Mr. ThomasSanderson is a single, 62 year old, hardworking, international energymarketing executive.He is employed by a large multi-national company.He earns a salary of $600,000 Canadian annually. He has a residence in Toronto, as well as a house in Geneva.Generally, he lives within his annual income net of taxes. He occasionally spends more than his net income, but in other years he saves and invests.He recently suffered a heart attach, but has fully recovered.

His current portfolio is worth approximately $4 million.It reached this value primarily because of some successful energyinvestments as well as stock options granted by him employer.Mr. Sanderson is a widower, and has no children.

His primary financial goal is to retire at the age of 68, with a reduced spending level of $150,000 per year. He plans to bequeath any assets remaining after his death to his alma matter, Centennial College.

You have been working with Mr. Sanderson for less than a year now.During that time, you have prepared a comprehensive financial plan, and presented your findings to Mr. Sanderson.In spite of your recommendations, Mr. Sanderson's asset allocation has remain the same since you started.His portfolio consists of 80% equities, and 20% bonds.Of the 80% equites, 35% of that amount is invested in his employing company's publicly traded stock.

You believe that Mr. Sanderson is a rational, well grounded individual, but are concerned that he has some behavioural issues that need to be addressed. You are concerned that a severe downward turn in the market could have serious repercussions on Mr. Sanderson's financial situation.The financial plan that you presented showed that if he could save just $25,000 annually, he could meet is primary financial objective with less risk.

You suspect that Mr. Sanderson thinks your asset allocation model is too conservative. You notice that he is constantly worried about missing out on the new hot stocks which his friends are investing in.You believe that his considers himself an excellent investor because the biotechnology bets that he took worked out well for him in the past.

As part of your customer process, you have also administered a risk tolerance questionnaire for the purpose of generating a mean-variance optimization portfolio recommendation (RAA).The result of the questionnaire shows that Mr. Sanderson's RAA was 40% bonds, 50% stocks, and 10% cash.His actual asset allocation is 80% stocks and 20% bonds

You are convinced that Mr. Sandersonneeds to have a less riskyportfolio to reach his investment goals.You are convinced that he has invested so aggressivelyis primarily due to behavioural biases.

1.Is Mr. Sandersonan Active or Passive Investor?

2.Which of the 4 main behavioural investment types does Mr. Sandersonfall into?

3.Explain the risks of the existing structure of Mr. Sanderson's portfolio.

4.Based on the results from the behavioural test, name and describe 3 behavioural biases that Mr. Sandersonis susceptible to. Are these biases cognitive or emotional?Explain how these biases are affecting his investment decisions

5.Based on the information above, should you Moderate or Adapt to his Biases?Why?

6.What do you believe is an appropriate behaviourally modified asset allocation for Mr. Sanderson ?

Answer rating: 100% (QA)

1 Is Mr Sanderson an Active or Passive Investor Based on the information provided Mr Sanderson appears to be an active investor He has a highly concentrated portfolio with 80 in equities 35 of which i... View the full answer