You are required to select two (2) of the following four (4) scenarios. You will then be required to review each

Question 2

You are required to select two (2) of the following four (4) scenarios. You will then be required to review each of your two (2) chosen scenarios and analyse how issues in each scenario relate to the concepts of behavioural finance.

Scenario 1
Jack is a very experienced stockbroker who runs a boutique stock advisory business. His business proposition is that he looks after his clients to get the best portfolio results in the market. He makes all decisions regarding their portfolios and due to his experience and knowledge he believes that he can get better results than other advisers and the market in general. He actively manages his share portfolios and trades for his clients regularly.

Scenario 2
Lucy likes to manage her own share portfolio and believes she has a good history of success. She particularly likes banking shares as she ‘always does well with them’. She feels very strongly about staying away from IT shares as her brother lost everything in the technology bust in 2001.

Lucy is watching the latest investment news flash and sees that the price of AB bank has dropped quite a bit. She gets excited as she feels they must be undervalued and quickly logs on to her trading account. Lucy buys $50,000 of AB Bank shares as she recalls how successful her last bank share purchase was. One week later she is reading the financial news and the price of AB Bank has fallen again as there has been a significant compliance breach that has become more serious since it was reported last week.

Scenario 3
You are seeing a new client Bob who would like to discuss his financial goals and objectives.
Bob for you the following assets:

He is keen for you to review his investment portfolio only, as he has recently suffered some losses that he does not want to realise by selling the shares, as the shareholdings provide good income. Bob also does not like the loss! You suggest that he also should consider his overall financial position and investments, including repaying his debt. Bob however says he likes to keep that separate and is making repayments of $500 per month.

Scenario 4
In the late 1990’s into 2000 there was a rapid rise in US technology stock equity and major investments in internet and dot com related companies. The NASDAQ index grew over this time from 1,000 to 5,000 points as investors speculated on these tech stocks; and the projected profits and company valuations grew.

Ben’s brother lived in the US and kept telling Ben that these stocks were the next best thing and that everyone was investing. He repeatedly told Ben that if he left it too late, he would miss out. Ben was generally a conservative investor, however, he wanted to get in early and not miss the gains that were on offer. He quickly invested in three tech stocks, based on his brother's advice and what other investors were doing. In 2001, the bubble burst where a significant number of investors lost most of the value of these tech stocks with only a few major tech companies surviving the crash. Unfortunately, Ben’s selected stocks did not survive the crash.

For each of your chosen two (2) scenarios, complete the following:

1. Identify the key behavioural finance issue presented in this scenario. Include in your response a brief definition of the issue. (4 marks)
2. Provide evidence from the scenario to support your assessment. (5 marks)
3. Discuss the consequences of the impact of this issue in the context of the scenario provided if the issue is not identified and addressed appropriately. (4 marks)
4. Based on the scenario, identify how the issue impacts either the giving or receipt of information. For example, what type of information is likely to be provided to investors in the scenario by the adviser, or what type of information would help the client in the scenario. (2 marks)

Your answer for Question 2 should be in two parts: chosen scenario 1 and chosen scenario 2. For each chosen scenario you must clearly state which scenario number you are addressing in your response as well as clearly labelling each part of your response to the specific questions (a) to (d).