financial knowledge and rationality of canadian investors

FINANCIAL KNOWLEDGE AND RATIONALITY OF CANADIAN INVESTORS
Cécile Carpentier* and Jean-Marc Suret**
March 18, 2012
*Professor, Laval University, CIRANO Fellow and associate researcher with the Investors
Group Chair in Financial Planning. **Professor, Laval University, CIRANO Fellow,
associate researcher and member of the governing committee of the Investors Group Chair
in Financial Planning. The authors thank the Fonds pour l’éducation et la saine
Gouvernance of the Autorité des marchés financiers, the Ministère des Finances du Québec
and the Investors Group Chair in Financial Planning of Laval University for making the
implementation and dissemination of the study possible. The views expressed are those of
the authors, and not necessarily those of the Autorité des marchés financiers and the
Ministère des finances du Québec.

Table of contents
Executive summary ............................................................................................................. 1
Introduction ......................................................................................................................... 3
1 Background ...................................................................................................................... 4
1.1 Literacy ..................................................................................................................... 4
1.2 Rationality ................................................................................................................. 5
2 Survey and respondents ................................................................................................... 5
2.1 Survey ....................................................................................................................... 5
2.2 Respondents .............................................................................................................. 6
2.3 Characteristics of respondent portfolios ................................................................... 6
3 Respondents’ knowledge ................................................................................................. 7
3.1 Past return of asset classes ........................................................................................ 7
3.2 Basic concepts related to returns............................................................................... 8
3.3 Notions related to risk ............................................................................................... 9
3.4 Risk-return relationship .......................................................................................... 11
3.5 Diversification......................................................................................................... 11
3.6 Investors’ financial decisions .................................................................................. 12
3.7 Investors’ knowledge score..................................................................................... 13
3.8 Investors’ scores and characteristics ....................................................................... 13
4 Investor rationality ......................................................................................................... 14
4.1 Perspective theory ................................................................................................... 14
4.2 Availability bias ...................................................................................................... 15
4.3 Overconfidence bias................................................................................................ 15
4.4 Self Attribution ....................................................................................................... 19
4.5 Preference for lottery stocks ................................................................................... 20
4.6 Familiarity bias ....................................................................................................... 20
Conclusion ........................................................................................................................ 21
Tables and Figures ............................................................................................................ 22
Appendix 1 Questions used to calculate the score ............................................................ 49
Bibliography ..................................................................................................................... 52
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EXECUTIVE SUMMARY
Investors’ financial skill rests on two elements: 1) literacy, which is the financial
knowledge itself and the skill required to use the knowledge, and 2) rationality, which
refers to the lack of major biases such as overconfidence. To estimate the level of
investors’ knowledge and rationality, we administered an online survey to 1814 investors
in Québec and Ontario who manage their own stock portfolios. Their average portfolio is
valued at $200,000, mostly invested in stocks of large or small listed companies. We
measured knowledge using scores and compared these scores with investors’ evaluations
of their knowledge in various areas, to examine the dimension of rationality. We also
tried to identify several other behavioral biases.
Canadian investors’ financial knowledge is limited. On average, they obtain a mediocre
knowledge score; only 5% score above 66%. The vast majority of respondents scored
between 40% and 57%. Significant gaps were noted regarding knowledge of risk and
return of asset categories. Knowledge of past returns of the main asset categories is
abnormally low, particularly for equity, an area where all of the respondents are involved.
Mediocre knowledge of the performance of categories and of the concept of risk
premium calls into question investors’ financial planning ability. One out of five
investors is unaware that the return of a small growth company comes not from
dividends, but rather from a capital gain. One-third of investors are certain that they will
receive future dividends from a company that usually pays them. Almost 30% of
respondents are unaware that stock indices are greatly influenced by the returns of the
largest capitalization stocks. Three-quarters of investors do not systematically compare
the return on their portfolio with that of a stock market index.
Half of the investors do not clearly grasp the link between lack of liquidity and share
value. Many investors do not know that if they invest in the stocks of small companies
listed on the TSX Venture Exchange, they might lose all their capital. The risks
associated with shareholding are largely underestimated.
The majority of investors think that there is no systematic risk-return relationship. Nearly
all investors are convinced that some stocks offer a high return coupled with low risk.
A significant portion of investors does not clearly grasp what portfolio diversification is,
and 35% of investors do not know how to diversify. One out of five investors does not
know that it is possible to diversify a stock portfolio using mutual funds. One third of
investors do not know that one must scrutinize the financial information of small issuers.
Only one out of five investors knows that there is no reliable means of detecting
overvalued or undervalued stocks. 42% of investors are unaware that buying the shares of
a company with negative earnings incurs a very high risk. About 30% of investors do not
base their decisions on the allocation of their wealth. The same proportion does not
systematically analyze a stock’s risk and return before buying it.
The overall level of financial expertise is thus mediocre. The second half of the
questionnaire measured the extent that Canadian investors are subject to behavioral
biases. They seem to strongly overestimate their abilities. They generally consider
themselves skilled at selecting stocks, and knowledgeable about market trends and the
timing of their stock trading decisions. However, perceived expertise does not correspond
to the knowledge measured using scores. A large proportion of investors prefer lottery
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stocks, which is consistent with our observation of negative returns on small
capitalization stock issues. In addition, a very large proportion of investors exhibit a
familiarity bias. The most surprising result lies in the expectations of individually
managed portfolio returns. Even if they view themselves as generally more skilled than
their peers, most individual managers expect to achieve returns that are less than or equal
to those of the market index. Overconfidence is exhibited when it comes to detecting
exceptional stocks: 77% of investors say they can identify an exceptional stock within a
set of 20 stocks. Another example of overconfidence is that most investors consider that
the average projections by experts are false. Lastly, half of investors largely overestimate
the probability of obtaining an exceptional return when they invest in a company on the
TSX Venture Exchange. Our observations therefore confirm the presence of behavioral
biases, the main one being overoptimism and exaggerated confidence in the knowledge
and skills required to obtain high returns. In particular, investors overestimate their ability
to select winning stocks.
2

INTRODUCTION
To manage their savings effectively, individuals need basic knowledge and the skills to
apply it to make sound decisions. These two dimensions make up the current definition of
financial literacy (Huston 2010 p.307). Investors must also exhibit rationality. Their
financial behaviors must not be influenced by major biases (de Meza et al. 2008). If
behaviors are biased, financial decisions will be unsound even if the investors’
knowledge is adequate. Following their analysis, conducted for the Financial Service
Authority of London, de Meza et al. note that differences in financial competence
observed between investors arise more from behavioral problems than from knowledge
gaps. The dimension of rationality therefore cannot be neglected. Given investors’
limited rationality, the considerable efforts deployed to improve financial literacy may be
ineffectual (de Meza et al. 2008; Willis 2008).
Numerous authors have examined the financial knowledge of youth, households and
future retirees (Huston 2010). However, with the exception of Deaves et al. (2006) and of
some professional reports, 1 few researchers have looked at the level of knowledge of
individual investors. Research has highlighted the importance of specific biases among
groups of investors or students (de Meza et al. 2008). Nonetheless, few global analyses of
rationality exist, and even fewer works have simultaneously addressed the dimensions of
knowledge and rationality of investors who actively make management decisions. This
study presents an analysis of knowledge and rationality of Canadian investors who
personally manage their stock portfolios. The Canadian situation is particularly
interesting for several reasons. Canada is one of the countries with the largest proportions
of shareholders (37.52%), far exceeding the rates in the United States and the United
Kingdom (Grout et al. 2009). Given the very low minimum standards for listing on an
exchange, Canadians can acquire the shares of many small businesses that would be
excluded from stock markets elsewhere. Lastly, Canadian investors earn paltry rates of
return, particularly when they hold stocks listed on the TSX Venture Exchange
(Carpentier et al. 2010a; Carpentier and Suret 2010; Carpentier et al. 2011). We therefore
concentrated on this important category of agents, which is our first contribution. To
investigate the dimensions of knowledge and rationality simultaneously, we developed a
series of questions covering the most important points related to rationality of investors’
decisions; this is our second contribution. Lastly, we study the extent that language and
province of origin are related to investors’ financial skills, in addition to characteristics
generally studied in this type of analysis such as level of income or education.
In the first part of the paper, we situate our research relative to previous studies. Part 2
describes the characteristics of the survey and the respondent population. We summarize
the survey results in terms of knowledge (Part 3) and rationality (Part 4). The last section
concludes the paper.
1 Investor Protection Trust. 2007. The MoneyTrack/IPT Investing Secrets Survey.
http://www.investorprotection.org/downloads/pdf/learn/research/Secrets_Survey_Report.pdf
NASD Investor Literacy Research. 2003. NASD Investor Literacy Research: Executive
Summary.http://www.finrafoundation.org/web/groups/foundation/@foundation/documents/found
ation/p118411.pdf
3

1 BACKGROUND
1.1 Literacy
Financial literacy is a timely topic. The OECD published the first international study on
financial education in 2005 (OECD 2005). In 2007, the Financial Consumer Agency of
Canada put in place a branch intended to help Canadians improve their financial
knowledge. In September 2008, a Canadian conference on financial literacy was held in
Montréal. Social and Enterprise Development Innovations called for the creation of an
independent task force assigned to study the problem in depth and make proposals. In
June 2009, the federal government launched the task force on financial literacy, which
would recommend a strategy to the Finance Minister. 2
Several countries staged national survey campaigns on this theme. Australia, Japan,
Korea, the United Kingdom and the United States tried to measure financial knowledge. 3
Statistics Canada conducted a study of 20,000 respondents in 10 provinces in 2009. The
OECD (2005) concluded that countries are increasingly aware of the importance of
financial knowledge and have implemented a large variety of initiatives. Many of the
efforts have targeted diverse clienteles such as students or low-income households. The
general finding is that the population’s level of financial knowledge is limited (SEDI
2005).
Most of the works on financial literacy conducted to date assess the level of basic
knowledge of personal finance management and retirement planning, and sometimes
perception, in the case of fraud and regulatory bodies (Canadian Securities
Administrators, or CSA). Nonetheless, in most countries, very few initiatives are aimed at
investors.
Canada has devoted significant attention to investors’ financial knowledge, 4 perhaps
because this country has one of the highest rates of individual shareholding, 5 Cakebread
(2006) notes that in Canada, information and education are considered key components
of investor protection (p. 366) and that many resources are made available to investors by
regulatory bodies and other organizations (Cakebread 2009). These resources are
dedicated to information and investor training. CSA has developed the CSA Investor
Index, which measures knowledge at a general level according to various dimensions:
Canadians’ investment behavior, and knowledge of provincial securities regulators, and
fraud. If securities commissions have developed many programs and information
documents, limited data have been gathered on the reasons that individual investors
generally seem to make poor decisions.
In contrast to most previous studies, we are interested in the technical knowledge of
shareholders exclusively. In our previous research, we observed that individual Canadian
2
The task force’s report is available at:
http://www.litteratiefinanciereaucanada.com/canadians-and-their-money.html
3
http://www.oecdobserver.org/news/fullstory.php/aid/1908/The_asset_test.html
4
This report examines individual investors (retail investors) exclusively. We refer to them as
“investors.”
5
In Canada, the proportion of the population holding stocks was 37.52% in 2004. Comparable
values are 21.20% in the United States, 15.09% in the United Kingdom and 14.97% in France
(Grout et al. 2009).
4

investors, including qualified investors, obtain abnormally low returns, particularly when
they purchase stocks of companies listed on the Venture Exchange. The finding of poor
performance of individual investors has also been established in the United States,
particularly among active traders (Barber and Odean 2000b). The portfolios of
individuals who are members of investment clubs generally perform worse than those of
other individuals (Barber and Odean 2000a). This may be linked to the fact that members
of such clubs engage in more aggressive and active management than do isolated
investors. It seems that the transactions of individual investors systematically result in
large losses (Barber et al. 2009). Nonetheless, the paucity of individual investors’
knowledge may not suffice to explain their mediocre performance. Here is where
rationality comes into play.
1.2 Rationality
Individual investors do not manage their portfolios according to the basic rules of finance
(Broihanne et al. 2005; Broihanne et al. 2006; Séjourné 2006). They obtain rates of return
that are generally inferior to those of the reference indices (Barber and Odean 2000b) and
the returns are lower for investors who actively manage their portfolios (Barber and
Odean 2000a). Individual investors are very active in the small capitalization sector,
which institutional investors tend to avoid (Nofsinger and Varma 2009). They actively
participate in the small capitalization issue market where they obtain on average
extremely low rates of return. This situation is particularly apparent in the case of
investments in small companies listed on the TSX Venture Exchange, and holds for both
public issues and private placements (Carpentier et al. 2010a; Carpentier and Suret 2010;
Carpentier et al. 2011).
Several authors seriously call into question the value of investor literacy programs
(Williams 2007; Willis 2008; Willis 2009), attributing the poor performance observed to
individuals’ irrationality and to a set of biases that literacy programs alone cannot correct.
As Shefrin (2002) writes, “People are imperfect processors of information and are
frequently subject to bias, error, and perceptual illusions.” De Meza et al. (2008)
conclude that differences in financial expertise among investors originate more from
behavior problems than from knowledge gaps.
Despite the importance of the subject, Deaves et al. (2006 p.256) assert that knowledge
of individual investors’ decision-making process is very limited. In the academic
literature, biases are generally analyzed independently; very few works have examined
biases and knowledge simultaneously. This study is designed to fill this gap.
2 SURVEY AND RESPONDENTS
2.1 Survey
The 40-question survey was administered by Vision Critical/Angus Reid, an institute
specializing in Internet surveys, between May 26 and June 10, 2011, to 1814 people: 910
in Québec and 913 in Ontario. The respondents had to hold shares of listed companies
and be responsible for decisions related to these stocks.
5

