I am not doing well on this. willingness so difficult, today I did one of 2005 or 2006 exam. She just mentioned that she does not like volatility and past year it was volatile and she was concerned. I think any ANY decent person, whether you are risk taker or not, would certainly do not like volatility and if past perfomance showed some volatility you would be concerned. Her ability was above, so I said " totally avg and educate your clinet " My ans was wrong and it said BELOW ! We should teach that in behavioral finance, wheather you are risk lover, you would definitely be concerned when there is some volatility, and say you did not like it. haaaaaaa, tired.
^ totally agree. u just take a shot I guess, and justification is easy. As I understand though CFAI has a tilt towards above.
In general, you will educate a client only if their wealth is disporportionately high compared to the expenses and at the state time they may not be able to meet future needs(must condition) if they do not take risk more than their willingness allow. let us say I am below Avg in willingess I have an important goal to be met and it wont be met if I take below avg risk In this circumstance, advisor has to step in and counsel them. Otherwise in all other circumstances, willingess prevail.
The 2005 Yeo question was a terrible example of willingness. It says she aggressively leveraged her company to expand capacity. Last time i checked “aggressive” and “leverage” both are consistent with above average willingness. Even in Schweser’s answer they say “actions speak louder than words”…how the hell is that not above average willingness even if she does keep her money in cash or money market. Seems to me that she does have the “willingness” to tolerate above average risk IMHO That question was just terrible!
I think their justification was that some investors are only comfortable taking risk when they have some direct control over it. This is why you cannot assume entrepreneurs are inherent risk takers in investing. I know people like this in real life and it always surprises me to see how risk averse they are in investing.
I got the willingness and ability part right for Yeo, but I put she had overall average risk and you should council her. I’m wondering how many points off CFA would take. Also, I think these question on the the time horizon and liquidity constraints are kinda strange. It seems strange to me to formulate the constrait as being “they have a differentiated tax structure” and the reason is “capital gains are taxed differently than interest”, seems like it should all be rolled up in the constraint…