Traditional portfolio managers prefer well-known companies because
I. stocks of well-known firms tend to be less risky than stocks of lesser-known firms.
II. individuals are more apt to purchase a mutual fund if it contains stocks of well-known firms.
III. window dressing encourages the purchase of well-known stocks.
IV. institutional investors tend to exhibit "herd-like" behavior.

Question

Quizplus · Accepted Answer

Traditional portfolio managers prefer well-known companies for several reasons. First, stocks of well-known firms are perceived to be less risky, as these companies usually have a long track record of performance and stability. Second, individuals are more likely to invest in a mutual fund that includes stocks of well-known firms, as they are familiar and perceived as safer or more prestigious investments. Third, the practice of window dressing, where portfolio managers buy well-known or performing stocks near the end of a reporting period to improve the appearance of the portfolio, encourages the purchase of well-known stocks. Lastly, institutional investors often follow each other in a "herd-like" behavior, buying stocks of well-known firms because other institutions are doing so, which can create a self-reinforcing cycle of demand for these stocks.

Traditional Portfolio Managers Prefer Well-Known Companies Because