My observation so far is that if the real required return is >5%, then this means the asset base is small.
If ~5%, then moderate.
And if <5%, then large.
Is this correct, do you think?
Geezie, I agree but have been avoiding using that as an answer due to the ambiguity. I recall a CFAI AM Mock that had expenses of around 50k per year with 1mil investable assets and they considered that to be a high % (lower risk tolerance).
In the real world you might use required return (or size of asset base) as an indicator of ability to take risk, but on this exam I would suggest that you avoid it if you can. First, as you point out, there is no stark dividing line. Second, if you err in your calculation of the required rate of return, you will lose points on that question; if you then use it in the risk tolerance question, you may lose more points for the same mistake.
Generally, if they ask for reasons that the client’s ability to take risk is above average or below average, there will be enough information in the vignette to use without having to resort to required return/asset base. I’d use that only if there were nothing else.
I made that mistake as well. Thank you for reminding me why I avoid using it.