Q3 CFAI SS4, Reading 14, Pg 424
Why in the following Q would the answer be Strategy C for Wu as opposed to Strategy D? If Wu’s income is equity like in nature with high correlation to the stock markets, sure you’d want less of an exposure in the financial capital portion of the portfolio correlated to equities?
Is the answer taking the opinion of because he’s 35, he can afford to take that extra risk in stock markets exposure? but what is a guidline as being young/old - or is it a question of as long as you justify you’re answer then you would be credited with marks
Smith is the financial advisor to Nancy Johnson and Michael Wu. Johnson is a 35-year old professor with a stable and secure annual income of $175,000. Wu is a 35-year old stockbroker with an income that averages $175,000 per annum and is highly correlated to risky asset returns. Johnson and Wu have compara- ble total wealth and exhibit moderate risk tolerance.
Recommend which of the following portfolio construction strategies are opti- mal for Johnson and Wu and justify the selections.
Strategy Strategy Strategy Strategy Strategy Allocation ABCDE
Stocks 100% 80% 65% 20% 0%
AAA-rated government bonds 0% 20% 35% 80% 100%
(Institute 424)
Institute, CFA. CFA Institute Level III 2014 Volume 2 Behavioral Finance, Individual Investors, and Institutional Investors. John Wiley & Sons P&T, 2013-07-12. VitalBook file.
Allocation
Stocks
AAA-rated government bonds
Strategy A
100% 0%
Strategy B
80% 20%
Strategy C
65% 35%
Strategy D
20% 80%
Strategy E
0% 100%