n
    3. Consumer staples ETF.<\/li>\n<\/ol>\n

      Solution<\/h4>\n

      The correct answer is A<\/strong>:<\/p>\n

      The aspirational layer represents the loftiest goals and dreams of a client. An example might be to set up a charitable foundation in the investor’s name. While exciting and high-minded, this goal likely comes after the client meets their basic needs, such as shelter and food, and more common mid-range goals, such as sending children to college or retiring comfortably.<\/p>\n

      Since it is less important, this layer should contain the riskiest assets, which are also likely to produce the highest returns.<\/p>\n

      B and C are incorrect<\/strong>: Defensive stocks (Consumer staples ETF) and treasury bills are more conservative investments than venture capital funds.<\/p>\n<\/blockquote>\n

      Reading 2: Behavioral Finance and Investment Processes<\/p>\n

      Los 2 (d) Explain how behavioral finance can be applied to the process of portfolio construction<\/em><\/p>\n","protected":false},"excerpt":{"rendered":"

      Behavioral portfolios differ from traditional mean-variance portfolios. Rather than seek the optimal combination of assets that produces the highest risk-adjusted returns and utility to the investor, behavioral portfolios are generally structured in layers. Even though these portfolios are not technically…<\/p>\n","protected":false},"author":4,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[571],"tags":[],"class_list":["post-27429","post","type-post","status-publish","format-standard","hentry","category-cfa-level-iii","blog-post","no-post-thumbnail","animate"],"acf":[],"yoast_head":"\nApplication of Behavioral Finance to Portfolio Construction - CFA, FRM, and Actuarial Exams Study Notes<\/title>\n<meta name=\"description\" content=\"Behavioral portfolios adopt layered approach in their structure and composition. They do not aim to achieve the ideal blend of assets that maximizes risk-adjusted returns and investor satisfaction.\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/analystprep.com\/study-notes\/cfa-level-iii\/application-of-behavioral-finance-to-portfolio-construction\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Application of Behavioral Finance to Portfolio Construction - CFA, FRM, and Actuarial Exams Study Notes\" \/>\n<meta property=\"og:description\" content=\"Behavioral portfolios adopt layered approach in their structure and composition. They do not aim to achieve the ideal blend of assets that maximizes risk-adjusted returns and investor satisfaction.\" \/>\n<meta property=\"og:url\" content=\"https:\/\/analystprep.com\/study-notes\/cfa-level-iii\/application-of-behavioral-finance-to-portfolio-construction\/\" \/>\n<meta property=\"og:site_name\" content=\"CFA, FRM, and Actuarial Exams Study Notes\" \/>\n<meta property=\"article:published_time\" content=\"2023-06-08T06:31:01+00:00\" \/>\n<meta property=\"article:modified_time\" content=\"2023-06-10T16:41:26+00:00\" \/>\n<meta property=\"og:image\" content=\"https:\/\/analystprep.com\/study-notes\/wp-content\/uploads\/2023\/06\/Img_2-1-300x172.jpg\" \/>\n<meta name=\"author\" content=\"AnalystPrep Team\" \/>\n<meta name=\"twitter:card\" content=\"summary_large_image\" \/>\n<meta name=\"twitter:label1\" content=\"Written