What does the Normative Model attempt to explain regarding investor behavior?

• A. How investors actually behave
• B. How investors should behave
• C. The comparison of investor behaviors with historical data
• D. The correlation between risk and return in portfolios

Answer: (B)

The Normative Model focuses on establishing ideal behavior for investors, outlining best practices for decision-making under uncertainty. It provides a framework of how investors should logically make choices based on theoretical principles. This model sets standards for rational behaviors, such as maximizing utility or making decisions based on expected outcomes.

In contrast, other models may focus on describing actual behavior, historical comparisons, or the dynamics of risk and return in portfolios. However, the Normative Model’s primary purpose is to set a benchmark for what constitutes rational investment decision-making, thereby guiding investors to make informed and optimal choices.