Answer: holds a poorly diversified portfolio

## Explanation Overconfidence bias refers to investors' tendency to overestimate their knowledge, skills, and ability to predict market movements. This bias leads to several behavioral consequences: **Why option C is correct:** 1. **Poor diversification**: Overconfident investors believe they can pick winning stocks or time the market, leading them to hold concentrated portfolios rather than well-diversified ones. 2. **Excessive trading**: Overconfidence often results in higher trading frequency as investors believe they have superior information or skills. 3. **Underestimation of risk**: Overconfident investors typically underestimate the risks associated with their investments. **Why options A and B are incorrect:** - **Option A (overestimates downside risks)**: This is more characteristic of loss aversion or pessimism bias, not overconfidence. Overconfident investors typically *underestimate* risks. - **Option B (underestimates expected returns)**: This contradicts overconfidence bias. Overconfident investors tend to *overestimate* their expected returns, believing they can achieve above-average performance. **Key characteristics of overconfidence bias:** - Excessive trading - Poor diversification - Underestimation of risk - Overestimation of returns - Illusion of control - Self-attribution bias (attributing success to skill and failure to bad luck) In behavioral finance, overconfidence is one of the most common biases affecting investor decision-making and often leads to suboptimal portfolio construction and performance.

Author: LeetQuiz .