by\" \/>\n\t<meta name=\"twitter:data1\" content=\"AnalystPrep Team\" \/>\n\t<meta name=\"twitter:label2\" content=\"Est. reading time\" \/>\n\t<meta name=\"twitter:data2\" content=\"2 minutes\" \/>\n<script type=\"application\/ld+json\" class=\"yoast-schema-graph\">{\"@context\":\"https:\\\/\\\/schema.org\",\"@graph\":[{\"@type\":\"Article\",\"@id\":\"https:\\\/\\\/analystprep.com\\\/study-notes\\\/cfa-level-iii\\\/application-of-behavioral-finance-to-portfolio-construction\\\/#article\",\"isPartOf\":{\"@id\":\"https:\\\/\\\/analystprep.com\\\/study-notes\\\/cfa-level-iii\\\/application-of-behavioral-finance-to-portfolio-construction\\\/\"},\"author\":{\"name\":\"AnalystPrep Team\",\"@id\":\"https:\\\/\\\/analystprep.com\\\/study-notes\\\/#\\\/schema\\\/person\\\/ed0c939f3f12a02c5a193708b713d89e\"},\"headline\":\"Application of Behavioral Finance to Portfolio Construction\",\"datePublished\":\"2023-06-08T06:31:01+00:00\",\"dateModified\":\"2023-06-10T16:41:26+00:00\",\"mainEntityOfPage\":{\"@id\":\"https:\\\/\\\/analystprep.com\\\/study-notes\\\/cfa-level-iii\\\/application-of-behavioral-finance-to-portfolio-construction\\\/\"},\"wordCount\":291,\"image\":{\"@id\":\"https:\\\/\\\/analystprep.com\\\/study-notes\\\/cfa-level-iii\\\/application-of-behavioral-finance-to-portfolio-construction\\\/#primaryimage\"},\"thumbnailUrl\":\"https:\\\/\\\/analystprep.com\\\/study-notes\\\/wp-content\\\/uploads\\\/2023\\\/06\\\/Img_2-1-300x172.jpg\",\"articleSection\":[\"Level III of the CFA\u00ae Program\"],\"inLanguage\":\"en-US\"},{\"@type\":\"WebPage\",\"@id\":\"https:\\\/\\\/analystprep.com\\\/study-notes\\\/cfa-level-iii\\\/application-of-behavioral-finance-to-portfolio-construction\\\/\",\"url\":\"https:\\\/\\\/analystprep.com\\\/study-notes\\\/cfa-level-iii\\\/application-of-behavioral-finance-to-portfolio-construction\\\/\",\"name\":\"Application of Behavioral Finance to Portfolio Construction - CFA, FRM, and Actuarial Exams Study Notes\",\"isPartOf\":{\"@id\":\"https:\\\/\\\/analystprep.com\\\/study-notes\\\/#website\"},\"primaryImageOfPage\":{\"@id\":\"https:\\\/\\\/analystprep.com\\\/study-notes\\\/cfa-level-iii\\\/application-of-behavioral-finance-to-portfolio-construction\\\/#primaryimage\"},\"image\":{\"@id\":\"https:\\\/\\\/analystprep.com\\\/study-notes\\\/cfa-level-iii\\\/application-of-behavioral-finance-to-portfolio-construction\\\/#primaryimage\"},\"thumbnailUrl\":\"https:\\\/\\\/analystprep.com\\\/study-notes\\\/wp-content\\\/uploads\\\/2023\\\/06\\\/Img_2-1-300x172.jpg\",\"datePublished\":\"2023-06-08T06:31:01+00:00\",\"dateModified\":\"2023-06-10T16:41:26+00:00\",\"author\":{\"@id\":\"https:\\\/\\\/analystprep.com\\\/study-notes\\\/#\\\/schema\\\/person\\\/ed0c939f3f12a02c5a193708b713d89e\"},\"description\":\"Behavioral portfolios adopt layered approach in their structure and composition. They do not aim to achieve the ideal blend of assets that maximizes risk-adjusted returns and investor satisfaction.