book 1, exam 2am, question 1 after receiving an inheritance they now have $3,750,000 in investable assets after accounting for their after tax employment income, they need $116,437 annually from the portfolio. 2% inflation. no debt. don’t want to lose more than 10%. ages 39 and 40. want to pay for kids college, kids 10 and 12. risk? i say ability moderate- young significant NW and small demands on portfolio willingness - moderate - willing to lose 10% demonstrates that they are willing to take some risk schweser - ability low, willingness low comments?
That’s what I put too, these are such arbitrary answers from Schweser. boston Wrote: ------------------------------------------------------- > book 1, exam 2am, question 1 > > after receiving an inheritance they now have > $3,750,000 in investable assets > > after accounting for their after tax employment > income, they need $116,437 annually from the > portfolio. 2% inflation. no debt. don’t want to > lose more than 10%. ages 39 and 40. want to pay > for kids college, kids 10 and 12. > > risk? > > i say ability moderate- young significant NW and > small demands on portfolio > willingness - moderate - willing to lose 10% > demonstrates to ability to take some risk > > schweser - ability low, willingness low > > comments?
I agree with you. If you are willing to allow a drop of 10%, to me that is at least moderate willingness. From the Schweser tests I have seen, they are very ambiguos. I’m not sure if they are trying to better prepare us for the test by making us think, but the old CFA tests I have seen are much more straight forward.
any time thier spending needs are covered by portfolio and not current income thier ability drops a bit in this case they also have large future outflows ( education ) . However i wd have to agree that the time horizon is long From what i have seen so far wherever they have indicated a shortfall risk measure the willingness is always low . I havent seen the exact question you are referring too so there may be other factors as well that lead to the low ability and low willingness .
other info i left out: he works, makes $50k, she stays at home they dont want to invest in any individual security that is “too risky” taxes = 25% cap gain and income retire at 65 no other anticipated expenses other than emergency cash reserves
they dont want to invest in any individual security that is “too risky” – ’ That wd be a key factor - they have stated they dont want to do anything too risky + indicated they dont want to loose more than 10 % – Low willingness IMHO he works, makes $50k, she stays at home — Logically IMHO whenever your expenses are more than your income + 1 income household + 2 kids + future education needs = Low abliity . Anybody else have any input ??
AGree with Rudeboi. Whenever you need to take out of p’folio to meet expenses, ability goes down a notch.
in the real world, i would address the indv risky security issue by discussing how you can’t look at each indv security but rather how it affects the portfolio as a whole (i.e. prudent investor rule, asset segregation, mental accounting, etc.). The client would then agree 95% of the time and I would invest them in a balanced portfolio, about 50/50 stocks/bonds.
When I was reading this question, I couldn’t stop asking myself how they saved over $1,000,000 before their inheritance if they were constantly outspending their income by $100,000/year, and never had that high of an income to begin with. I also screwed up the required return calculation by adjusting for taxes on investment gains , and saying that their risk taking ability was high (although I got their willingness and overall tolerance right).
Don’t get why their ability is low even if you have to encroach on their capital somewhat. They are young, long time horizon with significant wealth. I get that their required return will encroach on the capital, but the required return from my calculations is: $116,437 / $3,750,000 + 0.02 = 6.10% That’s not sufficiently high to make their “ability to take risk” average instead of above average in my opinion.
I’m glad someone else is right there with me. I will note that I never answer “average”… the answer never seems to be “average”.