2.2 Respondents
Males make up 72% of the respondent population. This proportion is identical in Québec
and Ontario. The proportion of English speakers is 100% in Ontario and 34% in Québec. 6
Almost 58% of respondents are over age 55, whereas less than 9% are under age 35.
Respondents in the oldest age class (over 55) are proportionately fewer in Québec (55%)
than in Ontario (60%). These differences are statistically significant.
Most respondents are working full-time, but one-third are retired (Table 1). Income,
disclosed by 89% of respondents (Table 2), is at least $50,000 per year for almost 82% of
respondents. Only 18.4% have income below $50,000 per year. About 44% of
respondents have annual income situated in the $50,000-$100,000 bracket, in both
Québec and Ontario. In Ontario, 45% of respondents have income higher than $100,000,
versus 31% in Québec. The significantly higher income in Ontario is consistent with
Statistics Canada data. 7 66% of respondents have a university education, compared with
23% whose highest level of education is college.
2.3 Characteristics of respondent portfolios
This section covers the general characteristics of portfolios held and managed by
respondents. It paints a profile of the asset categories and the number of stocks each
portfolio contains. However, one cannot draw compelling conclusions regarding
diversification, because most respondents hold mutual funds.
The proportions of respondents who hold shares of large companies, small companies
and mutual fund units are 91%, 53% and 74% respectively (Table 3). 58% of respondents
hold fixed income securities in addition to shares of listed companies. About 11% of
respondents selected the Other investment category. It notably consists of cash, private
company shares, options and precious metals.
About 69% of respondents hold stock in a self-directed RRSP, which 96% of respondents
manage themselves. Over 78% of respondents hold shares in a portfolio outside an
RRSP. Close to 31% of respondents hold shares in a portfolio that they do not manage, in
addition to holding shares in at least one of the two previous categories.
Table 4 shows that respondents invest most of their portfolios (67%) in shares of large
companies (43%) and small companies (24%) listed on an exchange. Respondents also
invest a large portion of their portfolio in mutual funds (38%) and fixed-income securities
(30%). 8 1365 respondents estimated the total value of the financial assets in their
portfolios, corresponding to 75.3% of the sample (Table 5). The average value is
$427,000. Half of the respondents have a portfolio whose value exceeds $200,000 (Panel
A) and 36% of the respondents have a portfolio valued at below $100,000 (Panel B).
6 English speakers in Québec, who represent 13.4% of the population according to data from the
official languages commission, are overrepresented in this sample.
7 Statistics Canada, Income in Canada 2007, Catalogue no. 75-202-X, 2009 (p.10), notes a gap of
about $11,500 (17.3%) between median household income in the two provinces, in Ontario’s
favor: http://www.statcan.gc.ca/pub/75-202-x/75-202-x2007000-eng.pdf.
8 The proportions reported are the means of percentages indicated in response to Question 1a. In
some cases respondents mentioned that they hold an asset category but attribute a miniscule
percentage to it (0%). These values are retained.
6

More than 41% of responders invested in fewer than five stocks of large companies, and
65% of respondents hold fewer than nine stocks of large companies (Table 6). Their
median holdings are 4 to 5 stocks of small companies listed on an exchange (Table 7).
70% of respondents hold fewer than nine stocks of small companies.
Question 3 concerns the proportion of the portfolio invested in the respondent’s
employer's stock. This type of investment represents an additional risk in that human and
financial capital is invested in the same place. 70% of respondents do not hold these
stocks, and 80% of respondents have invested less than 10% of their portfolio therein. In
contrast, 56 respondents invested their entire portfolio in such stocks and 7.90% of
investors placed more than 50% of the value of their portfolio in the employer’s stock.
Not only are these respondents insufficiently diversified, but they assume substantial risk.
We noticed significant differences between respondents by province. Table 3 shows that
more respondents from Ontario (93%) than from Québec (88%) hold shares of large
companies. The same pattern is seen in mutual funds (79% versus 69%). Whereas 73% of
Québec respondents hold shares in a self-directed RRSP, only 65% of Ontarians do.
When the shares are in a portfolio outside an RRSP, Ontario investors seem more
involved in managing their stocks (98%) than Quebecers (95%). Quebecers invest more
in small companies’ stocks, fixed-income instruments and other securities categories than
Ontarians do (Table 4).
Ontario investors’ portfolios have greater value (median $250,000) than those of
Quebecers ($140,000, Table 5). More than 44% of Quebecers have a portfolio valued at
less than $100,000, compared with only 29% of Ontarians. At the other extremity of the
distribution, 80% of Quebecers have a portfolio below $400,000, versus 69% of
Ontarians.
In Québec, 39% of respondents hold more than nine stocks of large companies, compared
with 32% in Ontario. If we assume that one needs at least 10 stocks to diversify a
portfolio, more Quebecers are adequately diversified. However, it should be noted that
many respondents also hold the shares of small companies and mutual fund units (Table
6). RRSPs represent 65% of respondents’ portfolios in Québec, 55% in Ontario and 60%
on average. The relative importance of RRSPs confirms the importance of the study:
management errors would have a significant effect on the retirement income of most
people surveyed.
3 RESPONDENTS’ KNOWLEDGE
We analyze the dimensions related to return, risk, the risk-return relationship,
diversification and financial decision-making. We evaluate the extent that investors know
the basic facts regarding asset categories and securities, and that they have mastered
rudimentary concepts related to risk and return, as taught in basic finance textbooks.
3.1 Past return of asset classes
Between 1991 and 2010, the returns of Treasury Bills, government bonds and the
S&P/TSX index were 4.20%, 10.4% and 11.3% 9 respectively in Canada. We expect that
9 The relatively small variance observed between the return on bonds and that on stocks is not
unusual. It has been 2.5% on average for 207 years.
7

investors can rank these returns in order of size and situate the returns relative to one
another, especially because returns on Treasury Bills and stocks over the last 10 years
have remained fairly stable since 1928.
If we accept an error of 100 basis points, 10 slightly more than half of investors have an
accurate vision of the return on Treasury Bills (Table 8). About 23% of investors largely
underestimate this return, situating it at 1% to 2%, whereas 26% of respondents
overvalue this rate, sometimes considerably. About 13% of respondents situate this return
at 7% to 10%, whereas 5% estimate it at 11% or higher. 36% of people surveyed could
not answer this question.
Fewer than 4% of respondents can state the rate of return on government bonds in the last
10 years (between 9% and 11%), and a large proportion (36%) of respondents could not
situate this return at all (Table 9). Of those who replied, 91% undervalued the return,
sometimes with very significant variance.
Almost one-third of respondents (32%) could not situate the return of the S&P/TSX
index in the last 10 years (Table 10). Fewer than 15% of investors surveyed correctly
situated this return with a margin of error of less than 100 basis points. The proportion of
correct responses is higher in Ontario (16.65% vs. 12.43%). where the proportion of nonresponses
is lower. The proportion of respondents who undervalue the stock return is
very high (62.74%). A significant number (11% or 137 out of 1240) of respondents
estimate this return at 16% or higher. Many investors (19% of people who gave an
answer) situated this return at 5% or under. The statistical test indicates provincial
differences. If 21.5% of Quebecers with an opinion estimate the return of the S&P/TSX
at under 5%, only 16% of Ontarians shared this view. At the other extremity of the
distribution, 12% of Ontarians estimate this return at 12% or higher, as opposed to 10%
of Quebecers.
For long periods, the return of all bonds (the universe) can equal or surpass that of stocks
(Arnott 2009). Table 11 shows that only 44% of respondents in Ontario and 41% in
Québec are aware of this. This result confirms the mediocre knowledge of relations
between returns of asset classes, which may impede retirement planning and fund
allocation across investment categories. 20% of investors claimed they could not answer
this question.
Overall, the level of knowledge of past returns of major asset categories is abnormally
low.
3.2 Basic concepts related to returns
Companies with strong growth often need funding, and seldom issue dividends. Most
(81%) of the people who answered the question knew that the anticipated return from this
type of company comes from the capital gain realized during resale (Table 12). A
significant proportion (19%), however, estimated that most of the return will come from
dividends. 78 people did not know the answer. In the total sample, 22% of respondents
(403 people) did not know exactly where the return of this type of company comes from.
67% of the total of 1 665 people who had an opinion correctly replied that they were not
10 If the rate of return observed is 4.2%, all answers situated between 3% and 5% are considered
accurate.
8

certain to receive dividends in the future from a company that usually issues them (Table
13). 33% of respondents therefore take it for granted, mistakenly, that dividends will be
distributed in the future. A significant difference was noted between the provinces. Close
to 40% of Ontario respondents were certain that dividends would be distributed versus
only 26% of Quebecers. About 8% of respondents claimed they did not know the answer.
Therefore only 61.52% of respondents answered this question correctly.
About 19% of people admitted that they did not know whether stock market indices are
influenced or not by the returns of stocks of the large companies (Table 14). More than
88% of respondents who had an opinion know that stock indices are indeed influenced by
the behavior of large capitalization stocks. Only 12% wrongly believe that this is not the
case. The overall correct response rate was 71%.
The concept of risk premium plays a central role in finance; professionals use it regularly.
The risk premium determines the rate of return that one can expect from the stock market.
It is thus a very important element that should be considered during the financial planning
process. Nearly 41% of the people surveyed did not know that the expected market return
is the sum of the risk-free rate (that of government bonds) and a market risk premium
(Table 15). Fewer than 30% of the respondents answered this question correctly: 31% in
Ontario and 29% in Québec. The proportion of non-responses is particularly high in
Ontario, at 43% versus 38% in Québec.
Table 16 shows the distribution of investors’ estimates of market risk premium. Most
professionals and academics situate this premium at between 4% and 5% (Damodaran
2010). Surprisingly, 48.3% of investors replied that they had no idea about this premium,
although they manage their stocks. Fewer than 18% of the respondents provided correct
answers. A large proportion of respondents who provided estimates (22%) situated this
premium at higher than 8%, which is unrealistic, and 28% estimate the premium at 3% or
under.
It is better to buy when markets are low and sell when they are high to realize a gain.
81% of investors in Québec and 70% in Ontario did not know this principle (Table 17).
The difference between the two groups is significant. Only 6% of respondents were
unable to answer this question.
Evaluating the performance of one's portfolio regularly and rigorously is one of the
conditions for proper management. This evaluation entails benchmarking the portfolio’s
return against the market. The majority of investors do not benchmark their performance
regularly: 53% mentioned that they do it sometimes and 25% never do it at all. Only 22%
of investors do this comparison on a regular basis (Table 18). Statistically significant
provincial differences were noted: 24% of Ontario investors calculate their abnormal
return regularly, versus 20% of Quebecers. 57% of Quebecers sometimes do this
exercise, compared with 50% of Ontarians.
As a whole, the results indicate that a significant proportion of investors have major
knowledge gaps pertaining to stock market returns.
3.3 Notions related to risk
A rarely traded security is risky because of its lack of liquidity. The premium associated
with this risk, for companies listed on US exchanges, is estimated at about 3% per year
9

