Answer to Question #151066 in Finance for Sidra Singh

Question

The consensus in the market is that two stocks have zero alpha. If you are not informed and an average investor but you stand behind your non- zero alpha opinions on the stocks, your behavior follows which one

• loss aversion
• optimism bias
• overconfidence bias
• relative wealth concerns

Answer 1

Overconfidence bias - individual investors believe they can pick winners and losers when, in fact, they cannot.

According to the CAPM, investors should hold risk-free assets in combination with the market portfolio of all risky securities.