Question

Which of the following is not true regarding individual investor behavior?

1) employees tend to overinvest in their company's own stock.
2) individual investors fail to diversify their portfolios adequately.
3) a vast majority of individual investors hold fewer than 10 stocks in their portfolio.
4) individual investors' portfolios consistently outperform the market averages.

Answer 1

The statement that individual investors' portfolios consistently outperform the market is not accurate. Most investors, including mutual funds, do not outguess the market consistently, and diversification is advised to mitigate risk.

Step-by-step explanation:

The statement that individual investors' portfolios consistently outperform the market averages is not true regarding individual investor behavior. Historical data suggests that most financial investors, including mutual funds, do not consistently outguess the market.

In fact, it is generally observed that a significant proportion of mutual funds underperform relative to the market average. Additionally, the practice of diversification is highly recommended in investing, as it helps reduce the risks associated with holding stocks or bonds from a single company. Diversification allows investors to spread their investments across a broad range of companies, which tends to mitigate the impact of extreme increases and decreases in the value of individual investments.

Answer 2

The false statement regarding individual investor behavior is that individual investors' portfolios consistently outperform the market averages. Many investors do not outguess the market and often fail to adequately diversify their portfolios, leading to increased risk.

Step-by-step explanation:

The statement that is not true regarding individual investor behavior is individual investors' portfolios consistently outperform the market averages. Research and historical data indicate that a majority of financial investors, including mutual funds that attempt to pick stocks projected to rise above the market average, often perform worse than the market.

This reality is juxtaposed to common individual investor behaviors such as employees overinvesting in their own company's stock, individual investors' failure to adequately diversify their portfolios, and the fact that most individual investors hold fewer than 10 stocks in their portfolio.

Diversification is highly advised because it reduces the risk associated with investing in single companies which can suffer from market fluctuations and poor managerial decisions. However, individual investors often do not diversify enough, which leads to heightened risk. The recommendation is to follow the principle of not putting all your eggs in one basket, and instead invest in a wide range of companies to balance out potential losses and gains.