(Liu 2006). If a liquid stock has an expected rate of return of 10% a similar but less liquid
stock should command a rate of 13%. 11 This difference directly affects share value, a fact
of which many investors seem unaware. Question 12 asked about this effect: “You have
the choice between two listed stocks with the same risk level. Stock A is traded every
day, while stock B is traded once a month. Stock A is selling for $10. How much would
you pay for stock B?” The share price of stock B should be about $7 to $8, based on
American estimates. Almost 42% of respondents gave this answer (Table 19). 31% of
people surveyed could not answer this question, and 23% suggested a price equal to or
higher than $10. They estimate that the lack of liquidity has no effect on the value or even
commands a premium, which is patently incorrect. There seems to be a difference
between the provinces among people who have an opinion: nearly 69% of Quebecers
apply this discount, compared with only 65% of Ontarians.
Table 20 shows that 81% of respondents who have an opinion know that they may lose
the whole amount invested in small capitalization companies listed on the Venture
Exchange. We observed a statistically significant provincial difference: 78% of Ontarians
answered correctly versus 71% of Quebecers. Nearly 22% of Ontario investors (29% of
Quebecers) think it is not possible to lose the entire amount invested in a few stocks of
exchange-listed small businesses or could not answer the question.
The risk measure used in portfolio management is complex and refers to volatility and
systematic risk. We used an intuitive measure of risk--the probability of obtaining a
negative return during the coming year. For each of the asset categories we estimated this
proportion using historical returns: this proportion was zero for Treasury Bills between
1991 and 2009, and 7% and 32% for bonds and stocks respectively. Regarding Treasury
Bills, Table 21 shows that 18% of investors surveyed have no idea of the magnitude of
this probability. 40% of investors answered correctly (zero probability). Nonetheless,
about 15% of investors estimate that this probability is above 30%. Statistically
significant provincial differences were observed. 55% of Quebecers correctly estimate
that this probability is 5% or under, versus 52% of Ontarians. At the other extremity of
the distribution, 16% of Ontarians wrongly believe that this probability is higher than
30%, compared with 14% of Quebecers.
Table 22 indicates a very low proportion of correct answers related to bonds (7%). 269
out of 1814 respondents (15%) could not answer the question. Of investors with an
opinion, 15% estimate this probability at between 6% and 30%. Most (60%) situate this
probability at 5% or lower. Nonetheless, 10% think it is higher than 61%. We also noted
statistically significant differences between the provinces. 48% of Quebecers wrongly
estimate that this probability is zero, versus 38% of Ontarians. Bond risk seems to be
poorly known, similar to bond return.
The probability of obtaining a negative return by holding an index fund is generally
underestimated (Table 23). 29% of respondents situate this probability at between 31%
and 50%. Even by greatly expanding the bracket of correct answers to include the class of
11 If a security earns $.80 in perpetuity for a capital cost of 8%, it is worth 0.80 /0.08 = $10. If a
premium for lack of liquidity of 30% raises the cost of capital from 8% to 11% per year, the value
becomes: 0.8/0.13 = $6.15. The net effect on price depends on the initial assumptions, but an
estimate between $6 and $8 would be accurate.
10

21% to 30%, the proportion of correct answers is below 42%. Surprisingly, 35% of
investors who supplied an answer said that this probability was 20% or less. This trend is
most common in Québec, where 39% of investors answered this way, as opposed to 31%
of Ontarians. Equity risk therefore seems to be strongly undervalued.
In general, approximately one investor out of two does not have a clear idea of the link
between lack of liquidity and share price, and one investor out of five does not know that
they could lose their entire investment if they purchase the stocks of small companies
listed on the TSX Venture Exchange. Many investors largely underestimate the risks of
holding government bonds and stocks.
3.4 Risk-return relationship
Only 41% of respondents affirm the positive risk-return tradeoff (Table 24). The
remainder disregards this relationship or does not consider it systematic, which is
incorrect. 12 This finding corroborates De Bondt’s (1998, p.840) assertion that most
Americans investors deny the risk-return relationship. In Canada, 59% of investors think
there is no such relationship or have no opinion on this question. The difference between
Québec and Ontario investors is significant. In Québec, 47% of investors think that one
can obtain a high return only if one assumes a high risk. This proportion is only 34% in
Ontario. The conviction that the relationship between risk and return is not systematic
also appeared during the analysis of the results of question 15 (Table 25): more than 64%
of investors think that some stocks listed on the TSX are bargains, that is investments
with a high return and low risk, but that these stocks are rare. If we add the investors who
believe that this is true (19%), a total of 83% of investors think that the TSX offers
bargains with a high return and low risk. 7% could not answer the question. Only 10% of
investors know that this statement is false. 15% of Quebecers hold this view, compared
with only 5% of Ontarians. This difference is statistically significant.
The impact of risk on share prices was addressed in the following question (Table 26).
More than 14% of the respondents did not know what impact risk would have on stocks.
Only 58% of investors knew that the price of a risky stock would be lower than that of a
less risky stock. The proportions of correct answers were 66% in Ontario and 51% in
Québec, a statistically significant difference.
To summarize, the majority (59%) of investors think there is no systematic relationship
between risk and return of stocks. Nearly all investors (83%) are convinced that there are
low-risk stocks that yield a high return.
3.5 Diversification
Diversifying a stock portfolio can eliminate a portion of the risk without decreasing the
expected return. Table 27 illustrates that 82% of respondents rightly believe that this
statement is true. 14% of the respondents consider this statement false. The majority of
investors have a clear idea of what diversification is, even if they do not fully grasp the
means of applying it. The nonresponse rate is very low (4%). Fairly evident statistically
12 The search for undervalued stocks, which offer a higher return at an equal risk, is the rationale
behind fund managers’ financial analysis. If they do appear, such stocks meet great demand that
increases their price, which reaffirms the risk-return relationship.
11

significant differences appear between the provinces: 87% of Québec investors who
answered did so correctly, as opposed to 83% of Ontarians.
Basic finance textbooks set the number of stocks from different sectors required to
diversify a portfolio at 20. The strict minimum is 10, if they are carefully selected to
ensure they are not interrelated. 35% of Ontarians and 25% of Quebecers have no idea
about the minimum number of stocks required to diversify a portfolio (Table 28). Further,
35% of respondents claim that 1 to 9 stocks is sufficient. Only 35% of the respondents
gave an acceptable answer, i.e. between 10 and 50 stocks, and the proportion of entirely
correct answers (20 to 50 stocks) was 6%. Investing in mutual funds is a good way to
diversify an equity portfolio. Table 29 shows that 218 respondents did not know this, and
114 thought that this statement is false. Therefore, 20% of the people surveyed did not
think it is possible to diversify a stock portfolio through mutual funds. Whereas the
concept of diversification seems relatively well understood, only a small proportion of
people surveyed know how to effectively diversify a portfolio.
3.6 Investors’ financial decisions
Before investing in small capitalization stocks, particularly as part of issues or
placements, it is important to meticulously analyze the information about the stocks,
which are often overvalued. Table 30 shows that 24% of people surveyed have no
opinion on this question, whereas 11% found the statement false. More than one in three
respondents answered this question incorrectly.
Only one out of five respondents is aware there is no reliable means of systematically
identifying undervalued or overvalued stocks (Table 31). The difference between
provinces is significant: 89% of Ontarians that have an opinion on this question answered
incorrectly, compared with 74% of Quebecers.
Buying the stock of a company with negative earnings implies assuming a high level of
risk. Table 32 shows that nearly 42% of people surveyed consider this assertion false
(444) or do not know (309). Only 58% of investors are therefore aware of the risk of
investing heavily in a company with negative earnings. More investors from Ontario than
Quebec answered this question incorrectly: 33% of Ontarians with an opinion on the
topic wrongly believed that the statement was false, as opposed to 26% of Quebecers.
This difference is statistically significant.
Investment decisions should be made according to overall asset allocation. The
distribution of answers appears in Table 33, which shows that 32% of respondents did not
answer this question correctly. 18% think that asset allocation is irrelevant. These
investors consider that the main element of portfolio management is stock selection.
Before buying a stock for the first time, one should analyze information related to its risk
level and expected return. Panel A of Table 34 indicates that most investors perform this
analysis well. However, almost 29% of investors do not consider analyzing the
information important, or do not do so systematically. Panel B of Table 34 shows that
30% of investors in the sample do not have financial advisors. Therefore, 70% of
investors who make decisions on portfolio management use the services of a financial
advisor. However, nearly 81% of these investors analyze the recommended stocks as
closely as if they had picked them themselves, which is a sound approach.
12

On average, the return obtained by mutual fund managers is below or equal to the market
return, before management fees (Lortie 2011; Sundgren and Svanström 2011). Only 47%
of people surveyed think this return will be below the market return (Table 35). A
significant proportion (21%) of respondents could not answer the question. About 33% of
respondents think that the institutional investor’s return will be identical to or higher than
the market’s performance.
3.7 Investors’ knowledge score
To summarize the results of the responses related to knowledge, we calculated
knowledge scores. The details of the 28 questions used in this calculation along with the
points attributed to each question are presented in Appendix 1. The total maximum score
is 56 points. Our method is inspired by that used in a similar context by several
researchers (Volpe et al. 2002; Lyons et al. 2007).
Figure 1 illustrates the distribution of responses. The median and average score is 26 out
of 56 points. The scores range from 0 to 44 points, but 50% of the scores fall between 21
and 31 points. Whereas only 5% of respondents scored higher than 37, 10% of
respondents scored below 16. Despite the many existing programs dedicated to financial
education, investors obtained only an average score when their knowledge is tested. Only
5% of investors received a score higher than 66%, corresponding to a passing grade in a
university course.
We have tried to link the scores to respondents’ characteristics. Because these
characteristics are not totally independent, they will be examined simultaneously.
3.8 Investors’ scores and characteristics
Table 36 presents the analysis of the financial knowledge score, expressed as a
percentage, according to respondents’ characteristics. The explanatory variables are
defined as follows:
Sex: takes the value of 1 if the respondent is male, and 0 otherwise.
College: takes the value of 1 if the respondent has a college education, and 0 otherwise.
University: takes the value of 1 if the respondent has a university education, and 0
otherwise.
Age_35_54: takes the value of 1 if the respondent is between age 35 and 54, and 0
otherwise.
Age_55: takes the value of 1 if the respondent is 55 or older, and 0 otherwise.
Income_50_100: takes the value of 1 if the respondent's annual income is between
$50,000 and $100,000, and 0 otherwise.
Income_100: takes the value of 1 if the respondent's annual income is over $100,000, and 0
otherwise.
Québec_Eng: takes the value of 1 if the respondent is an English-speaking Quebecer, and
0 otherwise.
Québec_French: takes the value of 1 if the respondent is a French-speaking Quebecer,
and 0 otherwise.
13

Most of the coefficients are statistically significant. Financial knowledge is highest for
men, and the level of significance is high. A higher level of education increases the
knowledge score. The reference level is the lack of college education. Holding a college
diploma does not influence knowledge significantly. Nonetheless, having a university
education it is very significant and positively related to knowledge. The score is 2.27
percentage points higher for this investor category. High income is also positively
associated with the knowledge score: the two variables associated with this dimension are
statistically significant. The reference level is that of investors with income below
$50,000. The group with income of between $50,000 and $100,000 has a score 1.25
percentage points higher than this reference level, whereas investors with the highest
income exceed the base score by 2.26 percentage points. Most of the relationships
clarified are intuitive, and are in line with the results of previous studies. There seem to
be differences related to language, which we cannot explain. These differences warrant
more in-depth analysis.
4 INVESTOR RATIONALITY
In this section we examine elements related to investor behavior. Isolating each of the
elements of behavioral finance calls for a rigorous protocol and the use of large samples
in an experimental situation. This was not the objective of this analysis. Rather, we
sought to evaluate the extent that Canadian investors are influenced by the best-known
behavioral biases.
4.1 Perspective theory
There is ample proof that presentation of choices influences decisions. The situation
presented first will generally be overweighted relative to alternatives presented
subsequently. If this is the case, the sequence of information produced on a stock,
company or market may unduly influence agents’ decisions. For example, the risk factors
of a prospectus are presented in order, and the main factors appear after less significant
ones. To analyze the extent that risk perception is influenced by the order of presentation
of information, the survey contained questions with the same answer, but whose
presentation differed. Replies were interpreted in pairs. The first pair of question was as
follows.
“Q26 How much would you be willing to pay for a share in AB Inc. that has 1) a one in a
hundred chance of generating a profit of $1,000, and 2) a total loss in all other cases?
Q39. How much would you be willing to pay for a share in AB Inc. that has 1) a 99%
chance of generating a total loss, and 2) a 1% chance of generating a $1,000 profit?”
Question 26 presents the large gain first, whereas Question 39 begins by mentioning the
total loss. Because the choices are identical, we should observe similar distributions for
each of the two questions. The expected value of the lottery is $10 (i.e. 1000 x 0.01) in
each case. Perfectly rational individuals should therefore offer $10 per share. The
preference for asymmetry should lead some to offer more than this amount.
Most of the respondents would not buy the lottery stock proposed, which seems to
illustrate a level of risk aversion that is not observed in the small capitalization stock
market (Table 37). A small proportion of respondents who had an opinion (4% to 6%
depending on whether question 26 or question 39 is analyzed) appeared to prefer
14

