2017 mock exam AM Zubov #23

I absolutely hate the wording of this question as it states" SPECIFICALLY, the plan’s risk tolerance will be HIGHER if we overweight the portfolio with equities in the same Sector."

I agreed with this statement as it is true that a higher risk tolerance would be adopted if the plan decided to overweight it with these type of securities but the instititute said that it would create a low-risk tolerance

I think you need to be careful with the causality here.

It is erroneous to approach this question based on the assumption that higher risk tolerance is required to invest in assets highly correlated with plan sponsors business and therefore the answer is higher risk tolerence.

What they are after is for you to state that after allocating to such assets you increased risk of your pension plan and therefore you now have lower ability to tolerate additional risk. Think about it this way, if the question asked whether the high correlation of plan assets to plan sponsor financial health lower or increases risk tolerance what would you answer?

Yeah, thanks for the advice Panda.

It is an obvious answer once you step back, take a breath, and think about it but when you are in “the zone” sometimes statements can be misconstrued