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NISM Certifications · NISM-Series-X-B: Investment Adviser (Level 2) · Behavioural Finance in Practice

Caselet: A client's portfolio is Rs 20 lakh, with a target allocation of 60% equity and 40% debt. After a strong market, equity is worth Rs 15 lakh and debt Rs 5 lakh, but the client, enthused by recent gains, wants to move the debt into equity too. Rebalancing to target would require which action, and which bias is the client mainly showing?

Target equity is Rs 12 lakh, so the adviser should sell Rs 3 lakh of equity and add it to debt, giving Rs 12 lakh equity and Rs 8 lakh debt. The client's wish to go all-equity reflects recency bias, extrapolating recent gains.

  1. ASell Rs 3 lakh equity and buy debt; recency bias or extrapolation of recent gainsCorrect
  2. BSell Rs 1 lakh equity and buy debt; loss aversion
  3. CSell Rs 3 lakh debt and buy equity; anchoring
  4. DSell Rs 5 lakh equity and buy debt; hindsight bias

Explanation

Target equity is 60% of Rs 20 lakh = Rs 12 lakh, so equity above that by Rs 3 lakh must be sold and moved to debt, which becomes Rs 8 lakh (40%). Check: 12 + 8 = 20. The client extrapolates recent gains, which is recency bias. Selling Rs 1 lakh would leave equity at 70%.

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