asymmetry, and offered more than $10 for this share. Few respondents offered the price
that represents the mathematical expectation, or $10: almost 8% for Question 26 and 4%
for Question 39. A sizable proportion of respondents (12% to 15%) did not know how
much to offer for such a stock. Regarding Question 26, more than half of the respondents
(53%) claimed they would offer nothing for the stock and 71% would offer $5 or less.
These proportions are higher in response to Question 39, which presents the loss first:
59% of respondents would offer nothing at all and 80% would offer less than $5 for the
stock. The order of presentation thus influences the answers, albeit to a limited extent.
The second pair of answer concerns valuation of the risk of a biotechnology company
when the order of presentation of risk factors is inverted. The third pair pertains to the
perception of risk of the TSX Venture Exchange according to whether the winning stocks
are presented first or not. In either case, the order of presentation of the information has
very little influence on the answers, and we did not describe the results in detail.
4.2 Availability bias
We tested the proposition that investors are interested in stocks that have experienced
strong variations in price, and tend to extrapolate the pattern observed. Accordingly, a
stock that has yielded a high return should be preferred to a stock whose price has
changed little. However, there is ample proof that past returns are no indication of future
returns.
Table 38 shows that 69% of investors who answered correctly could not judge the better
purchase based on the past return of two stocks. 21% of investors replied that the best
stock to buy is the one that had a higher return than the market, and only 10% opted for
the stock with a low return. Investors thus tend to extrapolate from a past positive return,
but this attitude is not generalized. 73% of Ontarians answer correctly versus 64% of
Quebecers, a significant difference.
4.3 Overconfidence bias
Overconfidence refers to investors’ tendency to overestimate their knowledge and
abilities and the accuracy of their information. Overconfident agents undertake actions
for which they lack the necessary skills. To estimate the presence of this effect, we first
used the risk premiums established by specialists. An average realistic investor should
have confidence in the average projections established by all experts and not consider
them optimistic or pessimistic. This question lets us verify the coherence of the
respondents’ answers. Question 9 asked investors to estimate this premium.
Table 39 illustrates the results. The columns “total Ontario, total Québec and
total” present the distribution of answers by province, for all respondents, whereas the
previous columns report the answers according to the level of risk premium estimated in
Question 9. Panel A shows the number of responses and Panel B their proportion. Only
110 respondents out of 1814 (6%), consider the estimated risk premium realistic and
therefore trust the specialists. Many respondents (43%) consider this estimate pessimistic:
they feel that the market should deliver a return higher than 7%. Conversely, 27% of
respondents consider the estimate too optimistic. 24% of respondents did not specify
whether the premium was realistic or not. Note that in Question 9, soliciting the
estimation of the premium, 876 investors, or nearly half of the sample, checked the box “I
15

don't know.” More respondents from Ontario than Québec admitted that they did not
know the answer to this question. Surprisingly, only 4% of respondents who chose a risk
premium of 3% to 4% consider the experts’ forecast realistic, even though both they and
the specialists arrived at the same result. The replies to various questions thus indicated
incoherence. The majority of respondents who chose a higher premium consider the
projection pessimistic, in line with expectations. For example, 57% of respondents
estimate the premium at between 5% and 6% and consider the estimate of 3% to 4%
pessimistic. However, 25% of these investors think the premium is optimistic, which is
surprising. Similarly, only 38% of respondents who estimate the premium at between 0
and 2% think that the estimate of 3% to 4% is optimistic, whereas one would expect to
observe a percentage closer to 100%. The respondents therefore seem to have a very
unclear grasp of the size of the risk premium, given that their responses vary greatly
depending on the question.
Questions 30 and 30a (Table 40) reflect investors’ ability to detect overvalued or
undervalued stocks. As Clarke et al. (2001) note, the chances of systematically detecting
over- or undervalued stocks are low, and the probability that an investor will
systematically beat the market for several periods is slim. Responses are expressed in
percentage of success. A random choice would give, on average, a rate of selection of
winning stocks of 50% because they represent half of the stocks available. The
probability of choosing an exceptional stock would be 5% (one chance out of 20). Panel
A presents the distribution of answers and Panel B the percentage of answers compared
with the entire sample.
Table 40 indicates a very high proportion of non-responses: more than one out of three
respondents did not know the odds of selecting a winning stock, and one out of five could
not specify their chances of selecting an exceptional stock. Only 17% of respondents
think their chances of selecting winning stocks is identical to that of a random choice, at
50%. Oddly, 23% of respondents indicated a lower probability of a correct choice (fewer
than five winning stocks out of 10) than what chance would allow. 25% of investors
think they can select more than 5 winning stocks out of 10, and therefore exhibit
overconfidence. This phenomenon thus seems to be relatively uncommon within the
sample.
Overconfidence is more evident concerning the chances of identifying exceptional stocks.
Whereas we expected most of the investors to give a probability of 10% or less, only
23% of respondents chose this answer. For 77% of investors surveyed, the chances of
detecting a winning stock are greater than 2 out of 20. These investors clearly exhibit a
trend toward overconfidence. 20% of Ontarians rightly estimated that they have about a
50% chance of identifying winning stocks, compared with 14% of Quebecers. In
addition, 25% of Ontarians correctly estimated their chances of identifying a winning
stock at 10% or less, compared with 22% of Quebecers. The interprovincial differences
are significant.
Valuing a startup technology stock is a complex process, with huge margins of error,
even for professionals. Venture capital investors often make costly mistakes because a
significant portion of their investments fail. We attempted to determine whether investors
admit that it is very unlikely to obtain a high return (300% over three years) by holding
such stocks. We estimated this probability at 5%. This figure was observed, for example,
16

in the case of initial public offerings and reverse takeovers between 1993 and 2003. 13 The
only companies that provide a high return over three years are those that graduate from
the venture exchange to the main exchange (Carpentier et al. 2010b). These highperforming
companies represent less than 8% of newly listed companies. About 10% of
stocks in a given year consist of new listings. The probability of selecting such a winning
stock can therefore be situated at between 0 and 5%.
Table 41 presents the distribution of respondents’ estimated probabilities. Nearly 15% of
investors could not state this probability. Only 41% of investors rightly believe that this
percentage is 5% or less. Half of investors therefore largely overestimate the probability
of obtaining an exceptional return. On average, respondents estimate the probability of
obtaining an exceptional return at 14%, and 15% in Québec. Ontarians seem to be
slightly less optimistic than Quebecers: 58% estimate this probability at 10% or less,
compared with 54% of Quebecers. Investors thus overestimate the probability of realizing
exceptional returns.
We asked respondents to evaluate their skill in three important elements of portfolio
management: stock selection, market trends and timing of stock buying and selling
decisions. The survey structure lets us compare these opinions with skill measured by
scores. Although this measure is admittedly imperfect, 14 it indicates the correct response
rate to the question on knowledge, presented in Part 3. For each group and response, we
recalculated the respondents’ median score. Table 42 presents the distribution of answers.
Regarding stock selection, 53% of investors consider themselves competent, 28% not
very competent, about 10% not competent at all, and 10% very competent (Panel A).
There are nonetheless differences between the provinces: 59% of Ontarians say they are
competent, compared with 47% of Quebecers, and 15% of Ontarians say they are very
competent, versus 6% of Quebecers. The last column of Table 42 indicates the median
distribution of the competence scores of investors in each group. In terms of stock
selection, investors obtain a median score of 19 out of 38: 50% of investors score below
this limit. The global level of skill measured is therefore average. The score increases as
the level of perceived competence increases: investors who do not feel competent at all
obtain a score of 13, whereas investors who consider themselves very competent obtain a
score of 21. Note that 50% of investors who thought themselves very competent obtain a
score below 21 out of 38. These investors are therefore optimistic when they judge their
ability to select stocks. It is in this area that respondents feel that they are most
competent.
When they assess their ability to predict the overall evolution of the market, 46% of
investors say they are not very competent, and 19% are reportedly not competent at all
(Panel B). This high proportion of respondents who do not consider themselves very
competent at anticipating market trends reflects the difficulty inherent in this exercise,
even for specialists. Nonetheless, 32% of respondents said they were somewhat
competent, and investors from Ontario were more likely to report feeling competent than
13 The probability of realizing a positive return in a given year is 43% (Carpentier and Suret
2008). The probability of earning a rate of return of 300% or more one year and positive or zero
returns in the two following years is therefore below 5%.
14 We could not verify all the aspects of investors’ financial knowledge.
17

Quebecers. This difference is statistically significant. The score obtained by all
respondents is 4 out of 14, which is below the average. Median scores measured for the
two groups who think they are somewhat competent or not very competent are identical.
At 5, the score of investors who consider themselves very competent falls short of the
average of 7 out of 14. Investors in these categories probably overestimate their abilities.
Panel C of Table 42 illustrates skill at timing stock buying or selling decisions. 81% of
investors feel not very competent or somewhat competent at choosing the right time. The
median score obtained by investors is 10 out of 18, or slightly above the average.
Investors who consider themselves most competent did not obtain a better score than
investors in the other groups (except for those who thought they were not at all
competent).
In general, investors thought they were more skilled than they actually were based on our
estimators. However, only a small minority of respondents said they were very
competent. They represent only 3.42% of the sample. However, the scores obtained did
not indicate that these investors are particularly skilled.
Investors affected by the overconfidence bias think they can outperform the market
return. To measure the extent of this bias among the investors, we asked respondents to
forecast the return of individual investors given a specific projection of the index return,
along with the return of their own portfolio.
We report the variance directly:
- The Investor-Market Gap (IMG) is the difference between the respondents’ estimated
return for all investors and that of the market. Analyses conducted on various markets
indicate that the average return of individual investors is below that of the market
(Barber and Odean 2000b).
- The Respondent-Investor Gap (RIG) is the difference between the return respondents
expected on their own portfolio, and what they expect for individual investors overall.
- The Respondent-Market Gap (RMG) is the difference between the expected return on
the respondent’s portfolio and the market return.
Table 43 reports the distribution of these gaps for each group of respondents in both
provinces. Over 39% of respondents consider that overall, individual investors will
realize a return 300 basis points or more below the market (IMG indicator). If we add the
18% of investors who consider that this gap will be less than 100 or 200 basis points to
that number, almost 57% of respondents think that individuals will realize returns below
that of the market. About 22% of respondents think that individual investors will obtain a
return equal to or higher than that of the market. More than 21% of respondents could not
answer this question. The RIG indicator shows that 18% of investors estimate that their
own portfolio will generate a return identical to that projected for all investors. However,
a very large proportion (45%) of investors think that their own portfolio will earn a better
return than that of their peers. About 63% of investors therefore believe they can attain a
return at least equivalent to that of other individual investors. Only 15% of respondents
think they will obtain a lower return than that of their peers. A statistically significant
difference was observed between the provinces: many more Ontarians (65%) than
Quebecers (60%) think they can attain a return identical to or better than their peers.
Respondents therefore consider themselves more skilled than their peers.
18

Table 43 illustrates that 78% of investors think they can obtain a return less than or equal
to what they would obtain on the market or simply could not answer the question (RMG
indicator). It is surprising to observe that of the 1814 people surveyed who personally
manage their portfolios, only 401, or slightly more than 22%, expect to achieve a return
higher than the indices. 11% of respondents say that this difference in their favor would
be 300 basis points or more. One third of the investors who answered this question (517
out of 1550) think that their return will be below that of the market by at least 300 basis
points. Yet they persist in managing their own portfolios even though they anticipate
returns below those of the indices, returns that they could attain through mutual funds by
paying management fees.
Table 44 compares the RMV indicator, namely the difference between the return
investors expected on their portfolio and that of the market, and the global median score
of financial knowledge. Respondents who think they can obtain precisely the market
return with their own portfolio obtain an average score of 28 out of 56. Those who think
they can obtain less than the market by a gap of 300 basis points or more receive a score
below 26 out of 56. Although the score is lower, the difference is minor. Respondents
who think they can outperform the market by 300 basis points or more obtain a score of
27 out of 56, barely higher than the category discussed above and worse than respondents
who think they can perform as well as the market. In general, we did not notice a
significant relationship between skill measured and investors’ anticipated return. Those
who anticipate high returns therefore probably overestimate their abilities.
4.4 Self Attribution
The concept of self attribution is translated by the fact that investors attribute their poor
decisions to external factors and their sound decision to their skill. It also prompts
individual investors to buy and sell stocks very frequently. The return on individual
portfolios is generally inversely related to transaction frequency.
Table 45 shows that 64% of investors know that it is not necessary to trade frequently to
generate a high return. 26% of respondents think this is true and 11% don't know. Nearly
36% of respondents therefore do not know that it is useless to trade very frequently. We
observed significant statistical differences between the provinces: 73% of Ontarians
replied correctly that the statement is false, versus 54% of Quebecers.
Table 46 illustrates that the majority of respondents attribute the poor performance of
their worst investment to economic circumstances and the market (37%), followed by
insufficient analysis at time of purchase (29%) and mistakes by management (23%). A
small number of respondents don't know (6%) or attribute this return to bad luck (5%).
Sizable provincial differences were noted. More Quebecers (42%) than Ontarians (32%)
attribute the paltry performance of their investments to economic circumstances. 27% of
Ontarians (19% of Quebecers) blame poor management.
If the concept of blindness were to prevail in our sample, respondents would be most
likely to give themselves credit for their best investment, and blame their worst
investment on economic circumstances or other factors. Table 47 shows that this is not
the case. Only 21% of respondents attribute their good performance to their own
analysis, compared with 29% when asked about their worst investment. The most
frequently cited cause of good performance of their investments is economic
19

