Finance Quiz: Level 3 Wealth Planning | Harjesh Singh Kaushal, CFA

Question 1 of 10

A person wins Rs 10 lakh in a contest and immediately spends it on a luxury watch. The same person refuses to withdraw Rs 10 lakh from their retirement fund for the same purchase. This behaviour is an example of:

Mental accounting is the tendency to treat money differently depending on its source or designated purpose. Rationally, Rs 10 lakh is Rs 10 lakh regardless of where it sits. Behaviourally, the "contest" bucket feels like free money while the "retirement" bucket feels sacred. This causes systematically irrational spending decisions.

Question 2 of 10

A high-net-worth individual has a large concentrated position in their employer's stock representing 70% of their total net worth. According to sound wealth planning principles, the most important next step is:

Concentration risk in a single stock means your income (salary) and your wealth are both tied to the same business. If the company struggles, you lose your job and your savings simultaneously. Gradual diversification manages the tax cost while reducing this correlated risk over time. Immediate full sale is usually tax-inefficient and emotionally unsustainable.

Question 3 of 10

In a liability-driven investment strategy, the primary objective is to:

Liability-driven investing (LDI) starts from what you owe or what you need to spend in the future, then builds the portfolio backwards from those obligations. A school fee due in three years, a retirement starting in fifteen years, and a mortgage payment each month are all liabilities that shape how the corresponding assets should be invested.

Question 4 of 10

A protective put strategy involves buying a stock and simultaneously buying a put option on that stock. This is functionally most similar to:

A put option gives the right to sell at a fixed price. Combined with owning the stock, it creates a floor on your losses. This is structurally identical to home insurance: you still own the asset and benefit if it rises, but the insurance limits your downside. The premium paid for the put is the cost of that protection.

Question 5 of 10

Tax-loss harvesting involves selling a losing investment to offset capital gains. This is often described as a timing benefit rather than a true gain primarily because:

Tax-loss harvesting defers tax, it does not eliminate it. When you sell the replacement investment later, you pay capital gains on a larger gain because your cost basis was reset lower. The benefit is the time value of money: paying tax later is better than paying now. But it is not free.

Question 6 of 10

An investor who sells their winning stocks too early but holds their losing stocks far too long is suffering from:

The disposition effect, documented extensively by Shefrin and Statman, describes the tendency to realise gains quickly (to feel the pleasure of being right) and defer losses (to avoid the pain of admitting a mistake). It is economically irrational because it inverts the optimal strategy of letting winners run and cutting losers.

Question 7 of 10

An investor who has had several lucky stock picks begins to believe they can consistently predict market movements better than most professionals. This is an example of:

Overconfidence is one of the most well-documented cognitive biases in investing. After a run of correct calls, investors systematically overestimate their predictive ability and underestimate luck. This leads to under-diversification, excessive trading, and position sizes that are too large relative to actual analytical edge.

Question 8 of 10

When designing an Investment Policy Statement for a family, why should insurance needs be integrated with the overall portfolio strategy rather than treated as a separate exercise?

An uninsured catastrophe can force you to liquidate equity at the worst possible moment, destroying the compounding that makes long-term investing work. Insurance is the financial equivalent of a foundation: invisible when working correctly, and catastrophic when absent. A portfolio strategy without adequate insurance is structurally unsound.

Question 9 of 10

In portfolio rebalancing, the discipline of selling what has risen and buying what has fallen primarily serves to:

Rebalancing is not a return-chasing strategy. Its primary function is risk management: it prevents one asset class from growing to dominate the portfolio and expose you to more risk than you intended. As a secondary benefit, it enforces a systematic buy-low, sell-high discipline against emotional impulse.

Question 10 of 10

For a retiree, "standard deviation" is commonly used to measure investment risk. However, the most critical risk for a retiree is actually:

Standard deviation measures volatility around an average. For an accumulator, this matters. For a retiree drawing down a portfolio, the existential risk is running out of money before dying. Shortfall risk is asymmetric: you cannot recover from depleting your savings. This is why retirement planning requires different frameworks than wealth accumulation.