\",\"breadcrumb\":{\"@id\":\"https:\\\/\\\/analystprep.com\\\/study-notes\\\/cfa-level-iii\\\/application-of-behavioral-finance-to-portfolio-construction\\\/#breadcrumb\"},\"inLanguage\":\"en-US\",\"potentialAction\":[{\"@type\":\"ReadAction\",\"target\":[\"https:\\\/\\\/analystprep.com\\\/study-notes\\\/cfa-level-iii\\\/application-of-behavioral-finance-to-portfolio-construction\\\/\"]}]},{\"@type\":\"ImageObject\",\"inLanguage\":\"en-US\",\"@id\":\"https:\\\/\\\/analystprep.com\\\/study-notes\\\/cfa-level-iii\\\/application-of-behavioral-finance-to-portfolio-construction\\\/#primaryimage\",\"url\":\"https:\\\/\\\/analystprep.com\\\/study-notes\\\/wp-content\\\/uploads\\\/2023\\\/06\\\/Img_2-1.jpg\",\"contentUrl\":\"https:\\\/\\\/analystprep.com\\\/study-notes\\\/wp-content\\\/uploads\\\/2023\\\/06\\\/Img_2-1.jpg\",\"width\":1590,\"height\":911},{\"@type\":\"BreadcrumbList\",\"@id\":\"https:\\\/\\\/analystprep.com\\\/study-notes\\\/cfa-level-iii\\\/application-of-behavioral-finance-to-portfolio-construction\\\/#breadcrumb\",\"itemListElement\":[{\"@type\":\"ListItem\",\"position\":1,\"name\":\"Home\",\"item\":\"https:\\\/\\\/analystprep.com\\\/study-notes\\\/\"},{\"@type\":\"ListItem\",\"position\":2,\"name\":\"Application of Behavioral Finance to Portfolio Construction\"}]},{\"@type\":\"WebSite\",\"@id\":\"https:\\\/\\\/analystprep.com\\\/study-notes\\\/#website\",\"url\":\"https:\\\/\\\/analystprep.com\\\/study-notes\\\/\",\"name\":\"CFA, FRM, and Actuarial Exams Study Notes\",\"description\":\"Question Bank and Study Notes for the CFA, FRM, and Actuarial exams\",\"potentialAction\":[{\"@type\":\"SearchAction\",\"target\":{\"@type\":\"EntryPoint\",\"urlTemplate\":\"https:\\\/\\\/analystprep.com\\\/study-notes\\\/?s={search_term_string}\"},\"query-input\":{\"@type\":\"PropertyValueSpecification\",\"valueRequired\":true,\"valueName\":\"search_term_string\"}}],\"inLanguage\":\"en-US\"},{\"@type\":\"Person\",\"@id\":\"https:\\\/\\\/analystprep.com\\\/study-notes\\\/#\\\/schema\\\/person\\\/ed0c939f3f12a02c5a193708b713d89e\",\"name\":\"AnalystPrep Team\",\"image\":{\"@type\":\"ImageObject\",\"inLanguage\":\"en-US\",\"@id\":\"https:\\\/\\\/secure.gravatar.com\\\/avatar\\\/0828fe7fdfdcf636b2061b4c563e20cc9b7453f7cd1641b4c43edbfba896727a?s=96&d=mm&r=g\",\"url\":\"https:\\\/\\\/secure.gravatar.com\\\/avatar\\\/0828fe7fdfdcf636b2061b4c563e20cc9b7453f7cd1641b4c43edbfba896727a?s=96&d=mm&r=g\",\"contentUrl\":\"https:\\\/\\\/secure.gravatar.com\\\/avatar\\\/0828fe7fdfdcf636b2061b4c563e20cc9b7453f7cd1641b4c43edbfba896727a?s=96&d=mm&r=g\",\"caption\":\"AnalystPrep Team\"},\"url\":\"https:\\\/\\\/analystprep.com\\\/study-notes\\\/author\\\/analystprep-team\\\/\"}]}<\/script>\n<!-- \/ Yoast SEO plugin. -->","yoast_head_json":{"title":"Application of Behavioral Finance to Portfolio Construction - CFA, FRM, and Actuarial Exams Study Notes","description":"Behavioral portfolios adopt layered approach in their structure and composition. They do not aim to achieve the ideal blend of assets that maximizes risk-adjusted returns and investor satisfaction.","robots":{"index":"index","follow":"follow","max-snippet":"max-snippet:-1","max-image-preview":"max-image-preview:large","max-video-preview":"max-video-preview:-1"},"canonical":"https:\/\/analystprep.com\/study-notes\/cfa-level-iii\/application-of-behavioral-finance-to-portfolio-construction\/","og_locale":"en_US","og_type":"article","og_title":"Application of Behavioral Finance to Portfolio Construction - CFA, FRM, and Actuarial Exams Study Notes","og_description":"Behavioral portfolios adopt layered approach in their structure and composition. They do not