circumstances and the market (37%), followed by good management. Significant
provincial differences appeared. Economic circumstances were mentioned more often by
Quebecers (42%) than Ontarians (33%) and good management is a more frequent cause
of good returns for Ontarians (35%) than for Quebecers (24%).
4.5 Preference for lottery stocks
If they allow investors to realize a very large return (stock B) or an exceptional return
(stock C) at a higher risk (and therefore a lower expected return), stocks B and C have the
characteristics of a lottery stock. Do investors prefer these types of stocks? According to
the results presented in Table 48, 66% of respondents prefer to hold an investment that
offers 6% with certainty. About one-quarter of respondents prefer to hold stocks that let
them obtain a very high return (400%) at the price of a lower expected return (which falls
to 5.41%). A small number of respondents (5%) prefer to buy a stock that lets them
obtain an exceptional return. In total, 29%, or about one out of three respondents, choose
a lottery type stock. Provincial differences were noted: more Quebecers (32%) than
Ontarians (26%) would purchase lottery stocks.
4.6 Familiarity bias
A familiarity bias leads individuals to think they can better control what they know more
about. To manage risk, good knowledge of a limited number of stocks is preferable to
diversification. We asked investors if it is more risky to invest in a small listed company
with sales of a few million dollars, whose products, management team and projects are
known, or in a large company included in a stock index. It is much riskier to invest in the
small company, which presents more operating risk and much higher financial risk than a
large firm.
Table 49 indicates that only 6% of respondents had no opinion on this topic. 35% of
respondents said that investing in the small company would be riskier or much riskier
than investing in the large one. 34% consider the risks similar and 24% of investors said
it is less or much less risky to invest in a small known company than in a large one.
Provincial distribution shows that 62% of Quebecers think the risk of investing in the
small company is less than or similar to that of investing in a large one, compared with
55% of Ontarians. The difference is statistically significant. Investors therefore seem to
consider knowing the business project very important, considering it a major element in
risk reduction.
Table 50 shows that only 56% of the respondents prefer a diversified portfolio of stocks
of large companies to a portfolio containing small-company stocks. In total, 44% of
respondents could not choose the less risky portfolio: a large proportion (38%) of
respondents chose the portfolio containing a very small number of known stocks, and 6%
did not know which portfolio to choose. A sizable proportion of investors therefore suffer
from familiarity bias. This trend is more evident in Ontario (40%) than in Québec (35%).
The difference is statistically significant.
Table 51 shows that 79% of respondents did not use any documentation to reply to the
questionnaire. About 15% of the people surveyed use the Internet and 5% another source.
Nearly 2% used two sources of information (Internet and one other source). More
20

Quebecers (26%) than Ontarians (17%) used at least one source of information to
complete the survey. The difference is statistically significant.
CONCLUSION
Overall, the survey evaluated the knowledge of individuals who manage their own stock
portfolios. We thus estimated their knowledge scores, which are generally mediocre.
Only 5% of individual managers scored higher than 66%. The vast majority obtain a
score between 40% and 57%. Major gaps appear regarding knowledge of risk and return
of asset categories. Knowledge of past returns of asset categories is abnormally poor.
The survey also measured the extent that behavioral biases identified in previous works
affect Canadian investors. The main result of the study is that investors are generally
unaware of gaps in their financial knowledge. However, they indirectly recognize these
gaps by expecting to achieve returns below than or equal to those of the market index.
Overvaluation of skill has a marked effect on stock selection. Combined with a
preference for risky stocks, this overconfidence is worrisome. It is consistent with the
very poor performance observed on small capitalization markets in Canada. These
observations have important implications for investor literacy programs. Most of the
programs seem designed for people who want to improve their knowledge. If investors
are unaware of their gaps, it is unlikely that such programs can fully achieve their
objectives. Efforts are therefore required to allow investors to judge their level of
financial knowledge objectively and improve that knowledge.
Our results have implications in public policy, particularly as part of the debate
surrounding the creation of group retirement savings mechanisms: most of the funds
managed by individuals surveyed are included in self-directed RRSPs. Poor investor
knowledge and bias could undermine returns.
Overall, Québec and Ontario investors have poor financial knowledge, despite the many
programs dedicated to financial education. We did not detect the presence of very
important biases in the investor population, except concerning overestimation of their
skill. This behavioral bias may hinder efforts to reinforce investors’ financial knowledge.
If they think they are skilled, investors may not see the need to train further. Gaps noted
between English and French speakers, in favor of the latter, warrant complementary
analyses. It also seems important to try to determine why investors manage their stocks
themselves even if they expect a return below that of the indices, which they could
approach or achieve using mutual funds or specialized services.
21

TABLES AND FIGURES
Table 1 Provincial distribution of respondents by employment status
Ontario % Québec % Total %
Employed full-time (> 30 hours per week) 440 48.19 431 47.84 871 48.02
Employed part-time (

Table 4 Q1a. How are your financial assets allocated in terms of percentage of value of
your portfolio (excluding real estate)?
Ontario Québec Total Test t
Average percentage of asset category
Shares of large companies listed on the stock exchange
(from market indices such as S&P/TSX 300 or similar)
Shares of smaller companies listed on the stock
exchange
Mutual funds or similar vehicles: Exchange-Traded
Funds (ETF) for example
42.0
21.5
44.3
25.6
43.1
23.5
-1.76
38.4 37.2 37.9 0.88
*
-2.79 ***
Fixed income (e.g. bonds, guaranteed investment
certificates)
28.5 31.4 30.0 -2.13 **
Other, please specify 22.5 30.4 26.2 -2.15 **
Median percentage of asset category
Shares of large companies listed on the stock exchange
(from market indices such as S&P/TSX 300 or similar)
Shares of smaller companies listed on the stock
exchange
Mutual funds or similar vehicles: Exchange-Traded
Funds (ETF) for example
40.0 40.0 40.0
15.0 19.0 15.0
31.0 30.0 30.0
Fixed income (e.g. bonds, guaranteed investment
certificates)
25.0 25.0 25.0
Other, please specify 17.0 20.0 20.0
23

Table 5 Q1b. What is the approximate total value of all of the financial assets in your investment portfolio,
(excluding real estate)?
Ontario Québec Total
Panel A: Descriptive statistics
Mean Median Mean Median Mean Median T test
in $ 552 363 250 000 301 296 140 000 426 554 200 000 4.92 ***
Panel B: Distribution by asset class
Cumulative
Cumulative
Cumulative
# % % # % % # % %
$500,000 160 23.49 100.00 96 14.04 100.00 256 18.75 100.00
Total 681 100.00 684 100.00 1365 100.00
Chi 2 55.39***
Not available 232 217 449
Total 913 901 1814
Table 6 Q1c. How many stocks are there in your investment portfolio for each of
the following financial asset classes? (For example, if I hold 200 shares of large
company A, 500 of large company B and 50 of large company C, the number of
stocks of large companies is 3). Number of stocks of large companies listed on the
stock exchange (from market indices such as S&P/TSX 300 or similar):
Class Ontario Québec Total
# %
Cumulative
% # %
Cumulative
%
1 - 2 188 27.05 27.05 101 21.91 21.91 289
3 - 4 114 16.40 43.45 76 16.49 38.39 190
5 - 6 116 16.69 60.14 71 15.40 53.80 187
7 - 8 55 7.91 68.06 32 6.94 60.74 87
9 - 15 104 14.96 83.02 69 14.97 75.70 173
16 - 20 39 5.61 88.63 34 7.38 83.08 73
21 - 25 22 3.17 91.80 15 3.25 86.33 37
26 or more 57 8.20 100.00 63 13.67 100.00 120
Total 695 100.00 461 100.00 1156
Chi 2 12.91*
Median 5 6 5
* significant at 10% level
24

Table 7 Q1c. How many stocks are there in your investment portfolio for each
of the following financial asset classes? (For example, if I hold 200 shares of
large company A, 500 of large company B and 50 of large company C, the
number of stocks of large companies is 3). Number of stocks of smaller
companies listed on the stock market:
Class Ontario Québec Total
# %
Cumulative
% # %
Cumulative
%
1 - 2 131 32.75 32.75 71 25.91 25.91 202
3 - 4 87 21.75 54.50 60 21.90 47.81 147
5 - 6 75 18.75 73.25 50 18.25 66.06 125
7 - 8 22 5.50 78.75 13 4.74 70.80 35
9 - 15 53 13.25 92.00 41 14.96 85.77 94
16 – 20 12 3.00 95.00 12 4.38 90.15 24
21 - 25 4 1.00 96.00 6 2.19 92.34 10
26 or more 16 4.00 100.00 21 7.66 100.00 37
Total 400 100.00 274 100.00 674
Chi 2 9.48
Median 5 4 4.5
Table 8 Q5a. In your opinion, what has the average annual rate of return been for the
following investment portfolio since 1991? A portfolio made up entirely of Canadian
Treasury Bills. The correct answer is 4.2%.
# %
Ontario Québec Total
Cumulative
% # %
Cumulative
%
1% 53 9.22 9.22 57 9.79 9.79 110
2% 68 11.83 21.04 86 14.78 24.57 154
3% 123 21.39 42.43 121 20.79 45.36 244
4% 88 15.30 57.74 93 15.98 61.34 181
5% 88 15.30 73.04 82 14.09 75.43 170
6% 45 7.83 80.87 45 7.73 83.16 90
7% 33 5.74 86.61 29 4.98 88.14 62
8% 26 4.52 91.13 21 3.61 91.75 47
9% - 10% 25 4.35 95.48 21 3.61 95.36 46
11% - 16% or more 26 4.52 100.00 27 4.64 100.00 53
575 100.00 582 100.00 1157
Chi 2 3.73
Median 4% 4% 4%
mean 4.65% 4.45%
4.55%
I don’t know 338 319
657
Total 913 901 1 814
25

Table 9 Q5b. In your opinion, what has the average annual rate of return been for the
following investment portfolio since 1991? A portfolio made up entirely of long-term
Canadian Government Bonds. The correct answer is 10.40%.
# %
Ontario Québec Total
Cumulative
% # %
Cumulative
%
1% 56 9.49 9.49 59 10.23 10.23 115
2% 54 9.15 18.64 47 8.15 18.37 101
3% 89 15.08 33.73 98 16.98 35.36 187
4% 97 16.44 50.17 110 19.06 54.42 207
5% 118 20.00 70.17 97 16.81 71.23 215
6% 64 10.85 81.02 48 8.32 79.55 112
7% 35 5.93 86.95 36 6.24 85.79 71
8% 29 4.92 91.86 28 4.85 90.64 57
9% 9 1.53 93.39 11 1.91 92.55 20
10% 13 2.20 95.59 20 3.47 96.01 33
11% 6 1.02 96.61 9 1.56 97.57 15
12% - 15% 10 1.69 98.31 8 1.39 98.96 18
16% or more 10 1.69 100.00 6 1.04 100.00 16
590 100.00 577 100.00 1167
Chi 2 9.55
Median 4% 4% 4%
Mean 4.81% 4.75% 4.78%
I don’t know 323 324 647
Total 913 901 1 814
26

Table 10 Q5c. In your opinion, what has the average annual rate of return been for the
following investment portfolio since 1991? A portfolio that mirrors the S&P/TSX
composite index. The correct answer is 11.3%.
# %
Ontario Québec Total
Cumulative
% # %
Cumulative
%
1% - 2% 27 4.19 4.19 27 4.53 4.53 54
3% - 4% 26 4.04 8.23 53 8.89 13.42 79
5% 50 7.76 15.99 48 8.05 21.48 98
6% 61 9.47 25.47 47 7.89 29.36 108
7% 61 9.47 34.94 60 10.07 39.43 121
8% 107 16.61 51.55 99 16.61 56.04 206
9% 52 8.07 59.63 60 10.07 66.11 112
10% 82 12.73 72.36 69 11.58 77.68 151
11% 26 4.04 76.40 20 3.36 81.04 46
12% 44 6.83 83.23 23 3.86 84.90 67
13 - 15% 29 4.50 87.73 32 5.37 90.27 61
16% or more 79 12.27 100.00 58 9.73 100.00 137
644 100.00 596 100.00 1240
Chi 2 22.00**
Median 8.00% 8.00% 8.00%
Mean 9.01% 8.50% 8.76%
I don’t know 269 305 574
Total 913 901 1 814
** significant at 5% level
Table 11 Q7.3 During long periods (of several years), the return from the overall
bond market (often referred to as the Bond Universe) can be equal to or higher
than that of stocks.
Ontario Québec Total
# % # % # %
True 401 54.56 369 51.18 770 52.88
False 334 45.44 352 48.82 686 47.12
Total 735 100.00 721 100.00 1456 100.00
Chi 2 1.67
I don’t know 178 180 358
Total 913 901 1814
27

