For those of you using Schweser; the Vol 1 practice exam #1 answers section gives several scenarios for gauging the willingness and ability to take risk. I have found this helpful. . . BUT it highlights the ridiculous subjectivity of the individual IPS. The institutional IPS, for me, is MUCH more cut and dry.
Agreed with you. That particular section in the answer KEY with different scenarios being mentioned are clear and easy to read I have been using that as a reference when working on my individual IPS questions
Hi guys, I found it a bit confusing in the following scenario: pg 185 scenario 2: individual with 50mil portfolio and 500k expense. Is it a large asset base and thus above average ability? scenario 3: if the ability is above average and the willingness is below average, shouldn’t the overall go with average OR above average? Maybe those fully understand what is going can kindly share the opinion! Thanks!
For scenario 3: Always honour willingness. Don’t average the ability and willingness. If ability is more than willingness, suggest counselling. Overall risk tolerence is driven by willingness. Another thing to keep in mind is don’t go blindly by what the client says. If his/her past actions suggest risk taker characteristics but his/her statements suggest risk averse, go with what the actions say; actions speak louder than words.
sid3699 Wrote: ------------------------------------------------------- > For scenario 3: Always honour willingness. Don’t > average the ability and willingness. If ability is > more than willingness, suggest counselling. > Overall risk tolerence is driven by willingness. > > Another thing to keep in mind is don’t go blindly > by what the client says. If his/her past actions > suggest risk taker characteristics but his/her > statements suggest risk averse, go with what the > actions say; actions speak louder than words. sid3699, I also want to choose the most conservative choice, but look at conflicting cases: scenario 1: above average ability, below average willingness -> go with average and recommend recounseling. scenario 2 average ability, below average willingness -> go with average and recommend recounseling. scenario 6: above average ability, below average -> go with average and recommend recounseling… The above few scenarios show the process of averaging the ability and willingness to get the overal risk tolerance. I am very confusing now… Not sure if I always go for the most conservative will CFAI give full credit in the exam?
ddolphin…I had the same thing marked…to eventually ask on this forum… I dunno why the one scenario (3) as you pointed out is different… but on most of the tests i’ve done do far though…you wanna lean towards willingness if it is below ability…some of the tests…for example .if they have above average ability and below average willingness …the answer provides average to below average overall risk tolerance…
I am very frustrated on this subjective things…
Is it right to say throw the normal W vs. A out the window when we have extremely low spending needs from the portfolio (all else the same)? Starting to freak on this stuff.
dddolphin Wrote: ------------------------------------------------------- > sid3699 Wrote: > -------------------------------------------------- > ----- > > For scenario 3: Always honour willingness. > Don’t > > average the ability and willingness. If ability > is > > more than willingness, suggest counselling. > > Overall risk tolerence is driven by > willingness. > > > > Another thing to keep in mind is don’t go > blindly > > by what the client says. If his/her past > actions > > suggest risk taker characteristics but his/her > > statements suggest risk averse, go with what > the > > actions say; actions speak louder than words. > > sid3699, I also want to choose the most > conservative choice, but look at conflicting > cases: > > scenario 1: above average ability, below average > willingness -> go with average and recommend > recounseling. > > scenario 2 average ability, below average > willingness -> go with average and recommend > recounseling. > > scenario 6: above average ability, below average > -> go with average and recommend recounseling… > > The above few scenarios show the process of > averaging the ability and willingness to get the > overal risk tolerance. I am very confusing now… > Not sure if I always go for the most conservative > will CFAI give full credit in the exam? The IPS is for the client. If the client does’nt want to take risk (highly risk averse) even if he/she has above average ability to do so why would you say the overall risk tolerence is average or above average? If the client says his/her shortfall risk is 0% or that he/she can tolerate only 2% volatility in the portfolio but the ability to take risk is above average (nominal required return of 3%), the overall risk tolerence is below average, assuming all else constant. However, like I said, if past actions show that the client has been taking risk (investing heavily in small-cap stocks, for example) then statements like, “I am risk averse” or “I don’t like volatility in my portfolio” should be disregarded as willingness is definitely above average. Its not a clear cut analysis, but averaging the two is the last option, in my view. There will certainly be factors that will provide a definite answer on risk tolerence – past actions, client statements, relying entirely on portfolio to support day to day expenses, etc.
The CFAI EOC questions do have one very good example of this … An individual who clearly has above average ability and has been taking a decent amount of risk already in his portfolio, but claims his risk tolerance is “average”. The CFAI text says he has an above average risk tolerance (Book 2, page 144, problem #9).