The Adams family includes a financially well-informed couple, both aged 36, and two children aged 4 and 6. The family is financially sound but suffered badly during the tech meltdown in 2000. The couple's total income is $120,000, which, like the family itself, is not expected to grow significantly. The Adams have managed to save $150,000, which they hope might serve as a financial foundation from which to send their children to college and, later, to fund a comfortable retirement. You have been working with the Adams for five years. You update a financial plan for them annually and recommend an asset allocation. Last year, you suggested the allocation that the mean-variance optimizer generated: 70 percent equities, 25 percent bonds, 5 percent cash. At that time, the Adams, however, chose to be more aggressive. This year, when you recommended the same mean-variance optimized allocation, the couple actually desired a more conservative position, requesting 50 percent equities, 45 percent bonds, 5 percent cash.

Questions;

1. Analyze and identify the biases displayed by Adams family in this case?

2. What effect do the Adams biases have on the asset allocation decision?

3. Should you moderate or adapt to their biases?

Answer rating: 100% (QA)

Here are my responses to the questions 1 The biases displayed by the Adams family are loss aversion ... View the full answer