Table 12 Q6. Today I buy a share in a fast-growing small business for $10. I hope to
obtain a return of 15% within three years. This expected return will primarily come from:
Ontario Québec Total
# % # % # %
Dividends I will receive 161 18.19 164 19.27 325 18.72
The profit I expect to make in three years
when I sell the share 724 81.81 687 80.73 1411 81.28
Total 885 100.00 851 100.00 1736 100.00
Chi 2 0.33
I don’t know 28 50 78
Total 913 901 1814
Table 13 Q7.0 Today I buy a share for $15 in a company that's listed on the
stock market and that usually pays dividends. I will definitely receive these
dividends in the future.
Ontario Québec Total
# % # % # %
True 327 39.64 222 26.43 549 32.97
False 498 60.36 618 73.57 1116 67.03
Total 825 100.00 840 100.00 1665 100.00
Chi 2 32.85***
I don’t know 88 61 149
Total 913 901 1814
Table 14 Q7.1 Stock market indices are generally calculated using a weighted
average based on market capitalization. These indices are therefore greatly
influenced by the return of stocks of the largest companies.
Ontario Québec Total
# % # % # %
True 651 89.67 645 87.04 1296 88.34
False 75 10.33 96 12.96 171 11.66
Total 726 100.00 741 100.00 1467 100.00
Chi 2 2.45
I don’t know 187 160 347
Total 913 901 1814
28

Table 15 Q7.2 The expected market return is the sum of the risk-free rate (for
example, that of 10-year government bonds) and the market risk premium.
Ontario Québec Total
# % # % # %
True 282 54.65 260 46.76 542 50.56
False 234 45.35 296 53.24 530 49.44
Total 516 100.00 556 100.00 1072 100.00
Chi 2 6.66***
I don’t know 397 345 742
Total 913 901 1814
*** Significant at 1% level
Table 16 Q9. How much is the current market risk premium (in other words, the
anticipated gap between the expected return of the stock market index and that of
government bonds)?
Ontario Québec Total
# % # % # % Cumulative %
0 - 2% 66 13.95 64 13.76 130 13.9 13.9
3% 65 13.74 66 14.19 131 14.0 27.8
4% 67 14.16 56 12.04 123 13.1 40.9
5% 100 21.14 100 21.51 200 21.3 62.3
6% - 7% 71 15.01 76 16.34 147 15.7 77.9
8% - 9% 36 7.61 45 9.68 81 8.6 86.6
10% or more 68 14.38 58 12.47 126 13.4 100.0
Total 473 100.00 465 100.00 938 100.0
Chi 2 2.92
Mean 5.5 5.5 5.5
Median 5 5 5
I don’t know 440 48.19 436 48.39 876 48.29
Total 913 901 1814
29

Table 17 Q7.4 A good investment strategy is to buy stocks when markets are
rising and sell stocks when markets are falling.
Ontario Québec Total
# % # % # %
True 214 25.12 131 15.27 345 20.18
False 638 74.88 727 84.73 1365 79.82
Total 852 100.00 858 100.00 1710 100.00
Chi 2 25.75***
I don’t know 61 43 104
Total 913 901 1814
*** Significant at 1% level
Table 18 Q8. To determine if my stock portfolio contains good investments, I
compare the return of my portfolio with the return of a market index (for
example the S&P/TSX 60):
Ontario Québec Total
# % # % # %
Regularly 221 24.21 178 19.76 399 22.00
Sometimes 456 49.95 513 56.94 969 53.42
Never 236 25.85 210 23.31 446 24.59
Total 913 100.00 901 100.00 1814 100.00
Chi 2 9.42***
*** Significant at 1% level
Table 19 Q.12 You have the choice between two listed stocks with the same risk level. Stock A
is traded every day, while stock B is traded once a month. Stock A is selling for $10. How
much would you pay for stock B?
# %
Ontario Québec Total
Cumulative
% # %
Cumulative
% # %
Cumulative
%
$7 243 39.45 39.45 243 38.57 38.57 486 39.00 39.00
$8 121 19.64 59.09 153 24.29 62.86 274 21.99 61.00
$9 39 6.33 65.42 37 5.87 68.73 76 6.10 67.09
$10 169 27.44 92.86 132 20.95 89.68 301 24.16 91.25
$11 to $13 44 7.14 100.00 65 10.32 100.00 109 8.75 100.00
Total 616 100.00 630 100.00 1246 100.00
Chi 2 12.28**
I don’t know 297 271 568
Total 913 901 1814
30

Table 20 Q7.5 If my whole portfolio consists of a few stocks of small businesses
listed on the TSX Venture Exchange, I could lose the total invested amount:
Ontario Québec Total
# % # % # %
True 715 84.42 636 77.66 1351 81.09
False 132 15.58 183 22.34 315 18.91
Total 847 100.00 819 100.00 1666 100.00
Chi 2 12.41***
I don’t know 66 82 148
Total 913 901 1814
*** Significant at 1% level
Table 21 Q17a. In your opinion, what is the probability of having a negative return next year if you
are invested solely in Treasury Bills?
# %
Ontario Québec Total
Cumulative
% # %
Cumulative
% # %
31
Cumulative
%
0% 328 43.73 43.73 391 52.41 52.41 719 48.06 48.06
1% - 5% 143 19.07 62.80 105 14.08 66.49 248 16.58 64.64
6 %- 10% 59 7.87 70.67 48 6.43 72.92 107 7.15 71.79
11% - 30% 70 9.33 80.00 80 10.72 83.65 150 10.03 81.82
31% - 60% 71 9.47 89.47 65 8.71 92.36 136 9.09 90.91
61% - 100% 79 10.53 100.00 57 7.64 100.00 136 9.09 100.00
Total 750 100.00 746 100.00 1496 100.00
Chi 2 16.95***
I don’t know 163 155 318
Mean 16.9% 13.6% 15.2%
Median 1% 0% 1%
Total 913 901 1814
*** Significant at 1% level

Table 22 Q17b. In your opinion, what is the probability of having a negative return next year if you
are invested solely in long-term government bonds?
# %
Ontario Québec Total
Cumulative
% # %
Cumulative
% # %
Cumulative
%
0% 298 37.96 37.96 361 47.50 47.50 659 42.65 42.65
1% - 5% 151 19.24 57.20 121 15.92 63.42 272 17.61 60.26
6 %- 10% 67 8.54 65.73 52 6.84 70.26 119 7.70 67.96
11% - 30% 46 5.86 71.59 59 7.76 78.03 105 6.80 74.76
31% - 60% 138 17.58 89.17 111 14.61 92.63 249 16.12 90.87
61% - 100% 85 10.83 100.00 56 7.37 100.00 141 9.13 100.00
Total 785 100.00 760 100.00 1545 100.00
Chi 2 21.33***
Mean 18.3% 14.2% 16.3%
Median 4% 1% 2%
I don’t know 128 141 269
Total 913 901 1814
*** Significant at 1% level
Table 23 Q17c. In your opinion, what is the probability of having a negative return next year if you
are invested solely in stocks of the S&P/TSX index?
# %
Ontario Québec Total
Cumulative
% # %
Cumulative
% # %
Cumulative
%
0 - 10% 136 17.17 17.17 169 22.78 22.78 305 19.88 19,88
11% - 20% 113 14.27 31.44 121 16.31 39.08 234 15.25 35,14
21% - 30% 115 14.52 45.96 112 15.09 54.18 227 14.80 49,93
31% - 50% 289 36.49 82.45 234 31.54 85.71 523 34.09 84,03
51% - 70% 69 8.71 91.16 61 8.22 93.94 130 8.47 92,50
71% - 100% 70 8.84 100.00 45 6.06 100.00 115 7.50 100,00
Total 792 100.00 742 100.00 1534 100.00
Chi 2 13.98**
I don’t know 121 159 280
mean 36.7% 32.4% 34.6%
median 34% 30% 31%
Total 913 901 1814
** Significant at 5% level
32

Table 24 Q14. A higher return can be obtained only by taking a greater risk:
Ontario Québec Total
# % # % # %
True 313 34.86 424 48.07 737 41.40
False 154 17.15 83 9.41 237 13.31
It’s not systematic… a 431 48.00 375 42.52 806 45.28
Total 898 100.00 882 100.00 1780 100.00
Chi 2 41.74***
I don’t know 15 19 34
Total 913 901 1814
a It's not systematic – it depends on one's knowledge of stocks
*** Significant at 1% level
Table 25 Q15. On the TSX, it is possible to find shares that are “great deals”; that is,
investments that combine a high return and a low risk:
Ontario Québec Total
# % # % # %
True 229 26.32 114 13.97 343 20.34
True but very rare 596 68.51 569 69.73 1165 69.10
False 45 5.17 133 16.30 178 10.56
Total 870 100.00 816 100.00 1686 100.00
Chi 2 81.04***
I don’t know 43 85 128
Total 913 901 1814
*** Significant at 1% level
33

Table 26 Q16. The expected future cash flows of companies A and B are identical, but
company A is riskier than company B. The share price for company A would therefore
be:
Ontario Québec Total
# % # % # %
Higher than the share price
for company B
The same as the share price
for company B because the
expected cash flows are
107 13.24 167 22.36 274 17.62
identical
Lower than the share price
101 12.50 125 16.73 226 14.53
for company B 600 74.26 455 60.91 1055 67.85
Total 808 100.00 747 100.00 1555 100.00
Chi 2 33.28***
I don’t know 105 154 259
Total 913 901 1814
*** Significant at 1% level
Table 27 Q18. By diversifying a stock portfolio, you can partly eliminate
the risk without lowering your goals in terms of return:
Ontario Québec Total
# % # % # %
True 724 82.93 756 87.20 1480 85.06
False 79 9.05 76 8.77 155 8.91
That’s impossible 70 8.02 35 4.04 105 6.03
Total 873 100.00 867 100.00 1740 100.00
Chi 2 13.00***
I don’t know 40 34 74
Total 913 901 1814
*** Significant at 1% level
34

Table 28 Q19. To diversify a stock portfolio properly, what is the minimum number of
stocks belonging to different sectors (in equal proportions) that you need?
Ontario Québec Total
# % # % # %
1 to 9 318 53.18 318 47.04 636 49.92
10 to 20 235 39.30 302 44.67 537 42.15
21 to 50 45 7.53 56 8.28 101 7.93
Total 598 100.00 676 100.00 1274 100.00
Chi 2 4.80*
I don’t know 315 225 540
Total 913 901 1814
* Significant at 10% level
Table 29 Q20_0. A good way to diversify a stock portfolio is through mutual funds or
Exchange-Traded Funds.
Ontario Québec Total
# % # % # %
True 732 90.26 723 92.10 1455 91.17
False 79 9.74 62 7.90 141 8.83
Total 811 100.00 785 100.00 1596 100.00
Chi 2 1.68
I don’t know 102 116 218
Total 913 901 1814
Table 30 Q20_1 Before investing in small-cap securities, in particular those issued at
private placements or at initial or subsequent offerings, I need to analyze the
information about these stocks carefully, because they tend to be overvalued.
Ontario Québec Total
# % # % # %
True 556 83.73 621 86.49 1177 85.17
False 108 16.27 97 13.51 205 14.83
Total 664 100.00 718 100.00 1382 100.00
Chi 2 2.07
I don’t know 249 183 432
Total 913 901 1814
35

Table 31 Q20_2 There are reliable ways of systematically identifying
over- or under-valued securities, but this takes time.
Ontario Québec Total
# % # % # %
True 671 88.52 537 73.56 1208 81.18
False 87 11.48 193 26.44 280 18.82
Total 758 100.00 730 100.00 1488 100.00
Chi 2 54.48***
I don’t know 155 171 326
Total 913 901 1814
*** Significant at 1% level
Table 32 Q20_3. 3 In the long term, there is a stable relationship between
a company’s profitability and its market return. Therefore, buying shares
of a company with negative earnings means taking a very big risk on its
future return.
Ontario Québec Total
# % # % # %
True 520 67.18 541 74.01 1061 70.50
False 254 32.82 190 25.99 444 29.50
Total 774 100.00 731 100.00 1505 100.00
Chi 2 8.42***
I don’t know 139 170 309
Total 913 901 1814
*** Significant at 1% level
Table 33 Q21. I make my investment decisions according to how my savings and investments
are allocated. In particular, I take into account the overall structure of my financial assets.
Ontario Québec Total
# % # % # %
True 618 73.05 623 74.43 1241 73.74
False 65 7.68 43 5.14 108 6.42
That's not important, what matters is stock picking 163 19.27 171 20.43 334 19.85
Total 846 100.00 837 100.00 1683 100.00
Chi 2 4.64*
I don’t know 67 64 131
Total 913 901 1814
*** Significant at 10% level
36

