Any rule of thumb based on risk factors? – time horizon, portfolio size, inheritance, dependents… I find this question hard to get because it gets very subjective at times.
it is subjective, but time horizon always seems to factor into the answer. So obviously, the longer horizon and more chances to make HC, the higher risk.
Ability is typically based on the size of initial asset base, time horizon, and addition contributions made to the investment account (inheritance, lump sum pension contribution, sale of business, employment income, etc) that may offset withdraws or market fluctuations. Willingness is usually based on the context clues in the question and current allocation of the account (though client statements are more important than asset allocation in this regard).
Re: sjuhawk, thanks for the explanation. I thought somewhere in the schweser notes it says ‘actions speak louder than words, watch out for risk seeking behavior while the individual claims to be risk averse’. Guess I was confused by all these different scenarios and questions. e.g. in the 08’ exam, they have a relative small portfolio size (less than a mil?), but a long time horizon, possibility of getting an inheritance… I thought that’s Average risk tolerance, answer sheet says Above Average.
'08 was because AA because of the 2 large trust distributions, and the expectations of a “significant” inheritance, long time horizon, and no demands on the investment account for a number of years. I see your dilemma on actions, but I got a ? wrong on another old CFA exam where the couple had limited assets and said they were conservative investors, but had most of their assets in the tech company the woman worked for. I went with the actions instead of the words and got it wrong. I wouldn’t sweat it too much, as the answers we see are “guideline” answers which indicates there is room for a well justified alternate response.
they are good at confusing us aren’t them!