CFA Level I · CFA Level I Exam · The Behavioral Biases of Individuals
An adviser is drafting an investment policy statement (IPS) for a new client. Which of the following features of an IPS is most likely to help limit the influence of behavioral biases on later decisions?
Written risk tolerance, return objectives and rebalancing rules agreed in advance best limit bias. They create a disciplined, pre-committed framework that the client and adviser can return to when markets move, reducing impulsive, emotionally driven changes to the portfolio.
- AWritten risk tolerance, return objectives and rebalancing rules agreed in advanceCorrect
- BA forecast of next year's best-performing asset class
- CA list of the client's favorite securities
Explanation
An IPS records objectives, constraints and rebalancing rules agreed when the client is calm. This gives a rules-based reference that restrains emotional or cognitive reactions later. Forecasts and favorite-security lists invite bias rather than limit it.
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