Behavioral Portfolio Theory Application

Very Easy Behavioral Finance Behavioral Portfolio Theory

Maria is a financial advisor who follows Behavioral Portfolio Theory (BPT) principles while constructing her clients' investment portfolios. BPT suggests that investors have multiple mental accounts for different goals and risks, and they allocate assets based on these perceived categorizations rather than a single utility function. Based on this theory, which of the following best illustrates Maria's approach to portfolio management?

Maria recommends a single diversified portfolio for her clients, focusing solely on maximizing overall returns.

Maria helps her clients create separate portfolios for short-term goals and long-term goals, adjusting the risk in each accordingly.

Maria only considers past performance of investments when advising her clients on asset allocation.

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