IPS Willingness/Ability Mismatch Question

If willingness is below average but ability is above average, do you go with below average (because you take the more conservative of the two), or is it “average” because you average the two?

Schweser would say you go with the lower tolerance figure, so below average.

The CFA text, however, explicitly averaged the two in the Inger family example.

So I have no idea. Bump for you.

for the purpose of the test i wouldn’t do what schweser does. I would do what the mock does is just state overall risk and they often give a range if it’s inbetween. but the important thing is they’ll probably ask you to justify it.

I think the safe bet is to go with the more conservative of the two, but I can make a different case w/ ability being the trump card:

High Willingness Low Ability - Ability trumps willingness in this scenario. E.g. I am willing to invest in bio tech stocks and like to day trade options, but I am close to retirement and have nothing to my name, but $100,000. I can’t risk large losses with that money.

Low Willingness High Ability - I think with this combination you could make the argument that they could be averaged together. The investor is likely taking less risk than they could given the size of their wealth based on a combination of biases.

I agree.

At the end of the day, justification will matter

For what it’s worth, I’ve noticed that the past exams seem to fall on one side or the other, typically asking explicitly what examples were in the case that indicated higher or lower ability/willingness to take risk. Either that or they will give you someone else to compare to and ask if their ability/willingness is higher or lower.

Of course this will be the year they don’t.

Just finished a MC practice set in the Schweser QBank and saw this noted related to an individual IPS question: “On the exam, if a conflict arises between willingness and ability generally go with the LOWER of either willingness or ability and recommend counseling to reconcile the difference between the two.” Makes sense to me and it is in line with several AM questions that I’ve worked through from 2012-2014.

If anyone has the CFAI cirriculum reference page for this (or something similar to it), I’d be really excited to get that info =)

just so you know, for all IPS questions between 2014 and 2009, the question has either been:

Justify why the risk tolerance is below average?

Justify why the risk tolerance is average?

Justify why the risk tolerance is above average?

I therefore think it’s unlikely that they’ll ask us, what is their risk tolerance, rather than, justify the tolerance given in the question.

And it’s exactly what they asked in 2008 :wink:

But probably didn’t come up again for a reason.