Dude, I’m wondering the exact same thing. In the 2007 exam, the real pretax need is 205k with a base of 4M = 5.13%, guideline answer says base is significant relative to need, supporting above-average ability.
Then, in the 2009 exam, real pretax need is 56,250 with a base of 1M = 5.63%. Guideline answer says base is small relative to spending levels, indicating below-average ability.
Kind of annoying - it’s not even that one is above/below average and the other is average. Clearly not a huge difference in base to need ratio, but cfai says opposite ends of the spectrum. Not awesome.
if anyone has any ideas about this, please do chime in.
ps - you’re studying for level 3. High probability you’re losing your mind regardless…as am I
Ability to take risk depends on a couple of different factors, the most important which I believe are: (1) size of portfolio, (2) liquidity needs, and (3) time horizon. Also note if the client is “flexible” in any way… can he/she alter lifestyle or spending needs, or perhaps return to work again if needed? Don’t just look at the calculated return objective by itself.
That said, I think 5% is the magic number. If your client’s portfolio needs to earn a real, after-tax return that is LESS THAN 5%, then I’d say he/she has an “ABOVE AVERAGE” ability to take risk.
Hey tozzert, I’m not looking at the return as a means to determine ability. Just pointing out that cfai is quite inconsistent when it comes to evaluating one of the important factors used to gauge ability. One case says base is small relative to need, in another they say significant. Meanwhile, the relative sizes of one to the other are very similar in both cases.
KOT- I hear what you’re saying. I, too, have asked myself the same question when analyzing ability to take risk (apart from willingness to take risk). As I said before, you have to look at all the different factors – but less than 5% real a/t return seems to coincide with the correct answer being “above average” ability to take risk. Take that with a grain of salt…