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(Photodisc / Getty Images<242>)
(Photodisc / Getty Images<242>)

Portfolio Strategy

How do you view risk? Add to ...

BEworks examined how people are influenced by the way in which various portfolio risk levels are described to them. Study participants were asked to look at some hypothetical $10,000 portfolios and pick the one that they felt most comfortable with. BEworks described the portfolio performance in three different ways – as total market value, gains or losses in dollar terms and percentage returns.

Groups of participants were shown different pairings of these descriptions – for example, some saw market value compared against dollar gains and losses, and others saw market value and percentage returns. Rationally speaking, this shouldn’t have mattered.

A $10,000 portfolio with the potential to gain $1,200 and lose $400 over a year is the same as one that might gain 12 per cent and lose 4 per cent and the same again as one that might grow to $11,200 or decline to $9,600. And yet, being shown gains and losses in dollar terms and percentage returns seemed to put investors in a more conservative mood than overall portfolio market value.

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