Let’s say someone has a very large portfolio of $5 Million, at what point would their living expenses change their ABILITY to take risk from say ABOVE AVERAGE to AVERAGE and/or to BELOW AVERAGE? Is there a specific % of the portfolio where we can say, okay, now this is BELOW AVERAGE? Also, with respect to liquidity, is it a rule of thumb that we take all 1st year expenses (lump-sum and ongoing) and put that in the LIQUIDITY category? I saw this done by Schweser in the 1st exam of Volume 1. I thought that the only amounts you would put under IMMEDIATE LIQUIDITY would be one-time lump-sums required in the first year. Thanks PJStyles P.S - I have yet to get a required return question right on the first try. It’s really pissing me off now!
i generally say that for anything 5% or 6% or less indicated above average ability. 6%-8% average, and higher than 8% below average based soley on portfolio size. of course, it also depends on the importance of the goals (i.e. are the spending desires primary or secondary and can they adjust their lifestyle?). I answered my thoughts on liquidity in your other post.
I got CFAI 2006 Q1 required return right! But its the only one so far.
PJ good question. I guess since such a simple and yet important point is not explained clearly anywhere, nobody including schweser and CFAI authors dont have a clue.
MGG is the only guy on the planet to ever get a return calc right. PJ–As for your question, I can only help on willingness. I remember seeing somewhere on AF a month or so ago that if they specify the most they would be willing to lose in one year, you can say: 14% is above average 12% average 10% below average …or something like that. This was someone’s rule of thumb and I don’t believe it is stated in the curriculum. Something you need to gain a “feel” for from doing the q’s. Not even sure myself.
That was my rule of thumb 
where is this coming from? never saw it in text?! so 11% would be above/average? 14% is above average 12% average 10% below average
Ryan- Check out what I wrote in my post. “Someone’s rule of thumb.” Then willy came on and said it was him that posted it. Its a guidepost based on the fact that the guy who posted it has studied his tail off. It is not stated anywhere in the curriculum, but I’ve been going by it anyway. I think on exam day I’m going to use the heads/tails methodology for determining risk, since I always seem to disagree with the institute most of the time anyway. For example, I was doing one earlier today. The parents died in a car crash and now its just Grandma and the kid with a trust fund. They give the circumstances at the time of the car crash. Now some time has passed and the kid is an adult and Grandma is really really old. The trust fund is worth $2M. Grandma is going to croak in 3 years and she’s living on 80k a year. The kid is now in his 20s and scored a gig as a consultant. So how has risk changed? Above average you say? WRONG. Its below average somehow. Moral of the story: Don’t try to figure out what CFAI is thinking. In my mind that portfolio could experience a 1987-type event a couple times over and Grandma is still going to have her meds. Hell, I’m in my 20s and I gotta tell you, if it was just me and my Grandmother and we could rub together $2M, I’d be letting that portfolio work for me. But back here in reality, I’ve got big student loan debt and workin’ for the man.