Which of the following is a disadvantage of neglecting total return in mental accounting?

Neglecting total return in mental accounting can lead to the disadvantage of failing to manage cross-asset correlations effectively. Mental accounting is a cognitive bias where individuals categorize and treat their financial resources differently based on subjective criteria, often ignoring the overall returns of their investments. When investors focus too heavily on isolating the performance of individual investments without considering the overall portfolio’s total return, they may overlook how different assets interact with each other.

This can prevent them from recognizing valuable insights about risk diversification and correlations between assets. Understanding cross-asset correlations is crucial for optimizing a portfolio, as it helps in mitigating risks and enhancing returns. Therefore, when one disregards the total return, it significantly hinders their ability to manage these correlations effectively, leading to suboptimal investment decisions.