aim to achieve the ideal blend of assets that maximizes risk-adjusted returns and investor satisfaction.","og_url":"https:\/\/analystprep.com\/study-notes\/cfa-level-iii\/application-of-behavioral-finance-to-portfolio-construction\/","og_site_name":"CFA, FRM, and Actuarial Exams Study Notes","article_published_time":"2023-06-08T06:31:01+00:00","article_modified_time":"2023-06-10T16:41:26+00:00","og_image":[{"url":"https:\/\/analystprep.com\/study-notes\/wp-content\/uploads\/2023\/06\/Img_2-1-300x172.jpg","type":"","width":"","height":""}],"author":"AnalystPrep Team","twitter_card":"summary_large_image","twitter_misc":{"Written by":"AnalystPrep Team","Est. reading time":"2 minutes"},"schema":{"@context":"https:\/\/schema.org","@graph":[{"@type":"Article","@id":"https:\/\/analystprep.com\/study-notes\/cfa-level-iii\/application-of-behavioral-finance-to-portfolio-construction\/#article","isPartOf":{"@id":"https:\/\/analystprep.com\/study-notes\/cfa-level-iii\/application-of-behavioral-finance-to-portfolio-construction\/"},"author":{"name":"AnalystPrep Team","@id":"https:\/\/analystprep.com\/study-notes\/#\/schema\/person\/ed0c939f3f12a02c5a193708b713d89e"},"headline":"Application of Behavioral Finance to Portfolio Construction","datePublished":"2023-06-08T06:31:01+00:00","dateModified":"2023-06-10T16:41:26+00:00","mainEntityOfPage":{"@id":"https:\/\/analystprep.com\/study-notes\/cfa-level-iii\/application-of-behavioral-finance-to-portfolio-construction\/"},"wordCount":291,"image":{"@id":"https:\/\/analystprep.com\/study-notes\/cfa-level-iii\/application-of-behavioral-finance-to-portfolio-construction\/#primaryimage"},"thumbnailUrl":"https:\/\/analystprep.com\/study-notes\/wp-content\/uploads\/2023\/06\/Img_2-1-300x172.jpg","articleSection":["Level III of the CFA\u00ae Program"],"inLanguage":"en-US"},{"@type":"WebPage","@id":"https:\/\/analystprep.com\/study-notes\/cfa-level-iii\/application-of-behavioral-finance-to-portfolio-construction\/","url":"https:\/\/analystprep.com\/study-notes\/cfa-level-iii\/application-of-behavioral-finance-to-portfolio-construction\/","name":"Application of Behavioral Finance to Portfolio Construction - CFA, FRM, and Actuarial Exams Study Notes","isPartOf":{"@id":"https:\/\/analystprep.com\/study-notes\/#website"},"primaryImageOfPage":{"@id":"https:\/\/analystprep.com\/study-notes\/cfa-level-iii\/application-of-behavioral-finance-to-portfolio-construction\/#primaryimage"},"image":{"@id":"https:\/\/analystprep.com\/study-notes\/cfa-level-iii\/application-of-behavioral-finance-to-portfolio-construction\/#primaryimage"},"thumbnailUrl":"https:\/\/analystprep.com\/study-notes\/wp-content\/uploads\/2023\/06\/Img_2-1-300x172.jpg","datePublished":"2023-06-08T06:31:01+00:00","dateModified":"2023-06-10T16:41:26+00:00","author":{"@id":"https:\/\/analystprep.com\/study-notes\/#\/schema\/person\/ed0c939f3f12a02c5a193708b713d89e"},"description":"Behavioral portfolios adopt layered approach in their structure and composition. They do not aim to achieve the ideal blend of assets that maximizes risk-adjusted returns and investor