Refer to CFAI Textbook Vol 6. Practice problem for Reading 45. Q3. I don’t understand why her ability to take risk is higher. If the return requirement is higher, won’t that imply ability to take risk is lower ? Can anyone please explain ?
> I don’t understand why her ability to take risk is > higher. Think the CFAI explanation is perfectly clear: husband working longer and more wealth. > If the return requirement is higher, won’t that > imply ability to take risk is lower ? Think you get it backward: ability to take risk is lower --> lower return requirement.
Thanks. But if both wealth and liquidity needs increase at the same time. How can we determine if the ability to take risk is higher or unchanged? Is it determined by whether those liquidity needs are important? If most of the increased liquidity needs are unimportant/ adjustable (e.g pay for new house, pay for living expense), then, higher wealth --> Higher ability to take risk. If most of the increased liquidity are important (e.g. pay for surgery), then, ability to take risk could be lower, even if the wealth has increased.
B_C Wrote: ------------------------------------------------------- > Thanks. > > But if both wealth and liquidity needs increase at > the same time. How can we determine if the ability > to take risk is higher or unchanged? Is it > determined by whether those liquidity needs are > important? > > If most of the increased liquidity needs are > unimportant/ adjustable (e.g pay for new house, > pay for living expense), then, higher wealth --> > Higher ability to take risk. > > If most of the increased liquidity are important > (e.g. pay for surgery), then, ability to take risk > could be lower, even if the wealth has increased. CFAI cited the assumption that the portfolio “will” grow substantially into $6m (comparing to $3.9m before), and the potential 25-year salary of her husband as the two reasons that the risk tolerance increases. Another key consideration is that the living expenses till retirement, downpayment, surgery cost is already deducted from the portfolio base, therefore, the portfolio’s on-going liquidity needs are not significant at all.