Table 34 Q22 and 23 – Analysis of information when buying a stock by oneself or
following the recommendation by a financial advisor.
Ontario Québec Total
# % # % # %
Panel A Q22. Before buying a stock that I don't already have in my portfolio, I
analyze the information about its risk level and its expected return.
True 664 75.80 633 72.34 1297 74.07
False 23 2.63 22 2.51 45 2.57
Not systematically
189 21.58 220 25.14 409 23.36
Total 876 100.00 875 100.00 1751 100.00
Chi 2 3.11
I don’t know 37 26 63
Total 913 901 1814
Panel B Q23. I research the stocks recommended by my financial advisor as
carefully as I do when I buy stocks myself.
True 507 56.33 524 59.55 1031 57.92
False 112 12.44 96 10.91 208 11.69
I don't have a financial advisor 281 31.22 260 29.55 541 30.39
Total 900 100.00 880 100.00 1780 100.00
Chi 2 2.1
I don’t know 13 21 34
Total 913 901 1814
37

Table 35 Q36_a. Assume that the stock market return will be 10% next year. What do you expect
the average return next year will be for mutual fund managers?
# %
Ontario Québec Total
Cumulative
% # %
Cumulative
% # %
Cumulative
%
0 - 4% 49 6.88 6.88 59 8.183 8.18 108 7.54 7.54
5% - 7% 184 25.84 32.72 189 26.21 34.40 373 26.03 33.57
8% - 9% 186 26.12 58.85 183 25.38 59.78 369 25.75 59.32
10% 94 13.20 72.05 104 14.42 74.20 198 13.82 73.13
11% - 12% 107 15.03 87.08 108 14.98 89.18 215 15.00 88.14
13% or more 92 12.92 100.00 78 10.82 100.00 170 11.86 100.00
Total 712 100.00 721 100 1433 100.00
Chi 2 2.62
Mean 9% 8.8% 8.9%
Median 8% 8% 8%
I don’t know 201 180 381
Total 913 901 1814
Figure 1 Distribution of respondent’s individual scores, calculated based on the 28 questions
dealing with knowledge. The total possible score is 56 points.
250
200
150
100
50
0
38

Table 36 Analysis of knowledge score based on respondents’ characteristics
Variable Coefficients t Sig.
Intercept 19.353 21.003 0.000 ***
Sex 3.491 8.577 0.000 ***
College 0.791 1.186 0.236
University 2.270 3.737 0.000 ***
Age_35_54 0.347 0.512 0.609
Age_55 -0.226 -0.351 0.725
Income_50_100 1.251 2.492 0.013 ***
Income _100 2.262 4.216 0.000 ***
Québec_Eng 0.264 0.517 0.606
Québec_French 1.914 4.724 0.000 ***
Adjusted R square 0.082 ***
*** Significant at 1% level
Table 37 Q26. How much would you be willing to pay for a share in AB Inc. that has 1) a one
in a hundred chance of generating a profit of $1,000, and 2) a total loss in all other cases?
Q39. How much would you be willing to pay for a share in AB Inc. that has 1) a 99% chance
of generating a total loss, and 2) a 1% chance of generating a $1000 profit.
Q26 Q39
# % # %
Nothing at all 478 52.70 535 58.99
1 dollar 107 11.80 138 15.21
5 dollars 59 6.50 50 5.51
10 dollars 71 7.83 36 3.97
15 dollars 7 0.77 4 0.44
20 dollars 18 1.98 14 1.54
25 dollars 11 1.21 6 0.66
30 dollars 5 0.55 5 0.55
35 dollars or more 15 1.65 11 1.21
I don’t know 136 14.99 108 11.91
Total 907 100.00 907 100.00
39

Table 38 Q25. Let's compare the stocks of two technological corporations. For the past year,
company A’s stock has a return of 29%, much higher than the market return. Company’s B
stock has -1% return. In your opinion, which stock is the better buy?
Ontario Québec Total
# % # % # %
Stock A 174 19.06 205 22.75 379 20.89
Stock B 69 7.56 121 13.43 190 10.47
Impossible to know from the information provided 627 68.67 515 57.16 1142 62.95
I don’t know 43 4.71 60 6.66 103 5.68
Total 913 100.00 901 100.00 1814 100.00
Chi 2 30.48***
Table 39 Q29. American specialists predict a risk premium of 3% to 4%, which would put the
stock market return at about 7%. Is this estimates:
Estimated risk premium - Question 9 Total
0 - 2% 3 - 4% 5 - 6% 7 - 8%
9% and
+
I don’t
know
Ontario
Total
Québec
Panel A: Distribution of answers
Optimistic 50 82 71 33 44 210 256 234 490
Realistic 10 11 23 14 16 36 49 61 110
Pessimistic 50 135 160 71 64 305 377 408 785
I don’t know 20 26 26 11 21 325 231 198 429
Total 130 254 280 129 145 876 913 901 1814
Panel B: Percentage of answers
Optimistic 38.46 32.28 25.36 25.58 30.34 23.97 28.04 25.97 27.01
Realistic 7.69 4.33 8.21 10.85 11.03 4.11 5.37 6.77 6.06
Pessimistic 38.46 53.15 57.14 55.04 44.14 34.82 41.29 45.28 43.27
I don’t know 15.38 10.24 9.29 8.53 14.48 37.10 25.30 21.98 23.65
Total 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00
40
Total

Table 40 Q30. You have the time and the resources to analyze 20 stocks chosen at
random in a sector that you are very familiar with. You can choose 10. We can assume
that, among these 20 stocks, 10 will do better than the market, (the winners), and 10 will
do worse than the market, (the losers). Among the winners, there is one exceptional stock
that will generate a return of more than 100% over the next three years.
How many winning stocks do you think you would be able to choose among the 10 that
make up your portfolio? (Q30). What are your chances of identifying the exceptional
stock? (Q30a).
Ontario Québec Total
Success Winning Exceptional Winning Exceptional Winning Exceptional
Rate stock stock stock stock stock stock
Panel A: Distribution of answers
0 - 10% 45 229 71 196 116 425
11% - 20% 55 101 66 110 121 211
21% - 30% 61 127 55 145 116 272
31% - 40% 37 57 36 52 73 109
41% - 50% 180 116 127 112 307 228
51% - 60% 84 23 72 37 156 60
61% - 70% 94 26 73 23 167 49
71% or more 71 49 66 27 137 76
Total 627 728 566 702 1193 1430
Chi 2 16.97** 13.79*
I don’t know 286 185 335 199 621 384
Total 913 913 901 901 1814 1814
Panel B: Percentage of answers
0 - 10% 4.93 25.08 7.88 21.75 6.39 23.43
11% - 20% 6.02 11.06 7.33 12.21 6.67 11.63
21% - 30% 6.68 13.91 6.10 16.09 6.39 14.99
31% - 40% 4.05 6.24 4.00 5.77 4.02 6.01
41% - 50% 19.72 12.71 14.10 12.43 16.92 12.57
51% - 60% 9.20 2.52 7.99 4.11 8.60 3.31
61% - 70% 10.30 2.85 8.10 2.55 9.21 2.70
71% or more 7.78 5.37 7.33 3.00 7.55 4.19
I don’t know 31.33 20.26 37.18 22.09 34.23 21.17
Total 100.00 100.00 100.00 100.00 100.00 100.00
41

Table 41 Q11. In some cases, small-cap stocks can deliver exceptional returns. For
example, shares in Galway Resources Ltd. went from $0.01 to $1.6 between the beginning
and the end of 2009. The initial investment was thus multiplied by 160. What do you think
the probability is of getting a return greater than 300% over a period of 3 years by
investing in small-cap stocks?
Ontario Québec Total
Panel A: Distribution of answers
0 - 1% 154 140 294
2% - 5% 249 205 454
6 %- 10% 125 140 265
11% - 20% 96 94 190
21% - 30% 73 64 137
31% - 40% 15 32 47
41% - 50% 41 46 87
51% or more 31 37 68
Total 784 758 1542
Chi 2 12,92*
Mean 13.27% 15.01% 14.13%
Median 5% 9% 6%
I don’t know 129 143 272
Total
Panel B: Percentage of answers
913 901 1814
0 - 1% 16.87 15.54 16.21
2% - 5% 27.27 22.75 25.03
6 %- 10% 13.69 15.54 14.61
11% - 20% 10.51 10.43 10.47
21% - 30% 8.00 7.10 7.55
31% - 40% 1.64 3.55 2.59
41% - 50% 4.49 5.11 4.80
51% or more 3.40 4.11 3.75
I don’t know 14.13 15.87 14.99
Total
* Significant at 10% level
100.00 100.00 100.00
42

Table 42 Q32_0. How competent do you think you are at choosing which stocks to include in your
portfolio? Q32_1. How competent do you think you are at predicting the overall evolution of the
market? Q32_2. How competent do you think you are at choosing the best time to buy or sell a stock?
Ontario Québec Total
# % Median # % Median # % Median
score score score
Panel A: Competence in stock selection
Out of
Out of
Out of
38
38
38
Not competent at all 61 6.68 12 96 10.65 score 157 8.65 13
Not very competent 181 19.82 16 323 35.85 19 504 27.78 18
Somewhat competent 538 58.93 20 426 47.28 21 964 53.14 20
Very competent 133 14.57 20 56 6.22 22 189 10.42 21
Total 913 100.00 19 901 100.00 20 1814 100.00 19
Chi 2 92.12***
Panel B: Competence in market evolution
Out of
Out of
Out of
14
14
14
Not competent at all 159 17.42 2 182 20.20 2 341 18.80 2
Not very competent 394 43.15 4 441 48.95 4 835 46.03 4
Somewhat competent 328 35.93 4 253 28.08 4 581 32.03 4
Very competent 32 3.50 6 25 2.77 5 57 3.14 5
Total 913 100.00 4 901 100.00 4 1814 100.00 4
Chi 2 14.66***
Panel C: Competence in buying and selling decisions
Out of
18
Not competent at all 150 16.43 8 134 14.87
Out of
18
8 284 15.66 8
Not very competent 359 39.32 10 375 41.62 10 734 40.46 10
Somewhat competent 372 40.74 10 362 40.18 10 734 40.46 10
Very competent 32 3.50 10 30 3.33 10 62 3.42 10
Total 913 100.00 10 901 100.00 10 1814 100.00 10
Chi 2
*** Significant at 1% level
1.37
43
Out of
18

Table 43 Q36_b. Assume that the stock market return will be 10% next year. What do
you expect the average return next year will be for all individual investors?
Q36_c. Assume that the stock market return will be 10% next year. What do you
expect the average return of your own portfolio will be next year? IMG is the return
expected by the respondent for all individual investors less the market return (10%);
RIG is the return expected by the respondents on their own portfolio less the return
expected for all individual investors; RMG is the return expected by the respondents
on their own portfolio less the market return (10%).
Variance Ontario Québec Total
IMG RIG RMG IMG RIG RMG IMG RIG RMG
Panel A: Distribution of
answers
-3 369 37 243 341 44 274 710 81 517
-2 130 36 105 101 46 87 231 82 192
-1 43 53 59 53 62 60 96 115 119
0 122 164 165 120 155 156 242 319 321
1 16 88 29 21 124 36 37 212 65
2 24 120 73 35 90 65 59 210 138
3 29 224 104 28 173 94 57 397 198
Total 733 722 778 699 694 772 1432 1416 1550
Chi 2 7.74 19.19*** 5.51
I don’t know 180 191 135 202 207 129 382 398 264
Total 913 913 913 901 901 901 1814 1814 1814
Panel B: Percentage of answers
-3 40.42 4.05 26.62 37.85 4.88 30.41 39.14 4.47 28.50
-2 14.24 3.94 11.50 11.21 5.11 9.66 12.73 4.52 10.58
-1 4.71 5.81 6.46 5.88 6.88 6.66 5.29 6.34 6.56
0 13.36 17.96 18.07 13.32 17.20 17.31 13.34 17.59 17.70
1 1.75 9.64 3.18 2.33 13.76 4.00 2.04 11.69 3.58
2 2.63 13.14 8.00 3.88 9.99 7.21 3.25 11.58 7.61
3 3.18 24.53 11.39 3.11 19.20 10.43 3.14 21.89 10.92
I don’t know 19.72 20.92 14.79 22.42 22.97 14.32 21.06 21.94 14.55
Total 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00
*** Significant at 1% level
44