satisfaction.","breadcrumb":{"@id":"https:\/\/analystprep.com\/study-notes\/cfa-level-iii\/application-of-behavioral-finance-to-portfolio-construction\/#breadcrumb"},"inLanguage":"en-US","potentialAction":[{"@type":"ReadAction","target":["https:\/\/analystprep.com\/study-notes\/cfa-level-iii\/application-of-behavioral-finance-to-portfolio-construction\/"]}]},{"@type":"ImageObject","inLanguage":"en-US","@id":"https:\/\/analystprep.com\/study-notes\/cfa-level-iii\/application-of-behavioral-finance-to-portfolio-construction\/#primaryimage","url":"https:\/\/analystprep.com\/study-notes\/wp-content\/uploads\/2023\/06\/Img_2-1.jpg","contentUrl":"https:\/\/analystprep.com\/study-notes\/wp-content\/uploads\/2023\/06\/Img_2-1.jpg","width":1590,"height":911},{"@type":"BreadcrumbList","@id":"https:\/\/analystprep.com\/study-notes\/cfa-level-iii\/application-of-behavioral-finance-to-portfolio-construction\/#breadcrumb","itemListElement":[{"@type":"ListItem","position":1,"name":"Home","item":"https:\/\/analystprep.com\/study-notes\/"},{"@type":"ListItem","position":2,"name":"Application of Behavioral Finance to Portfolio Construction"}]},{"@type":"WebSite","@id":"https:\/\/analystprep.com\/study-notes\/#website","url":"https:\/\/analystprep.com\/study-notes\/","name":"CFA, FRM, and Actuarial Exams Study Notes","description":"Question Bank and Study Notes for the CFA, FRM, and Actuarial exams","potentialAction":[{"@type":"SearchAction","target":{"@type":"EntryPoint","urlTemplate":"https:\/\/analystprep.com\/study-notes\/?s={search_term_string}"},"query-input":{"@type":"PropertyValueSpecification","valueRequired":true,"valueName":"search_term_string"}}],"inLanguage":"en-US"},{"@type":"Person","@id":"https:\/\/analystprep.com\/study-notes\/#\/schema\/person\/ed0c939f3f12a02c5a193708b713d89e","name":"AnalystPrep Team","image":{"@type":"ImageObject","inLanguage":"en-US","@id":"https:\/\/secure.gravatar.com\/avatar\/0828fe7fdfdcf636b2061b4c563e20cc9b7453f7cd1641b4c43edbfba896727a?s=96&d=mm&r=g","url":"https:\/\/secure.gravatar.com\/avatar\/0828fe7fdfdcf636b2061b4c563e20cc9b7453f7cd1641b4c43edbfba896727a?s=96&d=mm&r=g","contentUrl":"https:\/\/secure.gravatar.com\/avatar\/0828fe7fdfdcf636b2061b4c563e20cc9b7453f7cd1641b4c43edbfba896727a?s=96&d=mm&r=g","caption":"AnalystPrep Team"},"url":"https:\/\/analystprep.com\/study-notes\/author\/analystprep-team\/"}]}},"_links":{"self":[{"href":"https:\/\/analystprep.com\/study-notes\/wp-json\/wp\/v2\/posts\/27429","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/analystprep.com\/study-notes\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/analystprep.com\/study-notes\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/analystprep.com\/study-notes\/wp-json\/wp\/v2\/users\/4"}],"replies":[{"embeddable":true,"href":"https:\/\/analystprep.com\/study-notes\/wp-json\/wp\/v2\/comments?post=27429"}],"version-history":[{"count":20,"href":"https:\/\/analystprep.com\/study-notes\/wp-json\/wp\/v2\/posts\/27429\/revisions"}],"predecessor-version":[{"id":32263,"href":"https:\/\/analystprep.com\/study-notes\/wp-json\/wp\/v2\/posts\/27429\/revisions\/32263"}],"wp:attachment":[{"href":"https:\/\/analystprep.com\/study-notes\/wp-json\/wp\/v2\/media?parent=27429"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/analystprep.com\/study-notes\/wp-json\/wp\/v2\/categories?post=27429"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/analystprep.com\/study-notes\/wp-json\/wp\/v2\/tags?post=27429"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}