For someone in his accumulation phase, (40 something, still have a lot of years before retire) with a few million assets.
The book says, if his life style is rich, then his ability to take volatility is low. But if he needs money to finance his retirement at a level that seems high, he has to take risk to meet this objectives.
So what is the right way to answer that questions? I was reading the guideline answers from past CFAI exams but I think it is quite subjective. Please help
Willingness is much more subjective than ability. As far as I understand, I think ability is pretty easy to determine by examing the return objective and contraints:
The following reduces ability to bear risk. And the opposite would be true (opposite of below increases ability to bear risk):
High return requirement
Short time horizon
High need for liquidity
I think that’s pretty much it. Ususally there’s more than enough clues by examing return/ time horizon/ liquidity to determine ability to bear risk.
DO NOT confuse the need to take risk to meet certain goals with the ability to bear risk.
If I want to be a millionaire in year, but I have only $5,000 in the bank, would you advise me to go buy $5,000 in scratchers or buy some risky derivatives?
Ability to bear risk has nothing at all to do with how much money you want at some future date. That’s already taken care of in the return objective.