Table 44 Q36_c. Assume that the stock market return will be 10% next year. What do
you expect the average return of your own portfolio will be next year? Distribution of
total knowledge scores by category of RMG. The total score uses the 28 relative
questions on investor knowledge described in Appendix 1. The maximum possible
score is 56 points. RMG is the return expected by the investor on their portfolio less the
market return (10%).
Ontario Québec Total
RMV % score % score % score
-3 26.62 25 30.41 26 28.50 26
-2 11.50 28 9.66 28 10.58 28
-1 6.46 28 6.66 30 6.56 29
0 18.07 27 17.31 29 17.70 28
1 3.18 29 4.00 27 3.58 29
2 8.00 28 7.21 29 7.61 28
3 11.39 27 10.43 27 10.92 27
Table 45 Q20_4. To generate a higher return with a stock portfolio, it is
necessary to trade often to make the most of market opportunities that arise.
Ontario Québec Total
# % # % # %
True 163 17.85 307 34.07 470 25.91
False 667 73.06 486 53.94 1153 63.56
Total 830 90.91 793 88.01 1623 89.47
Chi 2 71.73***
I don’t know 83 9.09 108 11.99 191 10.53
Total 913 100.00 901 100.00 1814 100.00
*** Significant at 1% level
Table 46 Q33. When you think of your worst securities investment, which of these
statements do you agree with most? The poor return of this investment is attributable to:
Ontario Québec Total
# % # % # %
The economic situation of the market 296 32.42 374 41.51 670 36.93
Mistakes by management 250 27.38 171 18.98 421 23.21
Bad luck 40 4.38 44 4.88 84 4.63
Insufficient analysis when I bought the stock 275 30.12 257 28.52 532 29.33
Total 861 94.30 846 93.90 1707 94.10
Chi 2 24.57***
I don’t know 52 5.70 55 6.10 107 5.90
Total 913 100.00 901 100.00 1814 100.00
*** Significant at 1% level
45

Table 47 Q40. When you think of your best securities investment, which of these
statements do you agree with most? The high return of this investment is attributable to:
Ontario Québec Total
# % # % # %
The economic situation of the market 300 32.86 374 41.51 674 37.16
Good management decisions 320 35.05 213 23.64 533 29.38
Luck 73 8.00 78 8.66 151 8.32
Excellent analysis when I bought the stock 173 18.95 201 22.31 374 20.62
Total 866 94.85 866 96.12 1732 95.48
Chi 2 31.87***
I don’t know 47 5.15 35 3.88 82 4.52
Total 913 100.00 901 100.00 1814 100.00
*** Significant at 1% level
Table 48 Q34. You have $5000 to invest. Which stock would you be most likely to
purchase with this money? a) A share with a 100% chance of earning a 6% return, b) A
stock with a 1% chance of earning a 400% return, a 10% chance of earning a 20% return,
a 30% chance of earning a 0 return and a 59% chance of earning a return of -1%. This
stock has an average expected return of 5.41%. c) a stock with a 5% chance of earning a
return of 2000% and a 95% chance of earning a return of -100%. This stock has an
average expected return of 5%.
Ontario Québec Total
# % # % # %
Action A: 6% 623 68.24 569 63.15 1192 65.71
Action B: 5,41% 191 20.92 250 27.75 441 24.31
Action C: 5% 46 5.04 41 4.55 87 4.80
Total 860 94.19 860 95.45 1720 94.82
Chi 2 10.63***
I don’t know 53 5.81 41 4.55 94 5.18
Total 913 100.00 901 100.00 1814 100.00
*** Significant at 1% level
46

Table 49 Q13. You have the choice between a large company on the S&P/TSX 300
composite index that you aren't familiar with and a small company listed on the stock
market whose product, management team and projects you know well. This company
generates sales of a few million dollars. Would you say that investing in the small
company is:
Ontario Québec Total
# % # % # %
Much less risky than investing in the large
company 44 4.82 62 6.88 106 5.84
Less risky than investing in the large company 172 18.84 165 18.31 337 18.58
As risky as investing in the large company 285 31.22 333 36.96 618 34.07
Riskier than investing in the large company
Much riskier than investing in the large
286 31.33 242 26.86 528 29.11
company 57 6.24 58 6.44 115 6.34
Total 844 92.44 860 95.45 1704 93.94
Chi 2 10.46**
I don’t know 69 7.56 41 4.55 110 6.06
Total
** Significant at 5% level
913 100.00 901 100.00 1814 100.00
Table 50 Q35. Which portfolio do you consider the least risky? A portfolio composed of three
known stocks of medium-sized companies operating in a single sector. A portfolio composed of
25 stocks that you don't know in detail but that are issued by fairly large companies from a
variety of activity sectors.
Ontario Québec Total
# % # % # %
Three known stocks 367 40.20 316 35.07 683 37.65
25 stocks of large companies 479 52.46 542 60.16 1021 56.28
Total 846 92.66 858 95.23 1704 93.94
Chi 2 7.61***
I don’t know 67 7.34 43 4.77 110 6.06
Total 913 100.00 901 100.00 1814 100.00
*** Significant at 1% level
47

Table 51 Q41. Among the following sources of information, which did you use in the past
few minutes to help you answer the survey questions?
Ontario Québec Total
# % # % # %
None 759 83.13 667 74.03 1426 78.61
Internet 91 9.97 177 19.64 268 14.77
Other 50 5.48 38 4.22 88 4.85
Internet and other 13 1.42 19 2.11 32 1.76
Total 913 100.00 901 100.00 1814 100.00
Chi 2 36.22***
*** Significant at 1% level
48

APPENDIX 1 QUESTIONS USED TO CALCULATE THE SCORE
Each question is followed by the number of points attributed by the answer is considered
correct. All the other answers equals zero point the category of the questions and also
specified, with SS: stock selection ME: market evolution; and BSD: buying and selling
decisions. One question may fall into more than one category.
Past return of categories
Q5_a. In your opinion, what has the average annual rate of return been for the following
investment portfolio since 1991? A portfolio made up entirely of Canadian Treasury
Bills. 3% - 5%: 2 points, 2% or 6%: 1 point, ME.
Q5_b. In your opinion, what has the average annual rate of return been for the following
investment portfolio since 1991? A portfolio made up entirely of long-term Canadian
Government Bonds. 9% - 11%: 2 points, 8% or 12%: 1 point, ME.
Q5_c. In your opinion, what has the average annual rate of return been for the following
investment portfolio since 1991? A portfolio that mirrors the S&P/TSX composite index.
10% - 12%: 2 points, 9% or 13%: 1 point, ME.
Q7_3 During long periods (of several years), the return from the overall bond market
(often referred to as the Bond Universe) can be equal to or higher than that of stocks.
1) True, 2) False, 3) I don’t know. 1: 2 points, ME.
Basic concepts related to returns
Q6. Today I buy a share in a fast-growing small business for $10. I hope to obtain a
return of 15% within three years. The expected return will primarily come from: 1)
Dividends I will receive, 2) The profit I expect to make in three years when I sell the
share, 3) I don't know, 2: 2 points, SS.
Q7_0. Today I buy a share for $15 in a company that's listed on the stock market and that
usually gives dividends. I will definitely receive these dividends in the future. 1) True, 2)
False, 3) I don't know, 2: 2 points, SS.
Q7_1. Stock market indices are generally calculated using a weighted average based on
market capitalization. These indices are therefore greatly influenced by the return of
shares of the largest companies. 1) True, 2) False, 3)I don't know, 1: 2 points, SS.
Q7_2. The expected market return is the sum of the risk-free rate (for example, that of
10-year government bonds) and the market risk premium.1) True, 2) False, 3) I don’t
know. 1: 2 points, ME.
Q7_4. A good investment strategy is to buy shares when markets are rising and sell stocks
when markets are falling. 1) True, 2) False, 3) I don’t know. 2: 2 points, BSD.
Q8. To determine if my stock portfolio is composed of good investments, I compare the
return of my portfolio with the return of a market index (for example the S&P/TSX 60):
1) Regularly, 2) Sometimes, 3) Never. 1: 2 points, 2: 1 point, SS.
Q9. How much if the current market risk premium (in other words, the anticipated gap
between the expected return of the stock market index and that of government bonds)?
De 4% - 5%: 2 points, 3% or 6%: 1 point, ME.
49

Concepts related to risk
Q12. You have the choice between two listed stocks of the same risk level. Stock A is
traded every day, while stock B is traded once a month. Stock A is selling for $10. How
much would you pay for stock B? 1) 7$, 2) 8 $, 3) 9 $, 4) 10 $, 5) 11 $, 6) 12 $, 7) 13 $,
8) I don’t know. 1 or 2: 2 points, 3: 1 point, BSD, SS.
Q17_a. In your opinion, what is the probability of having a negative return next year if
you are invested solely in Treasury Bills 0%: 2 points, 1 to 2%: 1 point, SS.
Q17_b. In your opinion, what is the probability of having a negative return next year if
you are invested solely in long-term government bonds. 5% - 9%: 2 points, 3% - 4% or
10% - 11%: 1 point, SS.
Q17_c. In your opinion, what is the probability of having a negative return next year if:
you are invested solely in shares of the S&P/TSX index? 30% - 34%: 2 points, 28% -
29% or 35% - 36%: 1 point, SS.
Q7_5 If my whole portfolio consists of a few stocks of small businesses listed on the
TSX Venture Exchange, I could lose the total invested amount: 1) True, 2) False, 3) I
don’t know. 1: 2 points, SS.
Risk return relationship
Q14. A higher return can be obtained only by taking a greater risk: 1) True, 2) False, 3)
It’s not systematic– it depends on one's knowledge of stocks, 4) I don’t know. 1: 2 points,
SS.
Q15. On the TSX, it is possible to find shares that are “great deals”; that is, investments
that combine a high return and a low risk: 1) True, 2) True, but very rare, 3)False, 4) I
don’t know. 3: 2 points, SS, BSD.
Q16. The expected future cash flows of companies A and B are identical, but company A
is riskier than company B. The share price for company A would therefore be: 1) Higher
than the share price for company B, 2) The same as the share price for company B
because the expected cash flows are identical, 3) Lower than the share price for company
B. 4) I don’t know. 3: 2 points, SS, BSD.
Diversification
Q18. By diversifying a share portfolio, you can partly eliminate the risk without lowering
your goals in terms of return: 1) True, 2) False, 3)That’s impossible, 4) I don’t know. 1: 2
points, SS.
Q19. To diversify a stock portfolio properly, what is the minimum number of stocks
belonging to different sectors (in equal proportions) that you need? 1) 1 to 9, 2) 10 to 20,
3) 21 to 50, 4) I don’t know. 3: 2 points, 2: 1 point, SS.
Q20_0 A good way to diversify a stock portfolio is through mutual funds or Exchange-
Traded Funds. 1) True, 2) False, 3) I don’t know. 1: 2 points, SS.
Sources of information and transaction decisions
Q20_1 Before investing in small-cap securities, in particular those issued at private
placements, or at initial or subsequent offerings, you need to analyze the information
50

about these stocks carefully, because they tend to be overvalued. 1) True, 2) False, 3) I
don’t know. 1: 2 points, SS, BSD.
Q20_2 There are reliable ways of systematically identifying over- or under-valued
securities, but this takes time 1) True, 2) False, 3) I don’t know. 2: 2 points, SS, BSD.
Q20_3 In the long term, there is a stable relationship between a company’s profitability
and its market return. Therefore, buying shares of a company with negative earnings
means taking a very big risk on its future return.1) True, 2) False, 3) I don’t know. 1: 2
points, SS, BSD.
Q21. I make my investment decisions according to how my savings and investments are
allocated. In particular, I take into account the overall structure of my financial assets.1)
True, 2) False, 3) That's not important, what matters is selecting the best stocks, 4) I don’t
know. 1: 2 points, BSD.
Q22. Before buying a stock that I don't already have in my portfolio, I analyze the
information about its risk level and its expected return. 1) True, 2) False, 3) Not
systematically, 4) I don’t know. 1: 2 points, SS, BSD.
Q36_a Assume that the stock market return will be 10% next year. What do you expect
the average return next year will be for mutual fund manager? 8% - 10%: 2 points, 7%: 1
point, ME.
Total number of questions retained in the score: 28
Maximum number of points possible: 56
Total number of questions retained in the SS score: 19
Maximum number of SS points possible: 38
Total number of questions retained in the ME score: 7
Maximum number of ME points possible: 14
Total number of questions retained in the BSD score: 9
Maximum number of BSD points possible: 18
51

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